Monday, January 23, 2012

Amusing Story About Trade

One of the great flaws in the zero sum model of economics is that it fails to recognize that it is possible to increase the total wealth of a society by trade and improved efficiency of production.  Of course, you can go too far the other way, also, as with this amusing story from Richard Grant White, The Adventures of Sir Lyon Bouse, Bart: in America during the Civil War (New York: American News Company, 1867), 62-63:

I am inclined to doubt the stories told by my predecessors, of two Americans being shut up in a room together, and emerging twenty-four hours after, each with a large fortune made by swapping jack-knives.  This, I am quite sure, is a mere traveller's story, little worthy of credence. It probably is founded on the fact, that the bowie-knife, being the only article in the country of fixed value, is made the basis of all important financial operations. Thus an American offers to swap or dicker (an American never says sell or trade) his bowie-knife with a consignment of cotton, or a number of shares of bank-stock, to boot for his correspondent's or business friend's knife, and certain money, or so much real estate to boot. The stock or the real estate might fluctuate in value, pending the bargain, as, indeed, I have discovered to my cost, in case of my own stock; but the bowie-knife, being in universal and constant demand, has an absolute, permanent value; and it must be admitted, that it lends American trade a certain kind of respectability, by giving it some sort of metallic basis to rest upon.


  1. First off, I would say that swapping bowie-knives back and forth don't increase value for the traders, because after the second trade, both traders are back to square one on the second trade. The increase of value only occurs when both parties are more satisfied with what they have after the trade, than before.

    Second, though, I would point out that even the IRS (or perhaps especially the IRS) understands the truth, that when you trade, you increase in wealth: if you trade your services in installing kitchen cabinets, for braces for your child, both you and your dentist have to pay income tax on those transactions. (If I recall correctly, this is an example given in the IRS tax prep booklet.)

  2. I think that's why the author found the story implausible. He was making fun of what might be considered the anti-zero sum model: the illusion that trade alone can generate wealth.