OnExchangeandItsGains1
August2016
GeoffreyBrennan
Philosophy,ANU;Philosophy,UNC‐ChapelHill;PoliticalScience,DukeUniversity
“Iwant…economists…toconcentrateonexchangeratherthanonchoice.”
[Buchanan(1964)emphasisinoriginal]
IIntroduction
OverthehistoryofEconomics,therehavebeenasmallnumberofinfluential
voicesinsistingontheprimacyoftheideaof“exchange”withinaproperaccount
oftheEconomicsdiscipline.Sometimesthisviewhasbeenexpressedintermsof
recommendationsforachangeinthediscipline’sname–awayfromoeconomia
(withitsconnotationofhouseholdmanagement)andtowards“catallactics”or
“catallaxy”–thescienceofexchange.RichardWhateley–thesecond2incumbent
oftheDrummondChairatOxford(1829‐1831)–wasanotableexponentofthis
view.SotoowasHayek(1976ch10)followingvonMises(1949).But,inrecent
times,perhapsthemostpersistentproponentoftheexchangefocushasbeen
JamesBuchanan;andperhapsthemostextendedandexplicitpleaforthisview
iscontainedinhis1964PresidentialAddresstotheSouthernEconomics
Association,subsequentlypublishedas“WhatShouldEconomistsDo?”.The
centralmessageofthataddress/paperisnicelycapturedbythequotationfrom
it,offeredhereastheepigraph.Economistsshouldfocus‐‐notonchoice,noton
rationality,notonrelativeprices,notonscarcity–butonexchange!3
IshallshortlylayoutwhatIbelieveBuchanan’sreasonswereforthis
preference;butbeforedoingso,itmightbeaswelltosayalittleaboutwhatisat
stakeinanyclaimsaboutadiscipline’s“concentration”orprimaryfocus.After
all,onemightthinkthatthebasicelementsinthe“economicwayofthinking”are
properlyconstruedascomplementaryratherthanrival4.Soideasofscarcity,and
1Anearlierversionofthispaperwasgivenasthe2016BrianBarryMemorialLectureattheLSE
inJune2016.
2Hehadearliertutoredthefirstincumbent,NassauSenior.
3Icanattest,frompersonalconversationsonmanyoccasions,toBuchanan’sjudgmentthatthe
realtestofthequalityofanEconomicsPrinciplescoursewashowsoonitgottoexchange.He
hadinmindsomethinglikethefirstfiveminutesofthefirstlecture!
4IhavelongthoughtthatPaulHeyne(1973)wasrighttoinsistthateconomicsisbetter
understoodasa“wayofthinking”thanasasubjectmatter.Themajorjournalsarefullofpapers
withtitleslike“theeconomicsof…”wheretheobjectcanrangeacross:crimeandpunishment;
time;suicide;politics;thecourts;self‐confidence;esteem;climatechange;corruption–indeed,it
wouldbeaninterestingchallengetodeviseatopicwhichwouldreducetheeconomiststo
silence!Allthesepapersarerecognizedbytheboundary‐ridersofthediscipline(thejournal
editorsandreferees)asbeing“economics”insomemeaningful(andpublishable)sense.
rationalchoice,andtheroleofrelativeprices,orforthatmattermethodological
individualism,andtheideaofequilibrium5,allplayaroleinEconomics–and
arguablyanindispensablerole.AnditiscertainlynotBuchanan’sambitionto
dispensewithrationalchoiceorscarcityascentralelementsinthestructureof
thediscipline.
Itakeitthatbyemphasizingexchangeastheappropriateconcentration,
Buchananissuggestingsomethinglikeaguidingidea–agestalt,ortouseoneof
hisownfavouritemetaphors,a“lens”6‐‐throughwhicheconomicenquiryisbest
pursued.Effectively,heisborrowinganinsightfrom‘behaviouraleconomics’
abouttheimportanceofframing;andapplyingthatinsighttothedisciplineof
economicsitself7.Ifthisisacorrectinterpretation,thenonenaturalquestionto
askis:whatisatstakeinframingeconomicsthroughan“exchange”focus?And
whatmightweseetheexchangefocusasdelivering?Putanotherway,whatare
thechiefrivalstoanexchangefocus;andwhatareBuchanan’scriticismsofthese
alternatives?
ThetwoprimaryalternativesBuchanancanvassesinhis1964paperare
‘scarcity’and‘rationalchoice’;andIshallbrieflysummarizehisviewsonthese.
Scarcity:
Perhapsthemostfamiliar‘definition’ofeconomics–andprobablythe
mostinfluentialwithintheprofession‐‐islaidoutbyRobbins(1932).As
Buchananseesit,Robbinsthinksofeconomicsasaresponsetoaproblem.
Thatproblemisscarcity–theconfrontationoflimitedmeanswith
necessarily“competingends”.“Theeconomicproblem…isoneof
allocationmadenecessarybythefactofscarcity,thenecessitytochoose.”
[Buchananp30,emphasisinoriginal].ButasBuchananputsit:“Ipropose
totakeonLordRobbinsasanadversaryandtostatecategoricallythathis
all‐too‐persuasivedelineationofoursubjectfieldhasservedtoretard
ratherthantoadvancescientificprogress.”AsIreadBuchanan,hischief
objectiontothisRobbinsianconceptionofeconomicsisthatitis
hospitabletoaninappropriatelevelofaggregation.Theapproachtoo
readilyinvitesaconceptionof“societyatlarge”facingaproblemofhow
toallocate“itsresources”.Itfailstoemphasizethatanysocietyis
composedofindividuals,allofwhomfacetheirindividualproblems
basedontheirownresourcesinasettingwhere“success”istoberatedin
termsoftherealizationofthegoalsandpurposesofeach.“Society”is
properlyunderstoodasahabitatforproblem‐solvers;notasa‘problem‐
solver’initself!
RationalChoice:
5Eitherasastateofaffairsor(astheAustrianstendtothink)asamagnettowhichstatesof
affairsaredrawnbeforethereissome(inevitable)exogenouschangeinprevailing
circumstances.
6Buchanan’suseofthisNietzschianmetaphorisnicelyillustratedintheIntroductionto
Buchanan(1967).
7Buchananwasnotasithappensespeciallyinterestedinbehaviouraleconomics;andwould
probablynothaveusedthe‘framing’metaphorhimself,evenifithadthenbeencurrent.
Buchanan’sobjectiontothinkingofEconomicsasastudyof‘rational
choice’is,inonesense,almosttheoppositeofhisobjectiontoascarcity
focus–namely,thatitistooindividuated.Afterall,rationalchoiceis
somethingthatcanbepracticedbyCrusoeonhisisland.Crusoecanmake
decisionsastowhethertofishorgathercoconutsorswimouttotheship,
makingthemarginalcalculationsastowhichisbestforhimgivenhis
endsandthetimeandenergyusedupineachactivity.“Theuniquely
symbioticaspectsofbehaviour,ofhumanchoice,ariseonlywhenFriday
stepsontotheisland,andCrusoeisforcedintoassociationwithanother
humanbeing.Thefactofassociationrequiresthatawhollydifferentand
whollynewsortofbehaviourtakesplace–thatof‘exchange’…”[Buchanan
(1964)p35].
OrasBuchananwastomakethepointsomeyearslater8:
“Economicsis,orshouldbe,aboutindividualbehaviourinsociety”
BrennanandBuchanan(1985)p1
However,insistencethatEconomicsisasocialscience,andthereforedealswith
individualsinsociety,wherethestructuresofinterdependenceandpatternsof
associationareacentralissue,isIthinkonlyonepieceofBuchanan’scase.The
otherpiececonnectstothespecifically“symbioticaspects”ofsocialbehaviour.
ForBuchanan,onethingthattheexchangegestaltservestomakesplainisthe
positive‐sumpossibilitiesinhumaninteractions.Clearly,inthemorefamiliar
biologicalsetting,symbiosisreferstoastructureofinterdependencewhereeach
(species)hasitssurvivalprospectsincreasedbytheactivitiesoftheother.And
whenheappealstothattermBuchanansurelymeanstosignalafocusonthe
mutualgainsthatassociationmakespossible.Possible,butofcoursenot
inevitable.WhenFridayarrivesontheisland,thereistheprospectofwarfare,of
theft,ofinteractionsthathaveacharacteristicallynegativevalence.Andthough
Buchananmightinclude,withinthedomainofpossible‘exchanges’,an
agreementbetweenCrusoeandFridaytodividetheislandandleaveoneanother
inpeace,thatisnottheemphasisheseestheexchangefocusasdelivering:he
hasinmindpositivesuminteractions,ratherthantheavoidanceofnegativesum
ones.9
Wheneconomists(andcertainlyBuchanan)talkof“exchange”,theideaof“gains
fromexchange”followalmostimmediatelyinthewake.Ifyouaskthetypical
economistthequestion:“whatdoes‘exchange’involve?”themostlikelyanswer
is:“mutualgains”.Indeed,asHeath(2006)perceptivelyobserves,Buchanan
effectivelyuses“gainsfromexchange”ascoterminouswith“mutualadvantage”.
Soinparticular,Buchanan’sconstitutionalcontractarianism(andhis‘economic
8Admittedlyinaratherdubiouscollaboration.
9Thedistinctionseemstobeanimportantoneinthe‘framing’sense.Forexample,in
understandingthefunctionsof‘rights’,economistsarelikelytoemphasizetheirrolein
facilitatingexchange–andtherebyincreatingpositivebenefits[Coase(1961)exemplifies];
whereaspoliticalphilosophersarelikelytoemphasizetheroleofrightsasprotectionsagainst
losses,reflectingIsuspectabroadlyHobbesianpictureofthestateofnaturewhererightsare
absent.SeeBrennan(2016)foranextendedtreatmentofthisthoughtinthecontextofhow
‘liberty’tendstobeunderstoodinthedifferentdisciplinarysettings.
theoryofpolitics’)isdevelopedasanapplicationofthe“exchangefocus”broadly
interpreted.
“Inthemostgeneralsense(perhapstoogeneralformost…toaccept),the
approachtoeconomicsthatIamadvancingextendstocovertheemergence
ofapoliticalconstitution.”Buchanan(1964)p39
Relatedly,the“synthesisofthetheoriesofpoliticalandeconomicdecisionmaking
(PublicChoice)”10forwhichBuchananwasawardedtheNobelPrize,hewould
oftendescribeintermsofthestudyof“politicsasexchange”.11
OneinterestingfactinthisconnectionisBuchanan’sstatedpreferencefor
“symbiosis”over“catallaxy”.Symbiosismightbeunderstoodtoincludeallcases
ofmutualbenefit;catallaxyfocusesonexchangeassuch.ForHeath,this
predilectiontowrapupall“mutualadvantage”(touseRawls’phrase12)inthe
“gainsfromexchange”terminologyfailstodistinguishthefactofmutualbenefit
fromthe“mechanism”(Heath’sterm)bywhichsuchmutualgainisrealized.
Exchangemaybeonemeansofsecuringmutualadvantage;butatleastin
principle,mutualadvantagemightbesecuredinotherways.Heaththinksthat
therearesuchotherways;andconsidersthatthe‘exchange’focuslendsa
“catallacticbias”tothenormativeanalysisofsocialinteractions.13
Buchananclearlythoughtthatmarketexchangewasnottheonlyarenainwhich
mutualgainscouldbesecured,because,asnoted,heexplicitlysoughtto
conceptualizepoliticsthroughtheexchangelens;butthereissomeevidencethat
hethoughtofmarketexchangeasthenaturalpointofdeparture.Asheputitin
laterlife:
‘Thesimpleexchangeofapplesandorangesbetweentwotraders–this
institutionalmodelisthestartingpointforallthatIhavedone…theideas
thatcapturemyattentionarethosethatdirectlyorindirectlyexplainhow
freelychoosingindividualscansecurejointlydesired14goals.”Buchanan
(1986/99)p26
Inwhatfollows,Ishall,likeHeath,beconcernedwiththerelationbetween
exchangeandmutualgainsormutualadvantage.Ishallbeconcernedwith
mutualadvantagethatarisesotherthanviaexchange.AndIshallbeconcerned
toinvestigatewhethervoluntaryexchangealwaysyieldsmutualadvantage–or
atleasttouncovercaseswhichputpressureonthatconnection.AndIshallbe
concernedtoexplorecaseswhere,notonlyisitthecasethatmutualadvantage
canarisewithoutexchangebutwhereexchange(atleastinthefolk
10NobelPrizepressrelease(1986)
11Tobesure,Buchananreferredoftentopublicchoiceanalysisalsoas“politicswithout
romance”.Foranextendedtreatmentofthe“politicsasexchange”theme,seeBrennan(2012).
12Rawlsfamouslyreferredto“society”asa“cooperativeventureformutualadvantage”.
13HeaththinksthatthatcatallacticbiasextendsfarbeyondBuchanan–toalmostall
contractariansocialtheorists.
14Thereferenceto“jointlydesired”goalsisliabletomisinterpretation.Exchangedoesnot
requireornormallydependonanyprioragreementaboutthedesirabilityofparticularstatesof
affairs.Thereneedbenoconsciousnessoftheotherinwhicha“jointdesire”mightbegrounded.
Muchofeconomicsisconcernedwithwhateconomistsrefertoas“impersonalexchange”in
whicheachtradersimplyrespondstothemarketcircumstancesinwhichshefindsherself.
understandingofwhatexchangeinvolves)wouldactuallydestroythebenefits
onoffer.Itakeitthattheseexamplesaresufficienttoundermineanystrictly
logicalconnectionbetweenexchangeandgains.Ofcourse,thatclaimdoesnot
denythat,inmostcasesofsignificance,exchangeisthemostsignificantsourceof
generalgain.15
BeforeIattendtothesepropositions,IneedtosayalittleabouthowIshall
understandexchange;andwhyBuchananmightthinkthegainsthatitgivesrise
toaresignificant.ThiswilloccupysectionIIofthispaper.Ineedalsotoexpose
whatIthinkofasasomewhathiddendisagreementwithintheeconomics
professionastowheretheso‐called“gainsfromexchange”inmarketsoriginates.
ThatwilloccupysectionIII.IshalltheninsectionIVdiscussthecaseofexchange
withoutmutualgains.SectionVwillbeconcernedwithcasesofmutual
advantagewithoutexchange.InsectionVI,Ishallwanttoputsomepressureon
theideaofmutuality.AndinsectionVII,focusoncaseswheremutualbenefitcan
ariseonlyifexchangeisruledout.SectionVIIIoffersabriefconclusion.
IIExchangeDefined
Idonotintendtoattemptanythingespeciallyelaboratebywayofdefinitions
here.ButitwillhelptobeclearwhatImeanwhenIrefertoexchange.Andfor
thispurposeitwillbesufficienttogobacktoAdamSmith.
InthesecondchapteroftheWealthofNations,Smithcontraststwowaysof
gettingwhatwewantfromothers–byappealingtotheirbenevolence,onthe
onehand;andbyquidproquo,ontheother.Hethinksquidproquoismuchthe
moresignificant–andIshalltakeitthatthislattercaseisthearchetypical
exampleofexchange.
“GivemethatwhichIwantandyoushallhavethatwhichyouwant…”is
the“mannerinwhichweobtainfromoneanotherthefargreaterpartof
thosegoodofficeswhichwestandinneedof”[WN.I.ii.2]
TheactivitiesthatSmithhasinmindareintentional;inbothcases,eachactoris
takentobemotivatedbyadesireforthatwhichtheothermightprovide.
Distinctively,intheexchangecase,IsecurewhatIwantbyofferingaquid‐pro‐
quothattheotheraccepts.ThatexchangeismadepossiblebythefactthatIhave
agreaterdesireforthatwhichtheotherhas(andIwant)thanforthatwhichI
have(andtaketheothertowant).Consistentdesires(inthissense)arenotof
coursesufficient;theexchangemustactuallybeconsummatedforthemutual
advantagetobeproduced.ButItakeitthattheideaofexchangeinvolvesan
identifiablequidandanidentifiablequo;andarelevantdivergence(eitheractual
orpotential16)intheeffectivedesiresofthetwoparties.AndIamtakingitthata
15Inthatsense,Idonotseemyselfweighingintothequestionofwhetherthereisa‘catallactic
bias’incontractarianpoliticalphilosophy.Logicinitselfcannotestablishorrefute‘bias’claims.
16Therelevanceofpotentialdifferenceisobscurehere.Buttheissuewillbetakenupbrieflyin
sectionIII.
characteristicfeatureofexchangeisthepresenceofdesirespecificallyforthe
relevantquo.
Inthatsense,thereisasignificantdistinctionbetweenexchange(thecentral
notionincatallax/catallactics)and“symbiosis”–whereatleastinthestandard
biologicalinterpretationsthereisnointentionality.Theremaybeanaloguesto
symbiosisinthehumancontext17–casesinwhichtheflourishingoftwo(or
more)personsaremutuallyandpositivelyinterdependent.Butsuchcasesare
notinstancesofexchange,asIshallunderstandit(followingSmith,asIread
him.)Buchananmaybedisposedtowanttoincludewithinthescopeof
economicsallcasesofpositiveinterdependence–butthereisadistinction
betweensymbioticandexchangeprocessesanditisonethatBuchananmust
recognize(otherwisehecouldnothaveapreference).Ishallmeanbyexchange
themutualforgoingofsomethinglessdesiredforsomethingmoredesiredonthe
partoftheexchangingparties.
Inordertosetthestage,itwillalsobehelpfultosayalittleaboutthescaleofthe
gainsfromexchange,asmosteconomistsseethem.Accordingly,Isetoutin
Table1ahistoricalpictureoftheworldsince1700,showingGDP/head
(measuredin1990internationaldollars)forboththeworldandsomenotable
subsets;andworldpopulation.Overthisperiod,thedataaresuchasto
commandreasonableconfidence.AndIthinktheytellaspectacularstory.
Overthosethreecenturies,worldGPDperheadhasincreasedbyafactorof
around10;atthesametimeasworldpopulationincreasedbyafactorofabout
thesameproportion.Intotal,theproductivecapacityoftheworldincreased
roughly100‐fold.So,whateverelsewecanconcludewecancertainlydeclare
thattherehaveturnedouttobevast“generalgains”onoffer.Andifwetake
AdamSmithatfacevalue,thesevastgainshavebeendeliveredinlargemeasure
bymarketexchangeandtheincreaseddivisionoflabourassociatedwithit.
Table1
GDP/head(at1990internationaldollars)andWorldPopulation
UK
W.Europe
World
World
year
USA
gdp/head
gdp/head
gdp/head
gdp/head Popninm.s
1700
527
1250
997
616
600/680
1820
1257
1706
1202
667
900/1200
1870
2445
3190
1960
873
1300/1500
1913
5301
4921
3457
1526
1800
1950
9561
6939
4578
2113
2557
1973
16689
12025
11417
4091
4000
2003
29037
21310
19912
6516
6200
17Itisworthnotingthatthebiologicalcasesdifferfromthesocialintermsoftheevaluand.In
thebiologicalsetting,theobjectofconcernissurvival;intheeconomic,itisflourishinginmore
individualizedsenses(eitherpreferencesatisfactionortheindividuals’objectivewell‐being).
[TheincreaseinpercapitaGDPintheWesthasbeengreaterthanfortheworld
asawhole–afactorofabout60fortheUS;ofaround17intheUK;andabout20
inWesternEurope.]
Assessingsuchchangesintermsoftheirnormativesignificanceraises,ofcourse,
lotsofinterestingquestionsmostofwhichIdonotintendtoengageinanydetail
here.Butofcourse,Iconcedethatpercapitagdpisnotanunquestionable
measureofmaterialwell‐being,partlybecauseitleavesoutofaccountlotsof
relevantelementsandpartlybecauseitmayincludesomeelementsthatdonot
trackwell‐beingatall18.
Itshouldalsobeconcededthatpopulationincreasesinthemselveshavea
somewhatcontestednormativestatus.Butsomeaspectsofincreasedpopulation
areperfectlyuncontroversial.Forexample,one(significant)sourceofincreased
populationoverthelastthreecenturieshasbeenincreasedlifeexpectancy19and
mostwouldregardthatelementpositively,becauseitcanbeseenasimproving
thelivesofpersonsthatalreadyexist.Whetheranincreasedbirthrateis
desirable–assimpleutilitarianismwouldclaim–isamuchmorecontentious
issue.ButtherelevanceofincreasedpopulationforthepointIwishtomakeis
simplythis:thatiftheworldsocialorderhadbeenroughlyzerosum,anincrease
inpopulationcouldonlyhavetheeffectofreducingthewell‐beingoftheaverage
person.Thatthathasnothappened–thefactthatgdp/headacrosstheworldhas
increasedverysubstantially–showsthathumansocietydoesactuallyexhibit
positivesumpossibilities,oratleastthatithasdoneforthelast300years!
Thatthishasbeentheresultofexchangeprocessesspecificallymaynotbe
entirelyobvious;butthatiswhatAdamSmithclaimedanditiswhateconomists
eversincehavebeeninclinedtobelieve.20
IIIMarketExchangeanditsGains
If,asinthespiritofHeath(2006),wearetobecarefultospecifythevarious
mechanismsbywhichgeneralgainscancomeabout,itseemsdesirableto
distinguishgainsfromexchangeassuchfromthegainsarisingfromthedivision
18Increasedexpenditureonprotectionagainstcrimeassociatedwithincreasedcrimerates
wouldbeanexample.
19Forexample,lifeexpectancyinmostWesterncountrieshasincreasedbyaroundtwoyearsfor
everydecadethroughthetwentiethcentury.
20Apoliticaltheorycolleagueremarkedtomethatideaslikejusticeandlibertycouldgether
excited;butshehadnosimilarfrissoninrelationtotheideaofexchange.Aneconomistmight
respondthatthatsimplyrevealsignoranceonherpart–thatinanyassessmentofthe
developmentsoverthelastthreehundredyears,exchangeanditsupshotshaveprobablybeen
considerablymoresignificantthananychangesinlibertyorjustice.Thatfactdoesnotestablish
anycurrentpriorities:indeed,onemightthinkthatthefact(whichItakeittobe)thattherehas
beensomuchprogressinmaterialwell‐beingsuggeststhatwenowoughttoassignhigher
prioritytootherthings.Buttotheextentthatherattitudescanbegeneralizedacrosspolitical
theorists/philosophers,itisworthemphasizingthatexchangeanditsupshotsarebynomeans
normativelynegligible!
oflabour21.AlthoughSmith’sdiscussionintheWealthofNationsinvolvesaclose
connectionbetweenexchangeandthedivisionoflabour(specialisation)these
aredistinctphenomena–asIbelievealittlereflectionwillshow.InSmith’sown
discussion,forexample,chapteroneofBookIoftheWealthofNationsfocuses
exclusivelyonthedivisionoflabour(ie‘specialization’),leavingittochapter2to
discussexchange.Tobesure,Smiththinksthatasamatterofhistory,the
divisionoflabourarosefromthe“propensitytotruck,barterandexchange”.
Indeed,heclaimsthat“itisthenecessary…consequence”(myemphasis)ofthat
propensity.ButwecanshowthatSmithwasinerrorhere;for,asweshallsee,
therecanbecasesinwhichtherecanbeexchangewithoutanypossibilityof
specialization.
Anexamplewillmakethepoint.Inapapersometimesprescribedinprinciples‐
of‐economicscourses,R.A.Radford(1945)describeshowaprimitivemarket
emergedamongtheinmatesofthevariousprisoner‐of‐warcampswherehe
himselfhadbeenheldinthesecond‐world‐war.Thetradehedescribesisofthe
variousgoodsthatperiodicallycameinRedCross“packages”toallinmates‐‐
andoccasionallyindedicatedpackagestospecificinmatesfromfamily“at
home”.Radforddescribeshowcigarettesrapidlybecamethecurrencyof
exchangeandhowthecigarette‐priceforchocolateandbullybeefandsoapand
tinnedmilkandcertainarticlesofclothingbecamereasonablywell‐established‐
‐thoughsubjecttofluctuation,dependingonthetimelapsebetweenthearrival
ofRedCross(andother)parcels22.Themainpotentialforexchangedependedon
differencesinindividuals’tastesforthedifferentcommodities.However,other
differenceswererelevantaswell:therelativelyrisk‐aversecouldexchangewith
therisk‐loving23;individualswithahighrateofdiscountcouldexchangewith
thenaturalhoarders;andsoon.
However,Radford’sisanessentially“manna”economy:thereisnoproduction,
nodivisionoflabour,nospecialization24.Thereisnoincreaseinthenumberof
cigarettesorbarsofchocolate.Giventhatagentsarebroadlyrational,thereisa
presumptionthatallpartiestoallexchangeswillhavehigherpreference
satisfactionafterexchangethantheywouldhavehadifsuchexchangeshadbeen
precluded.Buttherewillbenoobjectivemeasuresoftheincreaseinwell‐being.
Radford’sisinthatsenseanessentiallysubjectivistexercise.
21Interestingly,Heathhimselfisratherunclearaboutthatdistinction.Hesays(p314):“thebest
knowninstanceof….thebenefitscooperationcanproduce…isthegainsfromtradeachieved
throughmarketexchange(orthedivisionoflabour)”.So,isthe“or”heretobeinterpretedasan
equivalence;orisHeathdrawingadistinctionbetweentwodifferentmechanismsthatmightbe
subsumedunder“gainsfromtrade”?Iwanttoinsistonthelatter.
22Forexample,thecigarettepricestendedtofallasthetimebetweenpackagearrivalincreased,
assmokerstendedtouseuptheircurrencyforpureconsumptionpurposes.
23Themainsourcesofrisklayinthestochasticnatureofpackagearrival–buttherewerealso
occasionalbombingraidsandotheruncertaintiesrelatingtochangesincampmanagement.
24Actually,thereissomeminorspecialization.Radfordreportstheactivitiesofaparticular
padrewhooperatedasamiddlemanexploitingknowledgeaboutdifferencesinrelativeprices
acrossdifferenthutsanddifferencesintastesasbetweendifferentindividuals.Thispadremight
havebeensaidto‘specialize’inbrokerage.
Now,onemightthinkthatthereisanaturalextrapolationofRadford’slogicto
theproductionsideoftheeconomy.Justas,intheRadfordcase,gainsfrom
exchangearisefromdifferencesinpreferences,soontheproductionside,gains
arisefromdifferenceinnaturaltalents.Thisisinfactanoldidea.Itisevidentin
Plato’sandAristotle’saccountofthedivisionoflabour25andinStPaul’s
descriptionofthefunctioningofawell‐orderedchurch26.Andthissamenotionis
inplayinRicardo’saccountofthebenefitsofinternationaltradeandcountry‐
widespecialization.ThebasisofexchangeinRicardo’saccountliesinthenatural
climaticdifferencesbetweenPortugalandEngland–theformerbeingrelatively
conducivetowineproductionandthelatterrelativelyconducivetowool
production.Notethoughthatintheseaccounts,thepossibilityofgainsfrom
exchangedependscruciallyonsuchdifferencesarising‘naturally’:without
differencesinclimateorinnaturalresourcesorinindividualtalents,there
wouldbenobasisforspecializationandnogainsfromexchangeonoffer.
AdamSmith’spictureofthegainsfromexchangeisdistinctiveinthisrespect.On
theSmithianpicture,thedifferencesthatarerelevantforexchangeare
“artificial”ratherthannatural–theyareendogenoustotheexchangeprocess
ratherthanexogenousfactsrelatingtohumanorgeneticorclimaticdifferences.
Smithrecognizeswellenoughthatone’srelationshipwithone’sbutcherissuch
thatbothpartiesrealizegainsfromtheexchange:thebuyerismadebetteroffby
gettinghermeatandthebutcherbetteroffbyhavingthebuyer’smoney.Butthis
isnotwhatSmithidentifiesasthemainbenefitarisingwithincommercial
society.Themoremajorsourceofbenefitarisesfromfeaturesthatareintrinsic
tospecializationassuch.Smith’sstoryisoneof“learningbydoing”,ofquasi‐
Fordistefficiency,andofthedevelopmentofmachines.Themagnitudeofthe
mutualbenefitsderivedfromthesesources,hereckons,arevast:theyamountto
increasesinpercapitaaggregateoutputperhaps240‐foldandmaybeeven4800‐
fold(totakethe“trifling”exampleofpinmanufacturethatSmithspecifically
cites).Suchspecializationarisesinthemarketmoreorlessspontaneously,
withoutanynecessarynaturaldifferencesinpersons’tastesortalents:the
necessarydifferencesemergefromspecializationitself,notfromdifferencesin
talents.Indeed,Smithhimselfevincesscepticismastowhetherindividualsdo
differthatmuchintermsoftheirnaturaltalents.Inthatsense,heidentifies
himselfexplicitlyonthe“nurture”ratherthanthe“nature”sideofawell‐known
(andlong‐standing)debate.27Inanyevent,itseemsquiteclearfromSmith’s
discussionthat,inhisview,thegainsfromexchangeassucharesmallbeer
comparedwiththegainsthataccruefromspecialization.NothingintheRadford
accountwouldleadonetoconcludethatthebenefitsareequivalenttoa4800‐
foldincreaseinoutput!
25ForPlatoandAristotle,suchnaturaldifferencesconstitutedthegroundsfortheformationof
humansociety.
26IntheFirstEpistletotheCorinthiansch12.
27Itwasthisview–andthecorrespondingfailureofthe‘economists’todiscriminatebetween
whitesandblacks–thatearnedeconomicsthefamoussoubriquetof“thedismalscience”in
Carlisle’s(1849)essayonthe“niggerquestion”.JohnStuartMill,inresponsetoCarlisle,
identifiedthestandard19thcenturyeconomist’sline:Carlislehadmadethe"vulgarerrorof
imputingeverydifferencewhichhefindsamonghumanbeingstoanoriginaldifferenceofnature."
Mill(1850).SeeLevy(2002)foranentertaininganalysisofthathistory.
ThereisanothernotablefeatureofSmith’saccount–namely,thattheextentof
thedivisionoflabourispositivelyrelatedtothesizeofthetradingnexus.That
aspectisthesubjectofchapter3ofBook1.Smith’sfocusinthischapterseemsto
bedirectedmainlyatgeography–andspecificallytheassociationbetweenthe
superiorityofwatertransportandthelocationofproductionactivities.Butthere
isamoregeneralmessage–thatthelevelofdevelopmenttendstoincreaseas
thepopulationincreases.Thisistheso‐called“increasingreturns”aspectof
Smith’sanalysis.28
ThisrelevanceofthiselementinSmith’saccountcanbeindicatedbyconsidering
asimplecaseoftwoidenticalnationaleconomies–exhibitingthesameclimate,
thesameindividualtalents,thesamepopulationsize,andhencethesamepre‐
traderelativepricesbetweenallgoods.TheRicardianapproachwouldseemto
denythattherecouldbeanybasisatallfortradebetweenthesetwocountries:
therearenorelativepricedifferencespre‐tradeandnocomparativeadvantage
onwhichprofitablespecializationmightbebased.Butiftradebetweenthetwo
economiesispermitted,thesizeofthetradingnexuswilldouble:andthat
doublingpermitsamorerefineddivisionoflabour,whichwillinturnmorethan
doubletotalrealoutput:realpercapitagdpwillincrease.Interestingly,this
“increasingreturns”aspectofSmith’sdiscussionisnotafeatureof
contemporarygeneralequilibriumtheory29,whichtends‐‐likeRicardo’s
accountofcountryspecialization‐‐tobelodgedwithinaconstantreturnsto
scalemodel.
Nowwehavesaidthatthemarket‘makespossible’thedivisionoflabour.Butit
seemsself‐evidentthatitwouldbepossibletohaveadivisionoflabourwithout
amarket.Aplatoon‐commandermayallocatedifferenttaskstodifferentsoldiers
–andiftheallocationofindividualstotasksisconstantovertime,thenthe
benefitsofspecializationcanbeexpectedtoaccrue.Totakeanotherexample,
thereisdisciplinaryspecializationwithintheorganizationofenquiry–afactthat
Smithhimselfmentions:
“…philosophyorspeculation…likeeveryotheremployment…issubdividedintoa
greatnumberofdifferentbranches,eachofwhichaffordsoccupationtoapeculiar
tribeorclassofphilosophers;andthissubdivisionofemploymentinphilosophy…
improvesdexterityandsavestime.Eachindividualbecomesmoreexpertinhisown
peculiarbranch…andthequantityofscienceisconsiderablyincreasedbyit.”
WN.I.i.9]
28InHeath’saccount,hedistinguishes‘scale’from‘exchange’asdifferentmechanismsformutual
advantage.Andhemightplausiblydrawthatdistinctioninrelationtogainsfromexchangeas
suchandgainsfromspecialization.ForitiscertainlytruethatonSmith’saccount,thegainsfrom
specializationincludeanimportantscaleelement.Butspecializationisamatterofthe
organizationofproductionandtheorganizationinquestionmightbesubstantiallyindependent
ofthenumberofagentstobesoorganized.Smithseesspecializationasanupshotofexchange;
butasIsay,wecouldimagineexchangewithoutspecializationandspecializationwithout
exchange.Andincreasesinscaleareonlyvaluableifthoseincreasesgiverisetoamorerefined
divisionoflabour–somethingthatdoesnotseemtobealogicalnecessity.
29SeeforexamplePaulRomer(1987)andYang(2001)foramoredetaileddiscussion.
Butthereisnonecessarypresumptionthattherelationsbetweenthevarious
disciplines/“branches”aregovernedbymarketrelations.
Equally,inastrictlyplannedeconomy,individualsmightbeassignedtodifferent
tasksonarandombasis,butprovidedtheysticktothetaskstheyareassigned,
benefitswillarise(providedthosetasksareconscientiouslyperformed).Tobe
sure,theincreasedproductionthatissuesfromanysuchdivisionoflabourwill
normallyinvolvetransfersofgoodsfromspecializedproducerstonon‐
specializedconsumers:noman,aswemightputit,livesbypinsalone!Butthere
isnologicalrequirementthatsuchproducer/consumerrelationsneedbe
mediatedbymarkets.Inasimilarmanner,bureaucratsmightbeassignedthe
taskofdetectingtalentanddirectingindividualstoemploymentswheretheir
productivecapacitiesarelikelytobegreater30.Suchaneconomywillpredictably
producemoregoodsthaninanunder‐specializedone.Ofcourse,thereisa
probleminanysuchplannedeconomyastohowtodeterminewhatexactlyisto
beproduced;andhowmanyindividualsaretobeassignedtodifferenttasks31.
Marketsdeterminetherequiredtransfersinthelightofthepreferencesof
consumers–andeconomistsareinclinedtobelievethatsuchmarketprocesses
areameansformaximizingconsumersatisfaction.Myobjecthereisnotto
entertainadebateaboutthevirtuesorotherwiseofmarkets.Itissimplytoinsist
thatthereisalogicaldistinctionbetweenfreeexchangeontheonehandand
specializationontheother.Onecanhaveexchangewithoutspecialization–asin
apure“manna”economy;andonecanhavespecializationwithoutexchange(as
inthecontemporaryuniversity).
Ofcourse,inthekindofcommercialsocietythatSmithdescribes,thereisboth
specializationandmarketexchange;andwithincommercialsocietythese
featuresaremutuallysupportive.Buttheyaresurelynotthesameactivity.Andit
seemstobeSmith’sviewthattheprimaryelementinproducingthe“general
plenty”(or“universalopulence”)whichheidentifieswitha“well‐governed
(commercial)society”isthedivisionoflabour,notmarketexchangeassuch.
Smithreferstoincreasesinproductivityfromthedivisionoflabourasbeingof
theorderof4800‐fold(orperhaps240‐fold)inthecaseof“verytrifling”
exampleofthepinfactory.WemighttakeitthatnothingintheRadford‘manna
economy’offersgainsofanythinglikethismagnitude!
LetmeattempttosummarizethisbriefdiscussionbyunderliningwhatItaketo
bethecentralconclusions:
1. Therearegainsforexchangeassuch–buttheseoughttobedistinguished
fromthegainsfromthedivisionoflabourwithwhichtheyareassociated
inamarketorder;
2. OnSmith’sview,thegainsfromthedivisionoflabourarehugerelativeto
thegainsfromexchangeassuch;
3. Thegainsfromthedivisionoflabour,becausetheyariseonthe
productionsideofthemarket,are‘objective’–theycanbemeasuredin
termsofincreasedoutput;
30RecruitsfortheBolshoiBalletweredeterminedbysuchaprocess
31Thatisthecentralthemeinthe‘socialistcalculationdebate’
4. Thegainsfromexchangeassuchareessentiallysubjective.Their
realizationdependsbothontherebeingdifferencesin
preferences/desiresamongdifferentindividuals(inthepre‐exchange
situation)andonindividualsbeingbroadly‘rational’intheirexchange
behaviour.
5. Thereisadistinctionbetweenthoseanalystsofthe‘divisionoflabour’
whoattributegainstopre‐existing‘naturalphenomena’(differencesin
preferences,orclimate,ornaturalresourcesornaturaltalents)andSmith
whoseesspecializationasanendogenousprocessarisingincommercial
society.
6. Relatedly,allbenefitsarisingincommercialsocietyissuefromrelevant
differencesbetweenindividuals.Butsuchdifferencescanbe‘potential
differences’:‘comparativeadvantage’canbeapre‐cursorofexchange,but
itcanalsobearesultofit.
Intheforegoingtreatmentofthe“gainsfromexchange”,IhavefollowedSmith
ratherthanthekindoftreatmentonemightderivefromabasicEconomics
textbook.Therearethreereasonsforthis.OneisthatSmith’saccountistheone
thatBuchananhimselfendorsed.AsecondisthatSmith’sdiscussionisricherand
moreinclusivethanthestandard‘constantreturnstoscale’account.Andathird
isthatSmith’streatmentoffersastraightforwardexplanationoftheworld
growthdatadescribedintheprevioussection:theorthodoxtextbooktreatment
doesnot.
IVExchangewithoutMutualGains
Ifpartofthemotiveforaconcernwithexchangeisnormativeandifthe
normativestatusofexchangehangsonthepropertythatbenefitsfromexchange
accruetobothpartiestoatransaction,thenitisaswelltobeginby
distinguishingthoseexchangesforwhichmutualityofbenefitappliesfromthose
wheresuchmutualityisabsent–thecaseofpositive‐sumexchangesfrom
(necessarily)zero‐sumones.
Withintherationalchoicetradition,thefactthatanagentwishestoenterintoan
exchangeisevidenceofabeliefthatthatagentholdstotheeffectthatthe
exchangewillmakeherbetteroff.Butofcourse,theagentmaybemistaken.She
mayholdfalsebeliefsaboutthequalitiesoftheobjectsheacquires.Andshemay
holdfalsebeliefsevenifshehasacquiredtheoptimalamountofevidence32
concerningrelevantfacts.Andthoughmarketsmaythemselvesgosomewayto
providinginformationaboutproductquality33,atleastsomepartiestoexchange,
atleastsomeofthetime,mayhavetheirexpectationsaboutfuturebenefits
disappointed.
32Theverynotionofthe“optimalamountofevidence”maynotbewell‐defined,sinceinmany
casestheagentcannotknowthevalueofnewevidenceuntilshehasacquiredit.Thisisapoint
emphasizedbyElster(
33ChoicemagazineandtheMichelinrestaurantguidearetwoexamplesofaphenomenonthatis
quitewidespread.
Onemightthinkthoughthatsuchoutcomesoccuronlybyaccident.Ofcourse,
onemightsay,agentscanmakemistakesandberenderedworseoffbyan
exchangethattheyexpectedtobebeneficial–butthegeneralcaseisonewhere
partiesexpecttobenefitandtheirexpectationsarebroadlyrealized.
Thereishoweveronefamiliarsettinginwhichthebasisofexchangeisitself
constitutedessentiallybymutuallyexclusiveexpectations–namely,the
exchangeofassetsonthestockexchange.Clearly,everytransactiononthestock
exchangeinvolvesbothasellerandabuyer–andinvirtuallyeverysuch
transaction,thebasisoftheexchangeliesinthefactofdivergentexpectations.
Thebuyerbelievesthepriceofthestockpurchasedisgoingtogoupvis‐à‐vis
othertradeableassets;andthesellerbelievesthatthepriceofthestockisgoing
togodown.Ofcourse,therecanbecaseswheretheseller’sandbuyer’stime‐
profilesofconsumptiondiffer,orwherebothsellerandbuyerareseekinga
“morebalanced”portfoliotohedgeagainstrisk(sothattheexchangeis
consistentwithzeropricechangeexpectations).Butthepresenceofsuch
motivesseemsincidental–notnecessary.Itseemsclearthatmosttradesin
listedsharesreflectdifferingbeliefsaboutthesamefutureevent.Ifthebuyeris
rightthesellerloses;ifthesellerisrightthebuyerloses.Bothcannotberight!
Andbothpartiesmustknowthispriortoexchange:thisisacasewhereitis
commonknowledgethattherecanbenomutualgainsfromexchange.
Nowitisclearthatwhatevertheeconomistshaveinmindwhentheytalkofthe
gainsfromexchange,thesekindsofsharetradesarenotit!Suchsharetradesare
essentiallyzero‐sum.Andweshouldconcedethatmanytransactionshavean
elementofdivergentexpectationsinthem.SoAdecidestosellhishousein
locationLandpurchaseahouseinlocationMwhenheshiftshisplaceof
employmenttofromLtoM.Butheislikelytobeinfluencedinthisrespectby
whatheexpectshouse‐pricemovementstobeinLandMoverthenextlittle
while.Inthatrespect,hisdecisionsabouttimingofsaleandperhapsthefactof
saleitselfwillbedeterminedbyhisexpectations–aswillthoseofanypotential
buyerofhisproperty.Theaggregateofsucheffectswillincorporateinconsistent
beliefsamongsellersinLandMtosomeextent.Thereisa“winner’scurse”
aspecttoanysuchtransactions.34
Framedinthelightofthe“divergentexpectations”viewofexchangerelevantfor
stockmarkettransactions,theonusofproofwouldseemtoliewiththosewho
(liketheeconomists)believethatmostmarketexchangeis“basically”apositive
sumactivity.Andsuchproofneedstobecarefulinspecifyingwherethegains
34Consideranauctionamongn‐contendersforagivenobject(agivenhouseinagivenlocation
say).Thehighestbiddermustacknowledgethathisownestimateofthehouse’svalueexceeds
thatofallotherevaluatorsintheauction.Totheextentthattheevaluationsofothersaffectthe
resalepriceofthepropertyandthatresalepriceisanobjectofconcerntothebuyer,thebuyeris
saidtosufferfromthe“winner’scurse”.Notethatthe‘winner’scurse’presupposesthatan
elementinevaluationisestimatingthevaluesofothers.Inamarketforobjectsacquiredforpure
consumptionpurposes,theideathateachbuyergetsanobjectforwhichno‐oneelsewouldbe
preparedtopayasmuchisafeaturenotjustofequilibriumbutalsoofmaximalpreference
satisfaction:theso‐called‘winner’scurse’hereisa‘winner’sblessing’!
fromexchangeariseandwhysuchgainsaremutual.Ifmanyimportant
purchaseshaveanasset‐valueelement,thentheextentofmutualgainmustbe
diminished.
VMutuality?
Itisaninterestingfeatureofthevocabularyof‘advantage’thatitalmostalways
appearsinassociationwith‘mutuality’.Thatusagetendstogive‘advantage’a
catallacticgloss–asifwheneverwetalkofadvantageinthesocialsetting,weare
thinkingofmarkets35.SowhenRawlsdescribessocietyasa“cooperativeventure
formutualadvantage”,itisnotentirelyclearwhatworktheterm“mutual”is
supposedtodo.Isittodirectattentionspecificallytothebenefitsfrommarket
transactionsthatthelawsdefiningbasicpropertyrightsandrulesofexchange
support(andoncertainviewsareindispensiblefor)?Orisittosuggestthat,ina
contractarianspirit,eachcitizenisinvolvedinanexchangewiththerestof
societyfromwhichsheexpectstobenefit–orperhapsisevenguaranteedto
benefit?InwhatwaywouldthespiritofRawls’descriptionbealteredifwewere
toreferto“generaladvantage”–or“expectedadvantage”or“aggregate
advantage”ratherthan“mutual”?
Afterall,wecanimagineexchangesinwhichthereisaggregateadvantage–and
inthatsenseexpectedadvantage–whereitiscommonknowledgethatthe
advantagecannotbemutual.Bothpartiesknowthatoneofthemwilllose.
ConsiderthecasewhereAandBarebothdyingofdifferentdiseases–oneofthe
lungsandtheotheroftheheart.Eachmightplausiblyenterabargaininwhich
eachagreestoa50/50chanceofgettingtheorganheneedsfromtheotherin
exchangeforanequalchanceofhavingtogiveuphishealthyorgan.Sinceeachis
goingtodieanyway,thisisagooddealforthemboth–inexpectedterms.There
isapositivenetadvantageonthetable.Butbothknowthatasaresultofthis
deal,oneofthemwilldie–presumablysomewhatearlierthanotherwise.So
therecannotbemutualbenefit–justpositiveexpectedbenefitforeach.
Thepointhereisthat,althoughinmostexchangesbothpartiescanknowthat
eachwillbebetteroffinherownlightsasaresultoftheexchange,thatisnota
necessaryfeature.Referenceto“mutualadvantage”suggeststhatitisa
necessaryfeature.Ifthesocialcontractmayconceivablyleavesomepersons
worseofftosomeextent,thentheterminologyofgeneraladvantageor
aggregateadvantagewouldbemoreapt.Theterm“mutual”carriesthe
implicationofnolosers..
AdamSmithexplicitlystateshisbeliefthatthe“opulence”associatedwith
commercialsocietyis“universal”and“extendsitselftothelowestranksofthe
people.”Thedivisionoflabourwithinthetradingnexusproducesa“general
plenty[that]diffusesitselfthroughallthedifferentranksofthesociety.”[WN
I.1.10]Referencetotheideaofmutualadvantageinassociationwiththegains
35JoeHeath(2006)complainspreciselyofthiscatallacticbiasinhisanalysisofthe“benefitsof
(social)cooperation”.
fromexchangemightleadonetothinkthatSmith’sclaimisananalytictruth.Itis
not.
Partoftheconfusionherearises,Ibelieve,fromatendencytothinkthatallthe
gainsfromtypicalmarketexchangeareabsorbedwithoutremainderbythe
partiestotheexchange.Thatisanimpressionperhapslenttodiscussionofthe
distributionaleffectsofexchangebyNozick(whoIbelievesomewhererefersto
marketexchangeas“commercialtransactionsbetweenconsentingadults”).The
implicationofNozick’sremarkisthatthemarketisaninstitutionofentirely
voluntaryactivity(andperhapsforthatreasona“morallyfreezone”asDavid
Gauthierputsit).Butanymarkettransactionislikelytohaveeffectsonpersons
otherthanthosewhoarepartytoit.Thereareresidualgainsandlossesthat
reflectthefactthatthemarketisavastnetworkofinterdependencies,inwhich
eachisconnectedinmultiplewaystoeachother.Perhapsinmanycasesthe
interdependenciesaresosmallastobeundetectable.Nevertheless,insome
casestheeffectsofparticularmarketexchangesarelargeandnegativeforsome
people–eventhoughgainsmayexceedlossesacrosstheboard.Thatis,some
specificexchangesareratherlikethelung/heartcase,thoughwithoutthe
propertythatlosersconsentedtothedeal.Andonsomereadings,thesecasesare
centraltothemarket’scapacitytodelivergeneraladvantage.
Schumpeterisfamousfordescribingthemarketprocessasanexercisein
“creativedestruction”.Whathehadinmindwasthatnewinventionsandnew
technologiesservedbothtocreatenewopportunities–bettergeneral
consumptionprospectsorcheapermeansofdoingthingsorboth–andinthe
processdestroythevalueofassetsassociatedwitholderwaysofdoingthings.
Suchprospectsforinnovationarejustoneaspectofthedivisionoflabour,as
Smithexplains.Butwhensuchinnovationsoccurtheyoftenrenderobsolete(or
significantlyreducethevalueof)thehumancapitalthatisassociatedwith
currenttechnologies.Andofcoursesuchhumancapitalisalsoonesignificant
aspectoftheadvantagesofthedivisionoflabour.Specialisationinvolvesthe
acquisitionofskillsthataretosomeextentjob‐specific.Andinnovationwill
typicallyleavesomeskillsredundant(oratleastgreatlyreducetheirvalue).The
Ludditeswerealmostcertainlycorrecttothinkthattheintroductionofnew
textile‐makingtechnologywouldreducetheirincomes.Totheextentthatthey
believedlabour‐savingtechnologiesinaspecificindustryreducedthereal
returnstolabourtoutcourttheywereprobablywrong.Butthatisnotnecessary
toadmitthepointthatmanyvoluntarytransactions(egbetweentheinventorsof
newmachinesandmill‐owner/managers)imposeentirelyinvoluntarylosseson
specificindividuals.Thesuggestionthatthemarketisanarenaofgeneralized
voluntarismistomakethemistakethatonlypartiestoanexchangeareaffected
byit.Lotsoftransactionsinvolvesignificantlossesforsomeindividuals.Thatis
thewaymarketswork.
IoccasionallyremindmyDukestudentsthatwhenBuckDukeacquiredtheright
touseJamesBonsack’smachineformakingready‐rolledcigarettes,hevery
substantiallydiminishedthevalueofthehumancapitalthathadbeenacquired
bythosewhohand‐rolledcigarettes.Theworkersinquestionsustainedthatloss
entirelyinvoluntary.
Onewayofputtingthepointistorecognizethatrightsinthemarketplace–
rightstopropertyandrightstoexchange–arenotjustprotectionsfromcertain
kindsoflosses(thoselossesthatmightbedescribedasrightsviolations).They
arealsopermissionstoimposelosses.Thatsucharightsstructureinvolves
generalbenefits(aseconomistshavelongargued–inmyviewtotally
convincingly)doesnotestablishtheuniversalityoftheiradvantagesinany
particularcase.Andwecannotperhapsevenruleouttheprospectthatsome
individualsmightloseoverall–ascomparedwithsomeplausiblebenchmark.
Theupshotoftheseobservationsisthat,whateveritisthatreferencesto
“mutuality”ofadvantagearemeanttoconveyshouldnotbetakenatfacevalue.
VIMutualAdvantageWithoutExchange
In“TheProblemofSocialCost”,RonaldCoaseoffersanexampleofaroad
intersection.Itwouldbepossibletoimagine,henotes,anauctioneeratevery
suchintersectiontakingbidsastowhoshouldproceedfirstwhenprogressis
contested.Thatwouldbeanexchangeprocessinafairlystandardsense.Each
road‐userwouldpayapriceforproceeding;andthetrafficflowwouldbe
determinedbytherankorderingofbids.36Whatevertheinstitutionaldetails,
Coasepointsoutthatthisispreciselynotwhatweobserve.Wehavetrafficlights
orgivewaysignsor“givewaytotheright”rulesorsomeotherprocedurefor
determiningorderofproceeding–butnoneoftheseinvolvesadirectexchange
process.Thereasonis,Coasetellsus,thatthetransactionscostsassociatedwith
theauctioneersystem(andanyanalogousdirectexchangeprocess)arejusttoo
large.Otherinstitutionalarrangementssubstituteforthemarket.
ForCoase,thetrafficanalogyappliesmoregenerally–andspecifically,tocases
wherepropertyrightsarecontested.Sosmokyfactoriesandnearbylaundries
havetheirdisagreementssettledbythecourts.Tobesure,inthejudicial
determinations,thejudgeissupposedtoworkouttheoutcomethatanidealized
marketinthecontestedresourcewouldproduce(inthefactory/laundrycase,
cleanair)andallocaterightsaccordingly‐‐soasto“minimizesocialcost”as
Coaseputsit.Butbyhypothesis,themarketitselfcannothandlesuchsituations
“efficiently”:thecourtdeterminationprocessistakentobemoreefficient.
ThesamegeneralthoughtliesbehindCoase’s(1937)theoryofthefirm.Itwould,
Coaseobserves,bepossibletoimagineamarketorderinwhichallrelations
betweenallindividualsweremediatedbyexchanges.Soinsteadofapinfactory,
wewouldobservethemultipletasksinpinmanufactureallbeingconductedby
individualentrepreneur‐craftsmen.Themanwho“drawsoutthewire”would
purchasetheinputstohisprocessandsellonthedrawnoutwiretothenext
craftsman(the“straightener”inSmith’saccount)inthechain,whointurnsells
thestraightenedandextendedwireontothecutter,whosellstothepointer,
36Therewouldhavetobechargesmadeinordertoensurethatbidsreflectedgenuine
preparednesstopay.
whosellstotheheadgrinderandsoon.Butthatisnottheprocesswetendto
observe.Ratherwesee“firms”inwhichtherelationsbetweendifferenttasksare
coordinatedandsupervisedbyaspecialistmanagerwhooperatesnotvia
purchasebutbyissuinginstructionsandmonitoringeffort.Thetransactions
costsimposedbythemarketarrangementaretoohigh(atleastrelativetothe
administrativealternative).Hencefirmsoperateinaseaofmarketrelations;but
relationswithineachfirmarenotthemselvesmarketrelations.Norarethey
exchangerelationsinanydirectsense.
Butaretheyexchangerelationsinsomeindirectsense?Buchananclearly
thoughtso.Hethoughtthatthesenon‐marketinstitutionscould(andshould)be
analysedthroughanexchangelens.So,thoughthelawoperatesviadirectives
andthoughpoliticsoperatesviaapparentlycoercivefiscalandregulatory
procedures,theycanbothbethoughtofasexchangeprocessesinabroader
sense.Butisthisanymorethanobservingthatsuchprocessescanbetothe
generaladvantageofparticipantsinthem?Inotherwords,isBuchanansimply
ridingrough‐shodoveranypossibledistinctionbetweenexchangeandgeneral
advantage?Afterall,itisacharacteristicfeatureofcourtdeterminationsthatone
partywinsandtheotherlosesinanycase.Equally,inpoliticsitwilloftenbethe
casethatspecificgroupsloseout(andsometimesloseoutconsistently)even
whentheypossessfranchiseandvoice.Sowhereasitisanecessaryfeatureof
ordinary37marketexchangethattwopeoplebenefit,itseemsthatinpoliticsand
inlawoneperson(orgroup)benefitsandotherslose.Thisisnottodenythat
overtheaggregateofmanysuchtransactionstheremaybenetbenefitstoalmost
allparticipants:theclaimissimplythatsuchtransactionsarenotthemselves
instancesof‘exchange’relations.
VIIMutualAdvantageNecessarilywithoutExchange
Intheprevioussection,Ilaidoutsomecaseswheregeneraladvantagecouldbe
thoughtofasarisingwithoutexchangeassuch.Theclaimatstaketherewas:
exchangeisnotnecessaryforgeneraladvantage.Andweestablishedinsection
IIIthatexchangeisnotsufficientforthemutualadvantageofexchangingparties
–evenwherethereisnoforceorfraud.InthissectionIwanttomakeastronger
claim–namelythattherearesomecasesofgeneraladvantageinwhich
exchangeisnecessarilynotinvolved.
Iwanttocitetwoexamples.Thefirstisacaseinwhichtheterm“exchange”is
oftenused–andwhereeconomistssometimesmisreadthefactofcontingent
reciprocitytoinduceacaseofstandardquid‐pro‐quothinking.Ihaveinmind
“giftexchange”–andwillbeginwiththesimplecaseofChristmascards.
Somebroadfacts.PeoplesendChristmascardsandrecipientsliketogetthem.
Interestingly,thepeoplewhoyousendChristmascardstoareprettymuchthe
samepeoplewhosendthemtoyou.Moreover,ifsomeoneceasestosendyoua
cardforafewyears,thenyoutendtoallowthosepeopletofalloffyourownlist.
37Iamtreatingtheorganexchangeexampleoutlinedearlierasan‘extraordinary’exchange.
Soasaroughempiricalgeneralization,wecandescribeChristmascard
“exchange”asacontingentlyreciprocalactivity:itlookslikeaquid‐pro‐quo,
muchlikemarketexchangesare.AndIhavebeenpresentinseminarswhen
economistshavetriedtoanalysetheChristmascardcaseinexactlytheseterms.
WiththeobviousRohanAtkinsoninterpretationthat,ifwhatyouwantistoget
lotsofChristmascards,thebestthingtodoistosendthemtoyourself.
Itseemstomeself‐evidentthattheexchangeofChristmascardsisasignalthat
thepartiesstandinacertainkindofrelationship.Thesignalisofcourseinternal
tothepartiesinvolvedinsuchexchange.Butitishardlysurprisingthat,ifoneof
thepartiesdecidesthatshedoesn’tsharethatrelationship,thentheotherwill
soonfeelthatitisinappropriatetosignalthattherelationshipisintact.Ittakes
twototango!
Ofcourseitmaybethatpeopleareself‐deceptive.Theymayliketofeelthatthey
havelotsoffriends.Andtwosuchself‐deceptivepersonsmightcontinueto
exchangeChristmascardsnotbecausetheysharetherelationshipbutbecause
theyliketothinktheydo.Andequally,peoplewhovisityourhouseandview
yourextensivearrayofcardsmaybeimpressedbyhowmanyfriendsyouhave!
Sotwopartiesmaycontinuetoexchangecardseventhoughtherelationshipthey
attesttoisnotpresent.Butdoingthisis,initsownlittleway,deceptive–itfree
ridesonandeventuallycorruptsaninstitutionthatisotherwisemeaningful.
InthissensetoviewChristmascardreceiptinquidproquotermsseemstoget
somethingdeeplywrong.Icannotsaytoyou:“SendmeacardwhichIwant,and
youshallgetfromacardwhichyouwant”:thatwouldbejusttomistakewhat
thecardissupposedtosignify.
Ortakearelatedpracticeofthedinner‐partyculture.We(mywifeandI,inthis
case)acceptyourinvitationfordinner;andsowefeelanobligationsubsequently
toinviteyoutodinner.Butthisisbecausethedinner‐partycultureisreciprocal.
Iliketohavedinnerconversationandenjoygoodfoodandwinewithyou;buton
theassumptionthatyouenjoytodothiswithme.Ifprovidinggoodfoodand
winewereviewedasameansofsecuringyourcompany,withoutanyongoing
presumptionsofreciprocity,itisdoubtfulwhetherthepracticewillcontinue.
Certainly,ifattheendoftheeveningIgotoutmycheckbookandpaidyoufor
thefoodandwine(includingproperallowanceforthelabourinvolvedin
preparation)youwouldthinkIhaddonesomethingoutrageous‐‐thatIhad
misunderstoodthenatureofaprevailingnormanddonesomethingseriously
insulting38.
Butwhyshoulditbethought“insulting”?Becauseingeneralpaymentsincashof
thekindthatoperateinmarkets–andmarketexchangesmoregenerally–are
obligation‐obliterating.OnceyouhavewhatyouwantandIwhatIwant,eachcan
contentedlywalkaway.Thereis,astheysay,“closure”.ButItakeitthat,inthe
giftexchangecase,althoughreciprocalobligationscanbecreated,theyarenot
38Aninterestingfeatureofsuchgiftrelationshipsisthatthecurrencyofexchangeseemstoplay
acriticalrole.Undernormalcircumstances,givingcashforChristmasgiftsisdecidedly‘tacky’.
totallyobliteratedwhenthereciprocalactionisundertaken.Ratherfulfilmentof
theobligationsimplyrecreatesareciprocalobligation.“WemusthavetheX’s
over:I’mprettysureit’sourturnandit’sbeenquiteawhilesincewelastateat
theirplace.”
Ofcourse,therearecultureswheregiftrelationshipsdodoubleduty:theyboth
signifyarelationshipandtheysubstituteformoreformalmarket‐like
mechanismsofexchange.Insuchcases,thedistinctionbetweensignifyinga
relationshipandthedesireforquidproquointhemakingofgiftsmaysimplybe
unclear.Butinatleastsomecases,thedistinctionisclear–eventhough
objectivepropertieslikethefactofreciprocityispresentinbothcases.Andin
suchcases,characterizingthe‘giftexchange’asjustaratherclunkyformof
‘marketexchange’getssomethingseriouslywrong.
Thesecondexampleisdrawnfromthe‘economyofesteem’.Inmanysituations
(thoughnotall39),thedesireforesteem(andtoavoiddisesteem)operatesasan
incentivethatinducesindividualstobehaveinwaysthataregenerally
advantageous–forexample:tobeprofessionallyconscientious;tobehonest;to
begenerous;tobeof“goodcharacter”.Tosomeextent,theincentiveisstrictlyto
appeartobethesethings.Butinsomecases,actingsoastoevincethegood
featureisalmostasdesirableasactuallypossessingthatgoodfeature40.And
arguably,thebeststrategyforreliablyevincingthegoodbehaviouristo
internalizetherelevantdisposition(soesteemconsiderationscreateincentives
atthelevelofdispositionacquisitionaswellasaction).
Takeacasewheretheeffectsarepositiveoverall,sothatesteemincentives
promoteactionthatisgenerallyadvantageous.Esteem(ordisesteem)isan
attitude;andmoreoveranattitudethatisnotentirelyunderthe‘supplier’s
control.Assuchitcannotbeboughtorsold.Icannotsaytoyou:“thinkwellofme
andIwillgiveyousomethingyouwant”.Esteemcanofcoursebeearned–by
performingtheactionsthatpeoplegenerallyapproveof.Indeedesteemcanonly
beearnedinthisway41.However,differentaudiencesplacedifferentvalueson
differentactivitiesanddifferentindividualsmayhaveratherdifferentjudgments
astohowyourperformanceranks.Sodifferentpeoplewillesteemyoumore
ratherthanless;andequallyyouwillesteemdifferentpeopledifferently.Soone
oftheeffectsofthedesireforesteemisthatindividualswilltendtolocateamong
audiencesthatthinkrelativelyhighlyofthem.Andsincethisistrueofeach,then
therewillbeatendencyforanygroupofindividualstoself‐organizeinto
“mutualadmirationsocieties”.Iamamemberof(say)yourphilosophy
departmentbecauseyouareinclinedtothinkwellofmywork;andyouarea
memberofminebecauseItendtothinkwellofyours.Suchapatternofself‐
organizationismutuallyadvantageous:ifesteemisanobjectofdesire,eachis
39Peerpressureseemstobeinplayinexplainingbehaviorinstreetgangsandterroristgroups
wheretheexpresspurposeisanti‐socialaction.
40Thoughtobemotivatedinternallytoactasvirtuerequiresispresumablymorerobust:it
remainsoperativewhentheselfistheonlyobserver.
41Acaveat:esteemcanalsobeearnedifpeoplecometobelievethatyoubehavedinanestimable
way–andthatbeliefcouldconceivablybefalse.
betteroffinthepondwhereothersesteemherrelativelyhighly.Therewillbe
greaterdesiresatisfactioninsuchaworldthaninonewhereindividualsare
distributedacrosssociallocationsrandomly.Anditmayseemasif,withinthe
mutualadmirationsociety,eachesteemsothermembersbecausetheyesteem
her.
Butthegeneraladvantagethatarisesfromsuchself‐organizationcannotcome
aboutbyexplicitquidproquo.Themotiveformyesteemingyoucannotlieinthe
factthatifIdoso,youwillesteemme.Thereisnoexchangeofesteeminthat
quidproquosense.Theveryideaofmyesteemingyouonlyifyouesteemmein
returnisludicrousEachmustesteemtheotherforindependentreasons.Here
thenisacasewherethereismutualadvantage–butthepresenceofthatmutual
advantagedependsontheabsenceofexchange.42
VIIISummaryandConclusions
Amongthemotivesforan“exchangefocus”ineconomics,oneimportantone,I
believe,isthedesiretoemphasizethepositivesumpossibilitiesinsocial
interactions.Thatis,atleast,amajormotivationforBuchanan–whohasbeen
oneofthemoreexplicitdefendersoftheexchangeparadigmwithineconomics.
Onthisbasis,theaiminthecurrentpaperhasbeentoexploretherelation
betweenexchangeandtheso‐called“gainsfromexchange”.Asapreliminary,I
havedefinedexchangeinSmithiantermsbyreferencetothepresenceofaquid
proquoinbilateralrelations.AndIhaveattemptedtoindicatethescaleofthe
general“gains”inquestion–whatevertheirprecisesource–byagestureatthe
fateofthehumanspeciesoverthelastthreehundredyears.
LikeHeath(2006)Ihavebeeninclinedtodistinguishbetweenthegainsfrom
exchangeassuchandgeneralizedgainsthatarisefromotherprocesses.But
unlikeHeathandunlikemosteconomists,Ihaveinthisconnectiondrawna
distinctionbetweenthegainsfromexchangeassuchandgainsfrom
specialization(thedivisionoflabour).Intheprocess,Ihavetriedtoemphasize
twoaspectsofSmith’saccountofthedivisionoflabourwhichdistinguishesit
fromotheraccountsfamiliarintheliterature–mostparticularlyAristotle’sand
Ricardo’s.Specifically,Smith’saccountemphasizesthe‘increasingreturns’
aspectsofspecializationandthefactthatoverasubstantialrangespecialization
emergesfromtheexchangeprocessratherthanfrom‘naturaldifferences’in
individualtalents.
Partofmyagendaherehasbeentoestablishthelogicalconnectionsbetween
exchangeandthegeneralgainstypicallyassociatedwiththeexchangeprocess.
Tothatend,Iemphasizethatexchangethatarisesfromdifferencesinbeliefs
aboutthefuturecourseofrelevantpricesisquiteunlikeBuchanan’s“simple
exchangeofapplesandorangesbetweentwotraders”inthatintheformercase,
oneorotherofthepartieswilllosefromtheexchange.Therearenomutual
42AnextendedtreatmentofesteemisofferedinBrennanandPettit(2004).
gainsonofferhereandthisfactcanberecognizedbybothparties.Indeed,the
gainsandlossesfromsuchtransactionsexactlycancel.So,exchange(entirely
voluntaryandnon‐fraudulent)doesnotlogicallyentailgainsfromexchange.
Ithenturntotheissueof“mutuality”ofgains.Iarguethattheideaof“mutual
advantage”thatisoftendeployedinrelationtothebenefitsofsocialinteraction
(followingRawlsperhaps)ismisleading:itsuggests,ontheonehand,that
marketexchangeisthemainexemplarofthosebenefits,andontheotherthat
marketexchangeaffectsonlythepartiestotheexchangeandisthereforeafully
voluntaryprocess.Myobjectistoputpressureonthesecondofthoseclaims.I
thinkitispatentlyfalse–asalittlesimplereflectionshows.Iconcludefromthis
that,whileitmaybelegitimatetorefertogeneraladvantage,itismisleadingto
refertomutualadvantageasifeveryonewereabeneficiaryfromeachinstance
of‘exchange’;orasifexchangeprocessesassuchensurethatoverasequenceof
instancesofexchangeallwillbenefit.
InsectionVI,Iofferanumberofexamples–familiarintheeconomicsliterature
–ofgeneralgainsthatdonotdependonexchangeinthesensemosteconomists
usethatterm.ButIthinkastrongerclaimcanbemadethantheseexamples
suggest.Ithinktherearecasesinwhich‘exchange’ofthestandardkindwould
obliteratethegainsthepartiesmightstandtomake(inthiscase‘mutualgains’).
Onesuchexampleisthecaseofreciprocalgift‐givingwherethegivingisasignal
oftherelationshipthatthereciprocatorsstandin.Anotherinvolvesthegiving
andreceivingofesteem–andinparticularthepossibilityof‘mutualadmiration’
relations,whereesteemhappenstobereciprocalbutwhereanyesteemgiven
hastobeindependentofesteemreceived.
TheconclusionIcometoisthatthereisnologicallynecessaryconnection
betweenexchangeontheonehandandthegeneralbenefitsthatBuchanan
characteristicallyreferstoas“gainsfromexchange”ontheother.Tosaythisisof
coursenottodenythatexchangeandthedivisionoflabourwithwhichitis
associatedarethemostsignificantsourcesofgeneraladvantage‐‐asan
empiricalmatter.Inthatsense,myargumenthereremainsagnosticonthe
questionastowhethertheemphasison“gainsfromtrade/exchange”involvesa
“catallacticbias”(asHeathclaims).Butanempiricalclaimrequiresempirical
evidence;andtheupshotoftheargumentshereisthattheneedforsuch
empiricscannotbefinessedbyappealstologicalone.
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