I participated in a webinar by Mike Munger yesterday. He spoke on “euvoluntary exchange”. It was very interesting.
The concept is pretty basic in economics that voluntary
trade creates wealth because all parties in a trade would not have participated
unless they expected to be made better off than before they started. Any trade that actually occurs must then make
all parties better off, absent mistakes or regret.
Munger formalizes the concept of voluntary exchanges by
stipulating five rules. First, the items
to be exchanged must be subject to some form of ownership and second, this
ownership must be transferable. He
stipulates in a voluntary transaction not only that there must be no force or
coercion compelling the sale, but that all parties are satisfied after-the-fact
and that there are no uncompensated externalities to third parties. All trades that satisfy these five criteria
of a voluntary transaction make all parties to the trade better off than they
otherwise would be.
The question is, why are there so many voluntary
transactions that are stigmatized or even outlawed? Why do people want to stifle wealth
creation? Munger posits a sixth,
intuitive deontological, rule for “good”, or “eu”voluntary exchanges: that
neither party be “coerced” by circumstances into accepting the deal. He used the concept of the best alternative
to a negotiated agreement (BATNA), to explain why people feel that otherwise
voluntary exchanges are looked upon as exploitative.
I’ll give an example of a lawyer. A lawyer may have many clients and many cases
at any one time. Losing any one case is
unlikely to bankrupt him. The client, on
the other hand, may invest a significant part of his net worth in hopes of
winning one particular case and would be devastated by having to start over
with a new lawyer. In this circumstance,
the lawyer’s BATNA (or result of losing the deal) may be having to buy a
Mercedes instead of a Lexus, but having time for an extra round of golf. The client’s BATNA may be bankruptcy and/or
jail time. This wild disparity in
BATNA’s reflects the state of the underlying reality. We can see that the lawyer has a negotiating
advantage and we hate him because it looks unfair.
Munger’s point is that life is unfair. Non-euvoluntary trades, as unfair as they may
look, can still be just because, when they are voluntary, they make life less
unfair.
We, as humans, seem to have an instinctive revulsion towards
non-euvoluntary transactions. We want
life to be fair. We can believe that the
evil capitalists exploit workers; and the poorer and more in need of employment
the worker is, the more we hate the man who hires him. The “moral smugness” that lets us hate the employer
in lieu of the difficult circumstances that make the worker need the employment
so desperately can only hurt the worker. When we punish the employer for “exploiting”
the workers, we are condemning the workers to remain in poverty. Preventing non-euvoluntary exchanges hurts
the worst-off.
So, how can we overcome this moral smugness in order to help
people? There’s always charity, but
charity is less efficient than the market (wrong incentives). The more voluntary exchange we allow, the
more euvoluntary trade will become possible because the poorest and most needy
will have more options.
Good luck convincing policy makers of this.
