Is Economy about trading or about transferring?

Hello,

A friend of mine used to say that whenever someone in the First world (Europe and North-America) becomes richer, someone somewhere else, becomes poorer. I found it very simple, but started to think about it and made these arguments:

Economy, in the beginning, used to be about trading, exchanging one thing I don´t have for another one someone needs and wants, so, in a fair exchange, we both do well.

But...I don´t know how or why, things turned to another very different thing, where Economy is no longer about trading fairly but about transferring wealth, but I am not sure about it, about my friend´s statement, at all.

Well, the planet is only one and with finite resources , so, there is an amount of gold, silver, cows, goods in general, so, if someone gets more gold, it is because in return, someone gets more silver or more cows or more cars, and so forth, but I really don´t know if that is what is really happening or it is just a transfer of wealth, and not fair trade. I feel really confused about it, but I see a world with , say, 10.000 coins of gold and if I have 90.000, the others can only have the rest, 10.000.

I guess this is a complex issue, but would like to know why Economy is not based on trading any longer, or why my friend claims that if someone gets richer in Holland, someone else is necessarily getting poorer in Nigeria or anywhere.

 

As I said in the other thread, your friend doesn't understand that wealth is not a fixed thing. Wealth can grow through business profits or decline through business losses. So wealth isn't limited by resources. The Nigerian could buy something from the Dutchman and then resell it at a profit making both him and the Dutchman have more wealth. The company that shipped the product from Holland to Nigeria also had his wealth increased. and so on and so forth. Your friend has a very simplistic knowledge of how economies work.

Also, natural resources don't leave the planet. They are just borrowed. We can raise more cows and grow more trees. We can dig up more gold, iron etc or recycle what we have. Einstein expressed it pretty well with e=mc2. You may want to read up on the physical law of conservation of mass/energy. We really don't lose anything. We just shift it around.

 

There are issues that aren't in agreement with your stance. First, we shouldn't ignore that economics splits into two strands: exchange theory and conflict theory. You'd have to ignore the latter. Second, we shouldn't ignore that the selfish profit motive can encourage the existence of multiple equilibria. As an economy gets stuck in an inferior result that can then allow inefficient redistribution effects to dominate. We see such effects with trade where some sub-saharan countries have actually been made worse off through resource exploitation

 

If I had even a slight inkling of what you are talking about, I'd respond. Since I do not, I'll stick with what I wrote.

 

It destroyed your comment, but never mind!

 

Those are extreme cases in Sub saharan africa where democratic traditions hold no sway and the dictators sell the nations resources as if they were the priavte holdings of the dictator.

That isn't trade, that is theft.

 

No, they are cases where resource exploitation is larger than any exchange effect gain. Its a normal feature, given the infant industry hypothesis is really just a reference to multiple equilibria and how an economy can be stuck in an inefficient result (allowing for redistribution of wealth to those with a 'first advantage')

 

Put it CONTEXT though. We're talking about a region of the world with virtually no infrastructure and what there is is poorly maintained or torn by war and a very poor, uneducated workforce incapable of doing anything but the simplest of tasks. These are not places to open factories where locally harvest natural resources could be turned into finished value added products. The ONLY thing they have are selling their natural resources on the global market, otherwise there'd be no trade at all from these nations.

They are essentially completely useless black holes except for their natural resources and no one is interested in anything else in the nation at all. No one cares about the work force or the local economy, because there isn't one to speak of.

 

Yes, as trade liberalisation increased, poverty also increased

 

Let's see. 200 years ago nobody had a car. Now some people have cars.
200 years ago nobody had any gasoline. Now some people have gasoline.
300 years ago the King of Scotland couldn't get a banana. Now, well, there's no king of Scotland now.
60 years ago nobody had a cellphone. Now some people have cellphones.
60 years ago nobody had a microwave oven, I think. Now some people have microwave ovens.
I guess I don't need to list everything.
We trade more now. Otherwise nobody would have any of that stuff.
Some people in third world countries have those things.
Some people in first world countries have those things.
It looks like your friend was wrong.

 

Trade is not necessarily mutually beneficial (as shown how trade liberalisation can harm developing country to the benefit of the developed world)

 

..How?

 

Already mentioned. Trade can lead to a 'first mover' disadvantage as shown by resource exploitation that reduces overall well-being (ironically proved by World Bank data)

 

You want to give us a synopsis of how this happens?

 

Already mentioned: multi-equilibria as characterised by the infant industry hypothesis

 

A little more vague than needs be.

On a micro scale, the first point is true. to use his example: The Dutchman, the Nigerian, the Company from Holland, all do make profit on whatever theoretical item is being traded. The person at the end, who ends up buying the product becomes poorer because they are spending more than the production value of the product, thus taking a loss.

On a macro scale, many other variables come into play. The value of currency will eventually fluctuate to and may offset the loss on the value of the item over time. The value of the item may depreciate. The Item may increase productivity of the end user, thus giving the item an end-user value.

And to put the E=MC(sq) comment into perspective. There are a finite amount of physical resources on our planet/solar system/galaxy/universe to whatever scope of time we are looking at. The total value of the economy on a grand scale is limited to the resoures we have access to. The only seemingly unlimited resource we have is time (but that's also limited if you bring it down to a personal level).

And don't even get me started on how the world economy got into debt trading is the biggest ponzi scheme ever. Lets trade something that doesn't exist and make money off it, which nobody has the assets to pay back, because we're generating interest on assets we don't have, so we borrow from somebody else to get these assets they don't have and so forth.

 

It is in no way my concern as a consumer in America, the poverty in sub-saharan africa that my cheap shelf prices may cause.

 

Your personal biases are of no interest. What is of interest is that we have an example where exchange theory fails to deliver the result consistent with a non-zero game

 

Wow, is it not your concern? , gosh, that sounds really thoughtful and gentle and generous of you!!. I wish there were more people like you, gosh (irony, needless to say)

 

Why don't you just give a brief synopsis of how you think it works.

 

What you said of the macro scale is also true of the micro scale. I don't see how the distinction is meaningful. How do you know what the value of an item is? How is it meaningful to say that the end user took a loss? I can tell what you're trying to illustrate here. What are we supposed to take away from the facts that resources are finite and central banking is a ponzi scheme?

 

What example?

 

The empirical link between trade liberalisation and increased poverty in Africa

 

Why? Its a well-known phenomena after all. Its also easy to embed it within orthodox comparative advantage analysis: i.e. we get an understanding of economies of scale as a dynamic concept (based on the learning curve those economies reflect accumulated output rather than current output), with first mover advantage then allowing for an inefficient specialisation that also hinders economic development

 

I don't know of any such empirical link. Are you sure you're not unjustifiably inferring causation from some correlation?