Reading: Lesson 2 – Why We Exchange

Description:

People voluntarily exchange because it ultimately makes all parties involved in exchange happier and better off. Exchange corrects mistakes in resource allocation by moving things toward higher-valued uses.

In this lesson we expand on the concepts illustrated during the Trading Game in Lesson 4.1. Students will watch and discuss two videos explaining the benefits of exchange. In the first, Professor Michael Munger discusses why we exchange things. In the second video, Professor Bryan Caplan explains how foreign trade creates wealth for all parties involved in the trade. Lastly, students will complete a trading activity reinforcing the concept of the power of exchange.

 

Time Required:

45 min

 

Required Materials:

Internet connection, writing instrument, item for donation (students will be asked to bring in a small/inexpensive item from home that they no longer need/want that they would consider donating)

Prerequisites: 

Lesson 4.1 – Gains from Trade

 

 

4.2.A – Watch and discuss the following video using the questions below to guide your discussion [10 min]:

Video:(Learn Liberty, 4:04 min)

“Professor Michael C. Munger explores what makes exchange more equitable than simply giving gifts. He finds that exchange is important for two reasons:

1. It corrects mistakes in allocation by moving things toward higher-valued uses.
2. It makes everyone involved in exchange happier.

Prof. Munger provides a few examples of how exchange can make people better off without changing the total amount of wealth available. Exchange can even make people better off when they have different items and different preferences. This is the power of markets.”

 

Discussion Questions: Why Do We Exchange Things?

1.  How does exchange make people better off, perhaps even better off than gift giving?

1. Professor Michael C Munger explains this is important for two reasons. Firstly, exchange corrects mistakes in resource allocation by moving things to higher valued uses. Secondly, exchange makes everyone who exchanges a lot happier.
2. Professor Michael C Munger provides an example to illustrate the point: “Prisoner’s at the camps received Red Cross packages that contained food, cigarettes, and a few necessities. These were precious supplies in POW camps. At first, prisoners gave away the things they didn’t like, but before long they started trading instead. Radford’s explanation of this behavior may surprise you. Very soon after capture people realized that it was both undesirable and unnecessary in view of the limited size and equality of supplies to give away or to accept gifts or food. Goodwill developed into trading as a more equitable means of maximizing individual satisfaction.”
3. Voluntary exchange is more equitable than gift giving because when voluntary exchange occurs both parties benefit – otherwise they wouldn’t give up something to acquire something else. However, when someone gives a gift only one person becomes better off.

 

2. How can people exchange goods to increase well-being without any increase in total resources?

1. Even with a fixed amount of resources, each voluntary exchange that occurs makes people happier and better off. Exchange moves goods to where they are most valued.
2. Professor Michael C. Munger explains with an example: “Let’s say we go on a field trip, with boxed lunches that each contain a sandwich, chips, pickle and a cookie. I like chips and you like cookies. I threw in my pickle to get you to agree, and we make the exchange. We’re both happier with our lunches even though we’re dealing with the same amount of food overall.”

 

4.2.B – Watch and discuss the following video using the questions below to guide your discussion [15 min]:

Video: “Foreigners are our friends”  (Learn Liberty, 3:55 min)

“Some people say technology is the driver of innovation, but society often takes great steps in prosperity by trading. Like technological shifts over history, trade is a powerful way of creating wealth for all parties. In one example, Professor of Economics, Bryan Caplan imagines a machine that turned agricultural products directly into cars: it would disrupt the way we do business, but the US would be wealthier for it.  If, however, that machine was nothing but a freighter that exchanges corn for cars with another nation, many people think this is unfair. Whether in dislike for foreign trade or worry about immigration, Prof. Caplan calls this “anti-foreign bias” and points out that most economists don’t share these concerns. Professional economists think that trade and immigration benefit all parties involved – just like innovative technology. As we said before: trade is made of win!”

Discussion Questions: Foreigners are our friends

1.  Why do we underestimate the economic benefits of dealing with people from other countries (anti-foreign bias)?

1. Many people believe that the United States shouldn’t have free trade because other countries don’t.
2. People believe that we are somehow better off if we limit trade to just trading within our own country.

 

2.  What did the 19^th century economist, Henry George, say about the idea of “protection” from foreign products?

1. He said that protection from foreign products is a “self-enforced blockade.”
2. “It teaches us to do to ourselves in time of peace what enemies do to us in a time of war.”

 

3. How is foreign trade a kind of technology? Are there differences in trade if Americans trade with other countries?

1. “When Americans use new technology, we’re better off.”
2. “When Americans trade with foreigners, we’re better off and so are they.”
3. “From the American point of view, technology and trade are the same.”
4. “From the human point of view, trade is better…because trade is made of win.”

 

4.  How is the concept of foreign trade compared to the concept of immigration?

1. They are the same. “Another name for immigration is trading labor.”
2. “Our cost of living goes down; our standard of living goes up.”
3. At the same time, foreigners are able to increase their standard of living as well.
4. Since both parties are better off, it shouldn’t matter that the other person comes from a different country.

 

4.2.C - As a group, play the following game which illustrates the power of exchange [20 min]:

Activity: It’s Valuable to Me!

The “magic” power of exchange moves things to higher valued uses and makes people happier. Although it may sometimes appear to be chaotic, this game will illustrate that with the freedom to choose and trade, the final result generally leaves people with a much higher satisfaction level.

 

Required Materials:

Students are asked to bring in a small/inexpensive item from home that they no longer need/want that they would consider donating.

 

Directions:

1. Students should first rate the item they brought with a satisfaction level on a scale of 1-5 (1 being the lowest and 5 being the highest).
2. Teacher will number all the items and place them in no particular order in the front of the classroom.
3. Participating students will start one at a time (teacher may have them draw numbers to make it fair) with student #1 choosing any item they wish to keep.
4. The next student (student #2) can choose another item from the front of the room, or trade an item which has already been claimed by student #1, ONLY if that student agrees to make the change. If they mutually agree to exchange, then the game proceeds to the next student (student #3).
5. The third student will choose a new item or make a trade with student #1 or #2.
6. Students will continue choosing until everyone has chosen and all the items are spoken for, pointing out that trade creates wealth by increasing value without needing to create anything new.
7. Ask students if their satisfaction level has improved with their “new” item?
8. At the end of the activity, open up the room for free trade for any students wishing to make an exchange.

 

Lesson Recap

• Exchange corrects mistakes in resource allocation by moving things toward higher-valued uses.

 

• Exchange makes all parties involved in exchange happier.

 

• Exchange can make people better off without changing the total amount of wealth available.

 

• The power of markets allow for exchange, even if people have different items and different preferences.

 

• Professional economists think that foreign trade and immigration benefit all parties involved – just like innovative technology.

 

Additional Resources

Article: “Values, Exchange and Profits: The Bedrock of Economic Science” by Frederick Jennings (FEE.org)

“A voluntary exchange, by its own nature, always results in the mutual advantage of both parties, at least in their eyes. In terms of an individual’s hierarchy of values, he will not tend to be willing to accept a lower value in exchange for a higher one. He will only be willing to act if he will be better as a result of the action, i.e. if he will profit by it.”

 

Article: “Why People Trade”  by Carl Menger (Mises Institute)

“The most general form of the relationship responsible for human trade is therefore as follows: an economizing individual, A, has a certain quantity of a good at his disposal which has a smaller value to him then a given quantity of another good in the possession of another economizing individual, B, who estimates the values of the same quantity of goods in reverse fashion, the given quantity of the second good having a smaller value to him than the given quantity of the first good which is at disposal of A.”