TRADE CREATES BOTH WINNERS AND LOSERS:

A MCEE Roundtable Commentary

By Patrik Hultberg, Ph.D. Center Director, Kalamazoo College

A previous Commentary discussed how students making trivets could trade their randomly assigned tiles in order to make them all better off, even while keeping total number of tiles the same. This example thus illustrated the important principle of how voluntary trade makes all trading partners wealthier.

      This is an economic principle that is undoubtedly true, yet many people feel that it does not accurately capture their perception of trade’s impact on them and the people around them. This is perhaps especially true in Michigan, where many people have been negatively affected by both domestic and international trade. If both the principle that trade creates wealth and the fact that many Michiganders have suffered losses from such trade are true, how can we reconcile these issues?

      Suppose the grade school students in Walla Walla, Washington, all had siblings. These siblings were similar to their older brothers and sisters, but they all differed slightly in terms of their preferred mix of tiles when making trivets. In this case the older siblings would attempt to trade tiles to make a trivet that made their “family” as well off as possible. Naturally, many voluntary trades would then make some siblings better off, while other siblings may actually be worse off. The older siblings would be forced to constantly weigh the added benefit to their “family” against the loss in benefit to one of their beloved siblings. Such choices in trade would be exceedingly difficult for any sibling to make, but in the end the wealth of the entire “family” would most likely win out.

      By adding siblings to our illustrative example, we see that the principle that “trade creates wealth” must be extended to “trade creates wealth while producing both winners and losers.” It is this extended principle that we in Michigan are so well aware off. As the government of the United States makes choices in order to generate wealth for the entire nation, some “family members” are hurt. As a suffering sibling in Michigan, it is often hard to accept the trading choices that our older siblings in Washington are making.

      Is there any way to make all the many different people within a trading nation feel that trade generates wealth to them individually? As a practical matter, this is probably not feasible. However, economists who favor the wealth generating possibilities of voluntary trade also tend to favor government policies that attempt to distribute some of the gains from the winners to the those of us who have suffered in order to make the nation, our family, better off.

The author would like to thank Center Directors Chuck Stull (Kalamazoo College), Brooks Hull (U of M-Dearborn), Martha Rowland (Marygrove College), Abdi Ferdowsi (Ferris State), and David Dieterle (Walsh College/CMU) for their assistance with this Commentary.