Clause 61: The Pushback Blog

Because ideas have consequences

Three Theories of Trade

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Why do people engage in trade? What do they gain from trading? There are three basic theories about the nature of trade. The choice among these is tied to the believer’s ethical stance and worldview. The belief chosen says more about the believer than it does about the subject matter.

Strictly speaking, trade is the exchange of goods or services for other goods or services. A person who accepts money only does so with the expectation of being able to exchange the money for goods or services (wealth) at some future time.

For purposes of discussion, however, consider bilateral agreements concerning the purchase of goods or services for money, in order to keep the discussion simple. Money flows one way, and goods or services the other. More complex transactions, having more forms of consideration moving between more sets of hands, do not alter the basic fundamentals, and only obscure the main points.

Implicit Coercion

One theory of trade insists that the stronger party takes advantage of the weaker party through implicit coercion. An example of this line of thinking: the employer has a stronger position than the employee, who “needs” a job in order to put food on the table, and can therefore dictate terms to the employee.

This position does not stand up to analysis. The worker is seeking a job, but is not compelled to accept this job. The word need is used with a double meaning here, which is why I have put it in quotes. It is an amphiboly: a semantic ambiguity. In order to get on in the world, one chooses to trade services for money, but it is still a choice. Furthermore, there is no compulsion to take any one specific opportunity.

One should remember that the larger a market that a worker has for his services, the more choices he has and the stronger his bargaining position will be with any one potential employer. A worker who has limited skills has fewer potential buyers of her services. A worker who has a high cost structure, with large fixed payments for home and auto loans, may be able to get a number of jobs that will not allow him to keep his head above water financially. However, none of these factors constitute implicit coercion. The alternatives, including relocation and bankruptcy, may not be attractive, but they are there nonetheless.

People — particularly people who operate from positions of powerlessness — often use language of compulsion where it is not warranted. He must stay at his job, she has to host Thanksgiving dinner, they had no choice but to rent that apartment. However, there are always choices, although they may be categorically unacceptable to the decision-maker.

Unfortunately, it is a bootless effort to attempt to reason with people who are invested in victim thinking. To challenge their thinking on this is often to challenge their whole justification for living as they have done. They won’t hear it, and they will be impervious to attempts to convince them that they are not being coerced.

Zero-Sum Net Effect

Another theory of trade assumes that, since the participants are exchanging value for value, there is no net effect on either participant. Both came out with the same utility which which they went into the exchange. However, this begs a simple question: why bother to trade at all? Trade requires effort. The participants have to gather information, enter the market, locate one another and arrive at a mutually acceptable agreement. If this provided no improvement to either party over the initial condition, there would be no reason to engage in trading.

Positive-Sum Net Effect

The fact that both participants opt to do the deal indicates that each believes that s/he will be better off trading than not trading. This is the only alternative that explains why trade occurs.

A Practical Example

The IRS received almost 143 million individual tax filings for 2010. In an effort to make this burden more manageable for both itself and the taxpaying public, the IRS introduced the Form 1040A in 1980 and the Form 1040-EZ in 1982. These forms are simplified and have restricted applicability. For example, in 2013 the taxpayer could not have dependents or taxable income over $100,000, among other restrictions, in order to use the Form 1040-EZ.

2013 Form 1040-EZ (partial)

2013 Form 1040-EZ (partial)

The form is only 12 lines long. It is deliberately designed to be simple: E-Z, like its name. Yet it is a substantial part of the business of paid tax preparation chains to help people fill these out.

Are the tax prep chains ripping off poor people? Are the taxpayers stupid? Neither conclusion is supported here.


What value are the firms providing to these consumers?

  • Specialization: The tax preparer completes these forms many times in a single year, while the individual does so once. The preparer can become more familiar with the requirements of the form.
  • Service: The preparer relieves the taxpayer of a chore that the latter would rather not perform.
  • Confidence: The taxpayer is confronted with an obligation that has emotional baggage. What if I don’t do it right? The preparer relieves the taxpayer of this emotional burden. Many of the larger firms advertise, as a selling point, that they will send representatives with you to the IRS if you are audited (Would the IRS audit a taxpayer who made $30,000 and had no deductions and no capital gains? Who knows for sure?).

Is this value proposition worth what the firms charge to prepare a 1040-EZ? Evidently to some people, not to others. Nobody makes taxpayers use a paid preparer in any form. I have seen people standing by the roadside dressed as the Statue of Liberty, trying to entice customers into the tax preparer’s office, but I have never seen people with nets who forcibly capture customers and carry them into the tax preparer’s office.

Is there implicit coercion? The government has withheld your tax money. Even if you, at the end of the year, do not owe any taxes at all, you have to file to get the withheld money back. Nevertheless, you could make the economic decision that the hassle of filing is not worth the value of the refund. Furthermore, you don’t have to use a preparer. The IRS has gone the extra mile to make it easy on people who are in simple filing situations to file their taxes. The taxpayer has to take responsibility for the choice.

Is it a zero-sum transaction? No, the taxpayer obtains more utility from the value provided by the preparer, including intangibles mentioned above, than he gives up in money. Otherwise, he wouldn’t take the trouble of going to the preparer.


Written by srojak

February 15, 2014 at 2:31 pm

Posted in Economics, Ethics

Tagged with , , ,

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