How To Think About Social Issues: Tips 3-4

3. Don’t neglect the benefits of exchange and the division of labour:

Based on the action axiom stated in tip #1 (that humans act in an attempt to substitute a less satisfactory state of affairs for a more satisfactory state of affairs, from their own subjective point of view), we can deduce the following axiom that also cannot be denied by anyone: that when a voluntary exchange is made between two parties, both parties must expect to gain, at the time of making the exchange, or else the exchange would not have been made. Thus, if John gives Jim $1 in exchange for one of Jim’s pineapples, John must expect that he will benefit more from having a pineapple than he would from having $1. The great potential benefits that could be realized through the simple act of an interpersonal exchange of goods that are valued differently by the two parties should not be ignored or thrown away lightly.

 It could be objected that it is conceivable that John could have made a mistake, perhaps realizing after the exchange that he did not actually like pineapples as much as he remembered he did and thus if he could turn back the clock, given his new knowledge, he would not have made the exchange. While this is true, there is, however, no reason to believe that such situations would be very common, because people like John will quickly change their exchanging conduct in the future once they realize that their valuations have changed. There is even less reason to believe that any outside observer could have the capacity to recognize John’s subjective-valuational mistakes quicker than John himself.  

The benefits of interpersonal exchange are supplemented by the fact that the division of labour among more people is more efficient than autarchic production. First, if someone specializes in performing a task, preferably a task for which he has a natural propensity, he will generally become more efficient at performing that task than if he had remained a generalist. Secondly, and more remarkably, even if one person is superior in every kind of production to another, it is still more productive for the two to exchange because time and effort are scarce. Thus, if the superior person specializes in his comparative advantage (the area of production in which he is most superior to others) while the inferior person specializes in his comparative advantage (the area of production in which he is least inferior to others), the total amount of production can be increased, simply through the two specializing and exchanging their products. It is due to these facts that societies of humans developed, because peaceful societies that enable exchange, specialization, and the division of labour are more productive than autarchic isolation. None of these things require war or coercion to attain, all they require is that the people involved realize the fact that peaceful social cooperation and exchange is more productive and act on this fact. One should thus consider the matter very carefully before proposing to interfere with these beneficial, primordial phenomena through coercion.

4. Incentives matter:

The way the free-market works, and indeed any system of production must work, is to provide incentives for people to produce things that others want to be produced. In the free-market, producers are incentivized to produce things that the consumers are willing to pay for (Note: most people are both producers and consumers), because the consumers monetarily reward them for doing so through their numerous decisions to patronize or not patronize a business, buy or not buy a product. People are incentivized to work in lines that the consumers deem important, save resources to devote to future production, invest in lines that the consumers deem important, and successfully bear the uncertainty of the future, being rewarded for anticipating future demands of the consumers or adjusting production so as to better reflect consumer desires. In the free-market, the incentives that the consumers offer to exercise their sovereignty over the production process take the form of monetary rewards. Producers may partially disregard the consumer in their use of resources for the sake of psychic gains (such as a decision not to get involved in the liquor industry for subjective moral reasons, even though doing so would be the most monetarily profitable course), but doing so means forfeiting some of the monetary reward they would have received.

Now, if people, in their capacity as producers, receive monetary rewards depending on how well they serve the consumers, then it must follow that inequality of wealth and incomes is a necessary part of the free-market incentive system, it cannot be otherwise. Whenever money is taken coercively from the producer for the benefit of others, this incentive system is consequently weakened by the extent of the money taken. In a fully egalitarian socialist system, this incentive system is completely destroyed, and the government must then use punishment and the threat of punishment to get people to produce. Without being slaves of the government though, the more money that is taken from the wealthy and given to less wealthy people, the less the market system of production can function efficiently. This is not to say that a sound social thinker cannot advocate any redistributive policies, only that when doing so, he cannot neglect the effects of these policies on the incentive structure of the free-market system of production.