Why Trade Makes Us All Better Off

When I was just a small rabbit, I received a computer game as a Christmas present from my parents. It was good – I played it for six months or so and pretty much played it to death. Another boy in my class had also received a game for Christmas and just like me he had also played his to death.

Seeing an opportunity, I suggested we trade them. Computer games are expensive and neither of us, with our limited supply of pocket money, could simply buy all the ones we’d like so a trade would benefit both of us. We would each lose a game in which we had little remaining interest but we would each gain a new game that we hadn’t played before. We each valued the other’s game more than our own and so we agreed to trade.

On returning home from school with a new computer game, my mum was immediately suspicious.

“Where did you get that?”

“From Malcolm.” *

“He lent it to you?”

“No, I traded it for the game you bought me for Christmas.”

My mum was not happy. It was a Christmas present, she said. I shouldn’t be trading presents that people had given me. She was cross. After Mrs Rabbit, my mum is the greatest person I’ve ever met but (also like Mrs Rabbit) making her angry is a bad idea. Oh well, lesson learnt.

Only the lesson hadn’t been learnt. In hindsight, this was a rare occasion when my mum got it wrong. After the trade, Malcolm* and I were both better off. We each had a new game to play and we each got another six months of enjoyment from playing them that we would otherwise have not had. I can understand the concern if there had been some emotional attachment such as if we’d traded family heirlooms or swapped cats but the computer games had no emotional investment from anyone other than ourselves.

(On a side note, I wish I had swapped our cat. It was a complete wanker.)

The other day I wrote a post about George Osborne’s recent speech on the need to cut benefits. One of the parts I took issue with said this:

We’re facing more and more competition from vast new economies like China and India. There are quite literally billions of people who are joining the world economy. That’s human progress. If we’re not careful, Britain risks being out-worked, out-competed and out-smarted by those hungry for a better life.

And the reason I took issue with it is that it suggests that the better that other countries do the worse we’ll do. Like there is a limited amount of “economy” to go around and if the Chinese get a bit more they’ll be taking that bit away from us!

It really does not work like this and George actually acknowledges this when it suits him. Ask him why our economy is weak and it’s all the fault of our European neighbours. The idea that Britain would be better off if all other countries were unsuccessful could not be further from the truth.

There’s a wonderful economics experiment a primary school teacher can do with her class that demonstrates this and it works as follows:

1. You get a bunch of children’s books (you need one per child).

2. You say that after this lesson there will be a special reading time where the children will each get to read a new book.

3. You distribute the books at random so each child has a book.

4. You ask them to each rate out of 10 how much they want to read the book they have during the special reading time.

5. You note down the results.

6. You give them 5 minutes in which they are allowed to swap books with one another if they wish to do so. It is important to point out that

a) they don’t have to swap if they don’t want to

b) swaps should only take place when both parties agree

c) they can swap as many times as they like within the time limit

7. After the swaps are done you again ask them to each rate out of 10 how much they want to read the book they now have.

What you will find is that the average score out of 10 is significantly higher the second time around. Why is that? Because the kids will only do a trade if there is a  gain for both of them. Supposing Child A has “The Gruffalo” and Child B has “The Mole Who Knew It Was None Of His Business.” Child A thinks poo is funny and Child B doesn’t (idiot). So before the trade Child A rates his book as a 7 out of 10 and Child B rates her book as a 3 out of 10. After the trade Child A rates his book as a 10 and Child B rates hers as a 6.

Note that Child B doesn’t think her book is the best in the world but she’d rather read it than read about a mole who spends the entire story wandering around with a (spoilers) dog poo on his head.

Anyway, the important thing is that both children are better off and the trade would not have happened unless both of them would have been better off.

It’s a brilliant exercise because it demonstrates why trade in the real world is so important. Take a look at Abu Dhabi for example. Abu Dhabi has lots of oil. Without trade, Abu Dhabi would be a poor country but with trade they are very rich. Lots of other countries want to use more oil than they can produce themselves and Abu Dhabi can produce lots more oil than they want to use themselves.

On the other hand Abu Dhabi isn’t very good at making the machinery and vehicles needed to get the oil out of the ground and to its destination. Luckily there are other countries who are good at that so rather than having to try to build all that themselves they can get it through trade with other countries.

Anyway, what I’m saying is that when one of our overseas friends gains economic growth it is not something we should fear. Instead we should see a marvellous opportunity for us to increase our trade with them and make both of us better off.

Sadly it seems that all George sees is another reason to cut benefits for poor people.

RedEaredRabbit

* His name wasn’t really Malcolm. I’ve never actually met anyone called Malcolm. He looked like a “Malcolm” though.