Saturday, March 30, 2013

Abundance and Trade

Yesterday, I noted my first objection to Peter Diamandis and Steven Kotler's book Abundance. My second is perhaps more technical. In Chapter Four, the authors make the (entirely true) point that progress is cumulative. The more we progress, the easier progress becomes, primarily because ideas interact and complement each other. Although not quoted in the book, Matt Ridley's quote on this blog's sidebar makes the same point:
"The more we prosper, the more we can prosper. The more we invent, the more inventions become possible. The world of things is often subject to diminishing returns. The world of ideas is not."
However, in making this point, the authors quote Dean Kamen (previously featured here as the inventor of the Slingshot water purifier, although better known as the inventor of the Segway):
"In a world of material goods and material exchange, trade is a zero-sum game. I've got a hunk of gold and you have a watch. If we trade, then I have a watch and you have a hunk of gold. But if you have an idea and I have an idea, and we exchange them, then we both have two ideas. It's nonzero."
While Diamandis & Kotler's overall point is true, Kamen's quote is just plain wrong. Even in a purely material world, trade is not a zero-sum game. Kamen looks only at the physical objects, not the value the traders place on those objects. By trading, both parties increase the value they place on the objects they have, so trade is positive-sum even if it's solely material trade.

Kamen is trying to speak of opportunity cost. When he and I trade material goods, I have to give up the material good that he wants, and vice versa. The opportunity cost of the material trade is the value of the material good that I'm giving up. But the value of the material good I'm receiving is higher than my opportunity cost, otherwise I wouldn't agree to the trade. The same is true on his side. Both of us increase the value of the things we hold, and our trade is a positive-sum game.

By contrast, if Kamen and I trade ideas, neither gives up the idea that we share with the other. The opportunity cost may include the time it takes to teach an idea, the effort to write it out, the cost to publish a book, etc., but the opportunity cost does not include the idea itself. This makes combinations of ideas far more likely, which is what Kamen seems to be getting at.

This is not just semantics. Much of our government's trade and economic policy is based in the idea that trade is a zero-sum game. Too many people think that if another country is getting richer, we must be getting poorer. The same applies within countries as well--if the rich are getting richer, the poor must be getting poorer. This is used to justify everything from import tariffs and export restrictions to higher taxes and complex regulations. Getting the public to accept that trade is positive-sum, not zero-sum, is the first step towards better economic policy.

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