Diversity

There's something I have to say, and it's embarrassing to say it, so I don't want to. But let me promise you, I'm not being uncharitable here, this is really an accurate and banal description of what really happened.

One day some years ago someone I worked with found they couldn't attend a continuing education session on economics. They asked me to take the seat because they didn't want it to go to waste. This was basically a few days off work, it was my boss asking me to go, and I love to hate-learn things, so this seemed like a good idea to me.

In the economics course, aimed at professional people who have degrees and work in public policy, they explained a fairly basic idea from economics: trade makes people better off. Here's the explanation:

Alice has a car and Bob needs a car. Alice sells the car to Bob for $3,000. Now, Alice would not have made that sale unless the car was worth less than $3,000 to them. Let's say Alice valued the car at $2,000. Bob would not have bought the car unless it was worth more than $3,000 to Bob, so let's just say Bob values the car at $4,000. Previously Alice had an asset worth $2,000 and Bob had currency worth $3,000. After the exchange Alice had currency worth $3,000 and Bob had an asset worth $4,000. Thus each is $1,000 richer and society is $2,000 richer.

Now I find the majority of my education to be painfully embarrassing, but that little parable seems so dumb to me that I feel like I am being dishonest by recounting it. Surely there was a more intelligent point that I am leaving out.

Actually there are far stupider points that are being left out. Like the idea that the value of a thing is reliably determined by how much the individual willing to pay for it is willing to pay, which pretends to employ the wisdom of crowds but actually allows the value of things to be set by weird outliers. It also holds the value of currency to be equal to each person in contradiction to that previous premise.

But I think there is a more intelligent point being left out. It's just a point not recognized by economics. In physics we say energy can't be created or destroyed. In order to make that make sense we have to acknowledge a thing called potential energy. If I have a large rock fifty feet from the ground it has gravitational potential energy - that is, if whatever is suspending the rock were to cease to suspend it, the rock could crush my body leaving a grisly pulp. The energy to do that was not created when the rock was released. Rather, it was converted from the kinetic energy that was the rock moving up there in the first place to the potential energy stored in the rock's position. When the rock is released it is converted back into kinetic energy.

I think there is a useful analogy in there. Intuitively, the car did not become an inherently more valuable thing when Bob took possession of it,

but rather its potential value was unleashed

. After all, what if Alice was conning Bob and the car is junk that won't work in a week? Economists would try to hold that as an exception by carving out some rule about fraud and coercion

without actually being able to define either

. I think instead we should look at things in the world actually having value, which is not affected by what we choose to pay for them.

A note, I think most economists would agree with me on that and say that market price is just the best way to know the value of things, it isn't the value of things. I think the discipline of economics has entirely substituted the metric for the thing they want to measure.

So let's think of the world as a

real

place with

real

things that

really

exist in it and that have some properties that stand regardless of whether we recognize those properties or not. Things may have value that is unrealized to any person, but unrealized value is only unrealized until it is realized.

There's an undoubtedly apocryphal story of two ancient civilizations living in what we'd consider close proximity that never met. One had domesticated animals, the other had invented the wheel. Because they never met they never combined these two synergistic inventions. Imagine the great increase in well-being in both of these two possibly fictional civilizations had they happened upon one another.

Where would that value come from? The facile argument from my economics course would say it came from trade. But I would say that the creation of value wasn't in the exchange of a

llama

for a wheel. The creation of value was in the invention of the wheel and the domestication of the llama. The explosion of well-being is the realization of the value of both of those things, and in the further creation of spin-off technologies like a harness to have a llama pull a wheeled cart.

Let's take those two civilizations. A traveler from one meets a traveler from another. They check out the wheel and the llama and say, "Wow, what's up with that?!?" They take the knowledge back to their civilizations. Next thing you know everyone is making wheels, everyone is training animals, and everyone is better off.

Instead let's imagine they meet and conspire to figure out how they can make as much personal gain off the new knowledge as possible. There is an agreement that civilization A can have trained animals but must buy them all from person B's farm, and civilization B can have wheels but must pay person A a fee per wheel-kilometer rolled. The explosion is considerably less.

Economists would say that everyone is still better off because of the trade. But in this example people are better off because of the sharing of ideas and worse off because of the trade. The trade part is limiting people's well-being, not expanding it. The point economists would make in rebuttal is that the trade is necessary for the sharing of ideas, but they would make that point because they base their understanding of society on the simple multiplication of number of people in society by the diary of an 18th century philosopher who spent their life obsessing over their trust issues.

So when an economist tells you that trade creates wealth, make sure to let them know that in fact what creates well-being is just that different people are different and thus have different ideas and we can combine those ideas. That is, diversity creates value. Trade is a way to realize that value but trade takes a cut of the value for itself.