Economists have often written and said that since both parties to a voluntary exchange agreement gain, private property-based market systems can be well-summarized as “mutually beneficial.” Every principles of economics textbook I can remember from over four decades of university teaching has said something of the sort.
The reason for such a unanimous positive “verdict” among economists about voluntary market relationships is that it does adequately summarize the results for party A and party B when they choose to exchange with one another. Every unit voluntarily exchanged benefits both.
The conclusion that everyone gains, however, only follows from that if there were no other parties adversely affected. What if there were also party C, who supplied A before B outcompeted him for the business? C loses relative to his prior circumstances. Others who also wanted a piece of A’s business but failed to get it may also claim they were unfairly “foreclosed” from it by B.
Perhaps such “What about C?” concerns are the reason more people aren’t convinced by the “mutually beneficial” conclusions economists draw. They might fear they will be like C in their market efforts. Such fears could be intensified for those who have learned of Joseph Schumpeter’s description of capitalism as a “gale of creative destruction,” and even more so if they knew he wrote that “This process of creative destruction is the essential fact about capitalism.”
Such concerns may explain why so many forms of protectionism are sought politically, despite the fact that they undermine free market competition and the immense gains consumers derive from it. While people want to enjoy all the gains they receive from market competition for their business as consumers, if they are producers of good X, they also want the even larger gains they can get in that market from protectionism against those who might out-compete them. They want to have their cake and eat it too, and that hypocrisy “goes down” easier if they can reject as false economists’ judgments that “everyone gains” from market competition.
Because those like C are sometimes harmed by the outcome of the competition process for A’s business (the “destructive” part of the story), believers in economic liberty could gain from more clarity on this topic, both for themselves and for the “pitch” they make to others to explain it.
This would also seem to follow from the fact that “mutually beneficial” and “creative destruction” seem at odds, yet economics texts support both descriptions.
One example on the “mutually beneficial” side is the common use of what economists call an Edgeworth Box, which only considers two parties in its basic form. Given its assumptions, it shows that both parties to any voluntary trade gain, and since no one else is considered, it can be taken to imply that “mutually beneficial” is a good description.
On the “creative destruction” side is the standard economic discussion of allowing the trade of a good between two different countries that have different opportunity costs of production. It demonstrates that both countries receive net benefits from opening trade. But there are also destructive effects in each country — producers of the good in the high opportunity cost country lose, as do the consumers of the good in the country that initially had lower prices.
The destructive effects of such gains to trade, however, can be hidden from view by focusing solely on the net gains to the countries involved through the use of a “potential compensation” definition of economic efficiency. That approach is that if there are net benefits to be had, the “winners” could potentially compensate the “losers” sufficiently to leave everyone winners. If acceptable compensation were actually paid (as must be the case for those whose property rights let them say “no” to an arrangement), such an arrangement would indeed make everyone winners. But such potential compensation is generally not paid, so that “losers” remain losers. Someone is left worse off, violating economists’ typical description of an efficiency improvement as leaving no one worse off than before.
How can we clarify the muddle?
To the extent that those like party C are made worse off relative to their previous level of well-being in the example above, we must reject the “everyone affected gains” from every individual voluntary exchange interpretation. A better description would be that voluntary exchange violates no one’s property rights.
A and B in our example both have the power to say yes or no to any arrangement they might be involved in, derived from their property rights. Further, continuing their relationship requires both parties to continue to say yes to it. And allowing A to decline continuing their voluntary relationship with C for better terms from B is what harms C.
Even though C loses in the example, he doesn’t have his property rights violated. All have the same private property rights — the right to offer their goods or services or resources to others on whatever terms they would find jointly acceptable — and no one has had that right diminished.
Unfortunately, saying nobody’s property rights are violated comes across as far less inspirational than “everyone gains” or “no one is harmed.” But that’s not the end of the story.
The fact is that jointly defending everyone’s property rights is the means by which we all gain from capitalism. That is well-illustrated by the traditional roles of government: National defense is to jointly protect our lives and property from foreign aggression; police and courts and jails are to jointly protect our lives and property from aggression by our neighbors. Jointly protecting everyone’s rights from violation by others makes those rights more secure, enabling more gains from voluntary relationships to be built upon them.
That is how market gains also extend to party C. Wherever there is economic freedom, better and better options are offered to consumers, which greatly improves their well-being. As George Reisman put it in response to claims that markets are harmful dog-eat-dog survival of the fittest jungles, “the only sense in which only the ‘fittest’ survive is that it is the fittest products and fittest methods of production that survive, until replaced by still fitter products and methods of production.”
But why does this mean that even those in circumstances like party C, whose pay and prospects may be reduced by a particular business failure, are still benefitted, rather than harmed, by capitalism? Again, Reisman is instructive:
Even in those cases in which an isolated competition results in an individual having to spend the remainder of his life at a lower station than he enjoyed before, he cannot reasonably claim that competition has harmed him. The most he can reasonably claim is merely that from this point on, the immense gains he derives from competition are less than the still more immense gains he derived from it previously.
For competition is what underlies the production and supply of everything he continues to be able to buy and is what is responsible for the purchasing power of every dollar of his. Indeed, under capitalism, competition proceeds to raise the standard of living of the average wage earner above that of even the very wealthiest people in the world a few generations earlier.
Thus, the “survival of the fittest” that actually takes place in markets not hamstrung by government interference — the process of discovering and introducing the fittest goods and services and the fittest productive and organizational forms — greatly benefits all consumers rather than harming them. And making those gains as large as possible is enabled by protecting individuals’ rights to cooperate with anyone on whatever terms they would find acceptable, combined with others’ rights to say no to whatever offers they find unacceptable. Restricting those rights via any of the many forms of government protectionism can provide those “favored” by such interventions with additional benefits, but opening the door to such restrictions on behalf of other favor-seekers as well will, over time, impose far greater harms to virtually everyone. That is the sense in which enabling free voluntary exchange for all is indeed mutually beneficial.
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