Euvoluntary Exchange

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.