Why trade happens

Recall that a few weeks ago, I learned that the $5 Trader Joe’s bags are being sold for $25 in Japan, and that really fascinated me. We’ll be revisiting this topic from time to time.

Today, I want to focus on one aspect of this phenomenon: “Why Trade Happens”.

By the way, it is a very hot day in Southern California, and I am writing this from the comfort of an air-conditioned coffee shop. I paid $3 for my decaf ice-americano and a seat at the cafe. Why should you care? Because fundamentally, trading my money for coffee is not any different from all trades that happen globally at massive scales every single day, which leads me to today’s key point: Trade happens because it benefits both parties. Once you understand this, you start to see the world a little differently.

In my case, I gladly traded my $3 for a table in this cafe, because to me, this comfortable spot where I can work on this hot day was way more valuable than the three dollar bills in my wallet. However, for the coffee shop, the opposite is true. To them, the $3 was more valuable than the coffee, so they gladly gave up their cup of coffee away in exchange for my $3. The trade made both of us better off, and we can rest happy that both parties contributed to the betterment of the other. Isn’t that beautiful? And just imagine, trades like this happen everywhere, every day, at unimaginable scale that makes the entire world’s economy function.

Access to the world’s market has been so important that it has lifted more people out of poverty than all of the well-intentioned non-profit volunteer organizations put together. There are tremendous advantages that come to allowing trade to happen freely; it brings costs of goods down, it makes us more efficient, and lives are improved everywhere. It is no accident that when governments try to intervene or restrict trade (or even worse, regulate how much of what should be produced and how much they should be sold for), the economy tanks. No economist is surprised that the Soviet Union has collapsed, and North Koreans are going hungry. I am amazed to see how there are so many well-intentioned but ignorant people today who have forgotten the brutal history of socialism’s collapse, and think that somehow the world will be better if it returns.

But there is a caveat to all of this. Our challenge is to carefully consider policies so that the market can continue to function effectively, while intervening in areas in which the market fails, such as when we act in ways that seem to grow the economy but actually doesn’t (like our increasing dependence on fossil fuel), or when we undermine important aspects of society that have tremendous long-term benefits but the free market will fail to provide because it benefits the entire society as a whole, and not one company (like providing high-quality education for everyone , or mandating a universal health care). Even though it may seem like drilling for oil and cutting back on education is a cheap and easy way to pay back some of our federal deficits and grow the economy, the growth that occurs in the short-term must be balanced with the long-term harm. Most people I know, even Trump supporters, at least agree with me on the point that it’s pretty difficult to grow our planet’s economy if we destroy the planet.

As you can imagine, the trading of Trader Joe’s bags are not too different from my trading my money for a cup of coffee. The bags are sold in Japan for $25 because those trades make both the buyers and the sellers better off, at least in their eyes. Who are these buyers and sellers and why do they act the way they do? We can discuss that in a future post, but today, I want to finish off by pointing out that there exists a common misunderstanding in which people assume that certain things are expensive because the sellers of such goods are evil. You know what I’m talking about if you’ve been surprised to see those $4 bottled-water or $18 sandwiches at airports. But before we make such judgements of merchants who sell these goods and services at outrageous prices, we need to remember today’s key point: trade happens because it benefits both parties.

Some people feel annoyed when they see water being sold for $4 at the airport and blame the merchants for such evil doing. Their anger is understandable because after all, not everybody pays attention in an economics class, but misplaced. Don’t think that the airport stores are charging that price because the store-owners have bad intentions of stealing your hard-earned money. Think again. Even if you refuse to buy that water, there are plenty of other people who are perfectly willing to buy them. I know that there are such people, because if there weren’t, the stores would have lowered the price a long time ago (or have really old water that they can never sell). So is the store to blame for this? Or are they simply charging a price that the buyers are willing to pay?

Another example that is a little more significant and relevant in recent political and economical discourse is the rising price of housing in certain places, namely New York City, coastal California, and Washington state where this is becoming a serious problem. Sometimes, landlords and developers are blamed for such high prices, but that comes from the same misconception. If you have understood today’s point, you should know that rent is simlar to other goods in that it becomes high when there are many people willing to pay it. You cannot blame the landlord, then, for charging that market rate. Why would they charge $500 when there are people willing to pay $1000? If any of us were in their shoes, we would do the same, so it is not right to criticize them. So who is to blame for the high cost of living?

The good news is, economists have studied this topic pretty extensively, and they actually know of data-driven solutions to make housing more affordable to people of varying levels of income, which is a topic I write extensively in this post (in short, remove rent-control, and remove zoning laws). The bad news is, emotionally-charged political debates that disregard everything that econmists have figured out, and politicians who play to people’s ignorance and emotions to get more votes, get in the way of implementing such solutions.

One big motivator for me to keep writing posts like this is to educate more people about economics, because we are all voting citizens. Let us not forget that politicians implement unhelpful policies because citizens ask for them.

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Shin Adachi

I am a pianist and composer based in Los Angeles.