“Trade Is Made of Win,” Part 1: Wealth Creation

Trade is Made of Win,” Part 1: Wealth Creation
One of the most important ideas in all of economics is that trade creates wealth. It’s
also one of the least understood ideas in all of economics. Most people think that if
two people trade, one of them has to win and one of them has to lose. But one of the ideas
that has evolved in economics is that trade creates wealth, and we’re going to see that
in the context of a couple of simple examples. Consider two people, Fritz and Lou. Fritz
and Lou can produce two goods. They can produce socks and they can produce corn. In a given
year, Fritz could produce 500 socks or 1,000 ears of corn. Lou, on the other hand, could
produce 25 socks or only five ears of corn. For Fritz, every sock that he produces costs
him the opportunity to produce two ears of corn. Same story for Lou. Lou could produce
25 socks or five ears of corn, so every sock costs him one fifth of an ear of corn. Every
ear of corn costs him five socks. Suppose that Lou comes up with an idea: Lou goes to
Fritz and says, “Hey, tell you what. How about you specialize in corn and I’ll specialize
in socks, and then I’ll trade you one sock for every ear of corn you’re willing to
trade me.” What we want to do is compare the price at which they propose trading to
their opportunity costs. If you’re Fritz, every sock costs the opportunity
to produce two ears of corn. If Fritz is able to trade for socks, then every sock is only
going to cost him one ear of corn. Fritz would prefer the trade. Why? Because socks are now
cheaper. Let’s see what happens to Lou. If Lou is
going to produce corn himself, he has to give up five socks in order to produce that corn.
If Lou trades for corn, he only has to give up one sock per ear of corn. Fritz, the buyer
of socks, is now able to get socks cheaper. Lou, on the other hand, is able to sell his
socks for more than he could get them for if he produced them himself. Fritz wins. Fritz
is made better off. Lou wins. Lou is made better off. Trade is made of win or, as your
economics professor might have told you, trade creates wealth.

100 thoughts on ““Trade Is Made of Win,” Part 1: Wealth Creation

  1. Brilliantly true. Free trade is also great because you're not forced into it. If you don't like a deal for any reason, you have the choice not to partake. This concept works for anything. I'm not willing to trade my cash for a $200 set of Dr Dree headphones, it's a rip off. However, I'll shop amazon for another set I feel is worth the money. No force, only choice.

  2. Just wondering, does this include the variables of price and demand? Despite how mathematically true this is, why would someone create 1000 stalks of corn when they could create 200 socks and 600 stalks of corn, therefore eliminating the "need" to trade with Lou when Lou affects a mere 2.5% of Fritz's profit?

    I may be wrong, but I don't know if P & D affects this example.

  3. @jmitterii2

    No trade = no jobs
    +Trade = +Jobs

    Increased trade increases the demand for labor, and the price of it (wages) too. WIN!

    +Trade = +Cheaper Goods
    Increased trade allows competition in price and quality of the goods, consumers pay less for better products, their purchase power is higher because of cheaper goods. WIN!

  4. @jmitterii2 You need to understande the nature of wages, their increase or decrease is subject to the laws of offer and demand like any other product. Im sorry if you are stuck in a crapy job, but in a more vibrant economy where your labour would be demanded you could switch to a job that pays better for what ever skills you have to offer. Labour prices (wages) work like any other product. What do you understand or mean when you say "Exploited"?

  5. @Researchrules that's untrue trade works fine when opportunity costs shift. I don't know where you got your information from, but current understandings of economics suggest quite the opposite.

  6. @Researchrules Except innovation happens every day and we do rely on trade. Regardless of your logic your conclusion is unsound. Innovation and trade together maximize efficiency. Also applying the laws physics and evolution to economics is an ineffective argument. In particular your misuse of the laws of thermodynamics is strikingly similar to the people who thinks it proves the existence of god. I suggest consulting an economics professor. .

  7. What people see is the imbalance in how much both sides win and assume that a less win is a loss … that's why people have gotten stupid about how the market works. They see the lowest as being a loss even when … it's still really a win.

  8. @Researchrules Ill give you more examples I-pads, microwaves, the internet. Innovation happens plain and simple. Second physics does not play a large role in economics(much like physics plays NO role in poly sci), psychology plays the predominant role The world you live in contradicts your theory were as my theory explains the world we live in. What it really comes down to is some people and land are just better equipped to produce certain products, meaning trade utilizes resources best.

  9. @Researchrules "Energy flows weather we dream of it or no"

    That is one of the most profoundly childish statements I ever heard. Electricity flows because it was generated by turbines and transported within an infrastructural of circuits. Corn grows because a farmer plants it and tends to it. A car drives because of an engine and gasoline and all the other prerequisite processes required. Nothing happens for no reason, and no amount of pure dreaming will make it otherwise.

  10. If the phrase "trade creates wealth" is qualified with the word "can" or "possibly", then I would be inclined to agree. Trade *can possibly* create wealth; it is clear that it does not necessarily do so.

  11. Trading does not "CREATE" anything. People create things then trade them.
    In fact, it takes time to trade, therefore it actually costs something,
    And many, many trades are Win/lose trades.

  12. "If both sides are informed and accept the trade willingly, both consider making the trade better than not making the trade, thus wealth is created."

    Since you use a subordinate clause using the word "if" I think my criticism stands. By your own admission, it shows that it is possible for one or more sides to not be informed or to accept by coercion.

    Also you forgot the possibility that one or more sides is informed and willing, but just incredibly stupid.

  13. I'm not suggesting that holding someone at gunpoint is the only kind of coercion. You can make implicit threats without crime. This is essentially what any serious and succesful salesmen does (if you don't buy my product you're going to experience such and such a consequence).

    And you're right. If you force people to make choices you think are best you're a tyrant. But don't act like just because one makes a choice on their own volition makes it a good choice. I've never advocated tyranny.

  14. From the standpoint of "economic profit", you can certainly arrive at win-win situations. Example: US and China together produce more when they trade vs. when they do not.

    However, from the standpoint of "accounting profit", trade can lead to win-lose situations. Example: US runs trade deficits and loses jobs to China, and as a result the US has more people depending on the government and youth on their parents, while China gets millions with greater longevity and out of abject poverty.

  15. It should be noted that this only proves that specialization of labor creates wealth. Trade (e.g. between nations) is a tricky subject because different nations could be subsidizing different industries. This is why trade negations are important.

  16. My point was that subsidies make fair trade hard. You can't just say "Ok, no tariffs, let's have free trade." Subsidies hide the true cost of a product and allow the product to be effectively made at a loss which is not sustainable.

  17. yes trade is win win, but most people especially at the top prefer to steal, think slavery in it's many forms, while corp move to cheap labor that labor is usually not in a win situation, they end up with a destroyed enviroment, low pay long hard hours, no benefits and if they get injuried or fired no compensation, so this is not free trade this is slavery. slavery is never trade. free trade, fair trade etc are just oxymorons as things are today. man is not free and he is not winning either.

  18. And "trade" as the type referred to in the example occurs not just between countries but within them.
    If it's so beneficial then shouldn't we make incentives for people to do it more often with people inside the country than outside of it?

  19. And as for "specialization" isn't it unfair when countries rather than individuals specialize? What if I grow up interested in the specialization for the other country?

  20. The channel Learn Liberty is owned by an organization called "Institute for Humane Studies" which is chaired by the Koch brothers. "Learn Liberty" contributors are paid to produce right-wing propaganda following the corporate agenda of the Koch brothers et al, who have also contributed millions to fascist organizations in the US.

    You can find this information on their website and their wikipedia page, though someone in IHS seems to keep a close eye on the wiki page to control its content.

  21. The free market is a myth in itself. It existed for extremely brief periods of history in isolated locations, but 99% of the history of capital has shown an entwinement of gov & big business because that's the way corporations want it and have always wanted it. In the end, corporations own the economy and thereby own this country & this world, except during those few periods of structural crisis when the people are able to fight back and fight for a more equitable society.

  22. I recommend looking up "Confessions of an Economic Hitman" which will explain how corporations systematically use their resources to control weaker government. How corporations influence the American government is often more subtle, but this can be researched too.

    First think of the economy as the foundation for everything that happens in our society, for truly there is almost nothing which has not been affected by economics.
    Next consider who owns the economic foundation. It is not 'consumers'

  23. "It's better to just think of society, which consists of an elaborate nexus of interactions between human beings."
    Society is not composed only of interactions between human beings. Most of the interactions which define society are between institutions or between institutions & individuals.
    It IS frustrating that we do not experience 99.999999% of the defining interactions in our society, and the American media which is 90% controlled by 6 corporations (literally) does a terrible job showing any

  24. When economists say voluntary trade is mutually beneficial, they assume the existence of private property rights and the nonexistence of externalities. Given these assumptions, everything stated in the video is correct. No economist has said that forcing a woman to be with a man against her will is beneficial. Your example is one that is NOT voluntary, and illustrates the point that the video is trying to make, which is that voluntary transactions are beneficial and involuntary ones are not.

  25. What about trading husbands though. You can't trade wives without trading husbands. By the way, whoever said anything about forcing?

  26. complexity and difficulty are fixed. a software engineer can learn to knit, but a person who can knit may not be able to code. as such one is getting inequitable return from sharing/offering their good. what happens in this market paradigm when a person has wants, but nothing to provide?

  27. [[Trade should not be viewed as good or bad.]]

    The argument that rational trade is "good" because it's win/win INCLUDES the idea of either party NOT trading when it's not to their benefit. Both actions, trading or not trading, support the same premises, that one should trade if he's better off afterwards for doing so, compared to ones alternatives. What would refute the "goodness" of the Subjective Theory of Value is if trade necessarily involved a zero sum condition, i.e. win/lose scenario.

  28. [[ what happens in this market paradigm when a person has wants, but nothing to provide?]]

    Tough shit. A robber "wants" my money, but has no right to get it for free.

  29. [[When economists say voluntary trade is mutually beneficial, they assume the existence of private property rights]]

    This is part of the Subjective Theory of Value. What it's 'opposing' basically is the Labor Theory of Value. So we're not simply talking about private property, but labor too, i.e. anything that can be traded for something else of value. This "trade is made of win" principle can apply to commerce, labor, or even personal social/emotional exchanges or interactions.

  30. Ah ha ha, here we go. Libertarians who make videos take pains to make their message seem positive and palatable, but their more emotional brethren, like you, inevitably enlighten people as to the true meaning of their ideology: "Fuck you, got mine."

    In other words, you believe that anyone who isn't useful to you personally, or to the 'free market' you worship, should just crawl into the gutter and die. Well, guess what? Those millions of poor feel the same way about your smug, greedy ass.

  31. You missed the point. I am part owner of a free to attend school for children in Issan Thailand. I and three blokes from England finance it out of our pockets. I also give to various Thai orphanages. I do that because I want to, not because society has a first mortgage on my life. Society does not own me. So your implication that want holds precedent above all other matters falls apart when one considers that a thief "wants" my money, but that doesn't mean he has a moral right to it.

  32. [[ Those millions of poor feel the same way about your smug, greedy ass.]]

    Not surrendering what I've earned is not "greedy". I give to charity because I want to, not because I'm obligated to. And BTW, if I kept every penny I earned, it would be perfectly moral to do so. There is no such thing as the right to the unearned and undeserved. I give to charity because morality is compassion & empathy for the innocent. I am not morally obligated to surrender my property. Do you know the difference?

  33. Yes it does. Say I can grow 2 crops with your fertilizer and I trade 3 crops for 3 fertilizers, I can grow 6 fertilizers and my wealth increases. But say 0.5 crops are required to create one fertilizer, then you win too and your wealth increases. So the net wealth increases. The wealth would not increase if we kept it to ourselves.

  34. No that's wrong. Value is never an intrinsic property of an object.

    It's subjective. If you happen to own a good, but value my good higher and I value your good higher we both gain by traiding. We're both better off, value was created by transfering resources to a better use.

    It's important to always remember that value is subjective. The physical stock of goods doesn't matter, without individual valuation. If you produce stuff that nobody wants, no value was created.

  35. Not against Liberty or free markets but…technology is rapidly changing the way we live. Automation of machines will continue to replace most workers as they become more productive and cost less. Don't forget about 3D printers soon will replace manufacturing.What will happen to the jobs and purchasing power of most people? Our system is outdated. If you have not heard of a Resource Based Economy and The Venus Project, look it up. Our current system is collapsing, and we have an alternative. 🙂

  36. A 3D printer still needs raw material to work. Jobs would just migrate towards raw material extraction.

  37. Right. BUT those raw material extraction jobs will be replaced by machines and robots, eventually. And the jobs to build these machines and robots.will also be replaced by machines and robots themselves. MOST IF NOT ALL PHYSICAL/LABOR JOBS WILL BE REPLACED BY MACHINES. Its scary to think about and its not hypothetical, this is where the trend is going.

  38. The rise of 3D printing technology along with the exponential growth of computing power,will allow economies around the world to achieve the highest productivity we've seen. Yet we will see the lowest consumption because millions of unskilled workers will be put out of jobs and replaced by machines/robots. The only jobs that will matter in the future are engineers (software/computer/electrical/mechanical etc. ), and all the rest of the sciences/technology fields.

  39. But the only reason that this is a problem is because of population growth. If there were less people to be unemployed, less people would be unemployed.

  40. You don't work. The system he describes is compatible with Anarcho-communism, which is what I would like to happen. In a system where everything is free, not everyone *has* to work. So if you have no skill you could use to benefit society, then you don't have to work. We don't need the entire population of Earth to become doctors and teachers, you know…Not everyone *needs* to work.

  41. Capitalism is becoming outdated. In a system where everything is free, they won't need to work. Besides, a huge barrier to gaining the skills for a good job is the inability to pay for college. Scholarships aren't that reliable, and student loans take decades to pay off. This year's salutatorian at my school didn't get any scholarships he applied for, he only got the NMSQT scholarship based on his PSAT scores, so even being top of the class isn't enough sometimes. Money prevents innovation.

  42. alright, thanks.I wasn't aware of the comparative advantage theories, but i belive absolute advantage is what i was thinking about. I guess in this case the party wich is underproductive can do nothing but minimise loss by, yet again, trading.

  43. The Third World would agree with TheSmackerlacker COMPLETELY. Invariably free trade creates MORE and HIGHER PAYING jobs in the country where production is increased, while MORE and HIGHER PAYING jobs are INsourced to the US than are outsourced (and still more jobs are created by the economic efficiencies that are created when goods and services are available at a lower price. Free trade has a great deal of consequences – all positive.

  44. You miss my point. There does not exist a circumstance where free trade does not benefit both parties period. It makes absolutely no difference whether one country is statist and another is not. Subsidies and tariffs are harmful to both parties, so the best thing that anyone can do is eliminate them UNILATERALLY and benefit from the result. If a business (ANY business) can't compete, it SHOULD be eliminated in favor of some other activity to everyone's benefit.

  45. I mean there does not exist a circumstance. Free trade not only has existed numerous times (all beneficially) but exists for countless items not so restricted even while others are. NAFTA, while not free trade was more so than what previously existed. It was a minor matter in the US economy but Mexico has done remarkably better shifting more jobs into a modern economy and materially LOWERING unemployment (from above 10% to 3.2% in a decade – now about 5%).

    Your "facts" aren't.

  46. The point that I was making is that, economically it doesn't make the slightest bit of difference whether one country is free and the other is statist to the benefit of reducing or, better yet, eliminating any and all subsidies and tariffs that interfere with free trade. That all sorts of such barriers have been erected is true but doesn't change the fundamental fact in the slightest.

  47. Actual jobs. The murder rate (not for jobs) in Mexico is high by US standards but low in comparison to much of South America and nearly ALL of Central America (Honduras, El Salvador, Venezuela, Columbia, Belize, Guatemala being among the deadliest places on earth). Columbia is the worlds largest drug pusher. And that the US offers a much higher standard of living attracting immigrants doesn't help your case or undermine anything I've said.

    The facts are against you.

  48. In fact, in the wake of the passage of NAFTA, the Mexico murder rate fell steadily and substantially from 16.9 in 1995 to 8.1 in 2007. the subsequent spike due to an ongoing drug war has NOTHING to do with either trade or any lack of jobs. The Mexican standard of living has nearly DOUBLED in that time ($8,200 – 1993 est. to $15,600 – 2012 est).

  49. I've done an objective profile on you and you come across as an imbecile, I haven't "justified" anything that's wrong in Mexico, I just pointed out that connecting it to NAFTA is complete and utter BS. I choose FACTS based on what they ARE, not by preference. The difference between us is that the facts that I have presented, unlike your own, ARE facts. All I have done is justify free trade on the FACT that it is always beneficial. That's not ideology; it's basic economics.

    Nice try.

  50. Neo liberalism includes much more than free trade and doesn't need any further justification from me. Since free trade DOESN'T EVER "destroy jobs", as the actual data shows, clearly YOU are the only one suffering from delusions. As for Mexican poverty you found a rare Factbook typo. Less than 2% of Mexicans live below the international poverty line. The official rate had been running around 18.2% (2012) before they changed the calculation and have it at 42% for 2013.


  51. The poverty rate did NOT suddenly increase, quite the opposite. All that changed was the methodology. Moreover, the greatest improvement in conditions for the poor took place between 1996 and 2002, right after the passage of that thing you claimed devastated Mexicans. That the Mexico drug war problem has nothing to do with any of this is pretty straightforward. there is neither evidence nor logical argument to the contrary. The overstatement about US immigration is another non sequitur.

  52. Ideally, there should be no reason why borders should not be open or trade should not be completely free. Open borders are incompatible with the welfare state, as Milton Friedman pointed out, but that's a problem with the welfare state not open borders.

  53. It would have been even better with more ridiculous products and services.

    Handjobs and Titanium jet ski propellers would have been my choice.

  54. This assumes that different people have different capabilities, which is still a good assumption in the real world. But it would no longer be a valid assumption in a world where everyone had equal capabilities.

  55. If life were so simple, then these conservative intellectuals would be genius Gods. Could this be the reason that there are 10 times more conservative think tanks than worthwhile realistic type of think tanks?

  56. Lou makes 1 sock, will needs 1 sock. Lou needs Will's tellytubby.  They swap.  End of story.  Giving Lou 5 tellytubbies isn't going to help.  Being able to gain 5 socks from Lou, well lou still has to make 5 socks and that's a lot of effort for 1 tellytubby. Only will wins if he gives away only 1 telly tubby for 5 socks (nearly typo'd socks lol)

  57. Firstly, nobody, not even Marxists, think that in trade one person has to win and the other has to lose. The Marxian perspective, rather, is that no nobody either wins or loses – all exchanges involve the trading of equal values. If I can make an ear of corn in one hour, I will sell it for an hours worth of socks, and no less. If it takes you an hour to make a sock, then we can trade on a one-to-one basis, nobody winning and nobody losing. If it takes you half an hour to make a sock, I will trade you my ear of corn for two socks – again, no winning, no losing. Value is never produced in trade – pieces of raw and transformed nature are simply moved around from person to person; this cannot result in an increase in wealth. Additional or surplus wealth is created in production – it is the difference between what the worker produces and what is he paid. The Marxian theory of exploitation destroys the Austrian model every time.

  58. Opportunity costs, markets, etc. are too confusing for most liberals, so their solution is just to spew the crap the liberal media gives them: "Man, we gotta do something about these corporations always ripping us off! The government needs to creating jobs so unemployment goes away, and raise the minimum wage to $50/hour so nobody will ever be poor again". 

  59. The trouble is that economic interactions have a bigger impact than this simplified scenario. The effect of organising an economic system, where it serves in our individual self interest to compete, whether as employees, employers, manufacturers, producers or consumers is that it will not always be a win-win. This is why negotiation is central to competition, and one's win, is another's loss.

  60. @Learn Liberty I've watched this video five times and I have questions. 1. What if the price mechanism is greater than the capacity for one of the producers? 2. What if the wealthy producer imposes severe conditions onto the poorer producer? 3. What if one of the producers is a wage earner and therefore has no "produce" to sell? 4. How does this apply to intangibles/invisible/information goods, which are infinitely reproducible (if at all)? I've furnished enough questions for another video, I realize, but I don't want viewer to take the principle of wealth creation on faith or by credence, but to deeply grasp the full implications of the idea. Lastly, what text do you recommend to explore this basic principle fully?

  61. interesting points ,if anyone else needs to find out about the secret affirmations for wealth try Craffanty Subconscious Power Center (do a search on google ) ? Ive heard some pretty good things about it and my friend got cool results with it.

  62. Who the heck disliked this video? It's economics 101 that has time and time again proven itself to be correct. I'm guessing some Sanders voters came through.

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