Why Do We Exchange Things?

What can we learn about markets from a WWII POW camp? According to British economist R. A. Radford, POWs found that rather than give away unwanted rations to other POWs, “goodwill developed into trading as a more equitable means of maximizing individual satisfaction.” Professor Michael C. Munger explores what makes exchange more equitable than simply giving gifts. He finds that exchange is important for two reasons:

1.       It corrects mistakes in allocation by moving things toward higher-valued uses.

2.       It makes everyone involved in exchange happier.

Prof. Munger provides a few examples of how exchange can make people better off without changing the total amount of wealth available. In one case, two people each have the same items but different preferences. In this case, they will exchange so each one has more of his or her preference. In another case, two people each have a different item, but both prefer to have some of both items. They will exchange so each one ends up with some of each item and both are happier. Exchange can even make people better off when they have different items and different preferences. This is the power of markets.

7 Comments

  1. Matt Wavle

    Exchange is preferred over gifts because of the value attached to what is received.  People often treat expensive gifts as if they are of no value at all, since they aren’t invested in them.  No so with exchanges.

  2. Emerson Howard

    This is such an important principle. I wish I knew a better way to educate other people on this principle and its far reaching impact on public policy.

  3. waldrop01

    Great video! Increased satisfaction through voluntary trade with no increase in wealth could be used as an argument by itself for free trade. When you add in benefits of increased wealth through free trade that come from comparative advantage it boggles the mind that otherwise rational people ever advocate for trade restrictions.

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