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.

The Fiscal Cliff and Opportunity Cost

I keep seeing conservative laments about the fiscal cliff deal, like this one, which sums up a bunch from Twitter. There are far too many to link to, but so far, every single one that I have seen has ignored the economic principle of opportunity cost.

Conservatives are upset that taxes are going up and spending won't be seriously cut. But when we look at the opportunity cost for this fiscal cliff deal, we can't just look at some pie-in-the-sky "deal" where the Democrats roll over and give conservatives everything we want. We have to look at the reality of what would have happened without the deal. And the reality is, without the deal, taxes would have gone up twice as much ($478 billion compared to $220 billion), and we would've seen a spending cut that's a measly 0.3% of federal outlays.

I know this isn't how the deal is being portrayed in the media, but these are the facts. Republicans gave the Democrats $9 billion in higher spending, and got $250 billion in lower taxes, compared to what would have happened without the deal. To me, that looks like a win.

A final note on the sequester: Most of the supposed sequester cuts would not have happened for years in the future anyway. If you believe future Congresses would have abided by the sequester, then you're in luck. The sequester is still going to happen, just two months later. If you think that two month delay is a sign that the sequester will never happen anyway, I think you're right. It was never going to happen in the first place, and we lose nothing by delaying it.