4 Exchange
Economics may concern itself with the manner in which a man in isolation chooses to expend his time and use the resources available to him - but Political Economics considers this behavior in a context of a society, in which the resources are divided among men, and each seeks to fulfill his desires in an environment in which others are seeking to do the same - ideally without interfering or intruding upon the interests of one another.
To achieve harmony and avoid conflict, economics in a society must consider the principles of property and exchange. A thing is owned by someone, and he has exclusive right over its possession, use, or disposal - and the only just way to obtain the property of another is in a voluntary exchange in which something is given in return. It is a significant concept of economics, and merits quite some deliberation.
If men lived in complete isolation from one another, and did not engage in exchange, there could be a multitude of "human units" but there could not be a society. It is arguable whether man can live outside of society at all, and while we can see that it is possible to live in isolation, this is not the preferred state. While man may be happiest in isolation, unconstrained by the interference of others, his life in that state tends to be unfulfilling and short. To live within a society is to trade happiness for efficiency, and it is the option that most men choose.
But, to rail at the socialists again, something must be produced before it can be traded. Want must be satisfied by effort. For man in isolation, he cannot have without producing. For man in society, he can still produce for his needs, or exchange with others. To do otherwise, to take from others without giving anything in return, is so abhorrent a notion that it is considered by most societies to be criminal.
To split hairs: any exchange of goods is essentially an exchange of effort. The goods exist because each party undertook the effort to produce them - and if their resources and skills were equal, each party may just as well have produced for his own consumption. And therein lies the value of society: it enables men to apply themselves where their resources and skills are superior to others and exchange their product. It is because of this efficiency that, in a society, our productive capacities can exceed our wants.
In the animal kingdom, the sustainability of a species depends on its productive capabilities matching its needs. In such instances, a creature can persist on its own, absent of the company an assistance of others of its own kind. In other instances, cooperative effort among members of a herd is more efficient. Man falls into the latter category of animal. And in comparison to other animals, man has most greatly developed in his abilities to work collaboratively with others.
(EN: I've seen the argument made that insects such as ants and bees are rather better at this, even to the point that their physiology is tailored to certain roles - queen, worker, soldier, etc. - and an individual is incapable of survival outside the hive because it has become overly specialized. The implication is that man can, if he so chooses, be debilitated by his specialization and dependency.)
He returns again to the distinction of creating materials as opposed to merely modifying the resources that were created by nature, and repeating again that there are instances (such as surgery) where simply performing actions conveys value.
There's some rather purple prose about the wondrousness of man's ability to survive and prosper by applying first his mind, then his muscles, to inhospitable environments.
He defends against the perspective that society is the source of human suffering. It is not necessarily so. In a social state in which men interact peaceably and with mutual respect, society is a significant benefit to man. Though society is not necessarily so, and when it becomes a parasitic rather than collaborative arrangement, then it is rightly to be condemned. A good society is better than isolation, a bad one far worse.
Bastiat subscribes to the notion that exchanges are win-win - each party gains something from the other that is worth more to him than what he has given in return. "Hence every exchange represents two gains for humanity." He spends some time on this, as the common notion that one man's gain is another's loss applies only when property is taken from one by another, and ignores that a voluntary exchange each of them gain from the other.
Cooperation and collaboration are another benefit of society: two men working together can achieve more than one by combining their strength or coordinating their motions. However, this may be seen as a form of exchange because they negotiate the ownership of the product of their work. The most customary arrangement is an even split of the proceeds, but there are instances in which their contribution was unequal: a master and apprentice do not contribute equally to the work. The more men involved in a cooperative effort, the greater the complexity of the negotiations over their share of the profit.
He quotes from Adam Smith, who was intently interested in the division and specialization of labor. He then speaks a bit toward which the forces of nature (sun, wind, water, etc.) are applied to production, and how recent science has leveraged gravity, steam, and electricity which are also agencies of nature. He suggests it is self-evident that the more man leverages the power of nature, the less his effort and the greater his product.
It must also be acknowledged that the powers and materials of nature are unevenly distributed: land that is good for growing grapes is inhospitable to farming cotton - so it is only natural (and wise) for villages and territories to produce what grows best and trade with others, rather than trying to force crops to grow in inclement environments. It is rather straightforward that a watermill requires a river and fishing requires a lake, and rather silly to suggest that those who live in a desert land should strive to do either.
There's a brief mention of knowledge, which also benefits from division and specialization. "No man is in a position to see everything" but when several each have a piece of the truth, their working together can result in significantly more ideas than any one of them is capable of producing.
Just as nature has given different capabilities to different lands, so has it given different capabilities to different men. We are not all granted the same degree of strength, intelligence, artistic talent, and so on. As such, specialization is a method by which each man makes use of his greatest gifts, and exchange the method by which we trade our best for that of others. Were it not for exchange, our consumption would be limited to our own resources and capabilities. Something is said for the efficiency of centralization. If the work of one farmer can feed twenty houses, then there is only need for one plow (rather than twenty).
Progress in Exchange
The most primitive form of exchange is direct barter. Two people, each of whom has something to offer the other, discuss an exchange of goods between them: eggs are exchanged for wheat, a pair of shoes for a coat, and so on. Direct barter of this nature requires the two of them to find one another, and for each to have exactly what the other desires. This is why it is common only in primitive societies where each household is largely capable of self-sustenance and a few luxury goods can be exchanged.
Barter does show the fundamental elements of an exchange. Each party seeks what the another has and negotiates the terms of the exchange. Each party is free to engage in barter or refuse the exchange if they do not like the terms. Once a deal is struck the goods are exchanged, and each leaves the bargaining table satisfied with something they wanted more than that which they brought.
Barter becomes "roundabout" when there are multiple parties - the farmer who wants cloth for his wheat meets a tailor who wants meat for his cloth, and then must find a butcher who wants wheat to get the meat to get the cloth, hoping no-one else has provided the tailor with meat in the meantime. It is entirely possible to transact in this manner without a common medium of exchange (money) - but it would be so inefficient that producers would spend much of their time seeking exchanges, and detracting from their productive time.
He speaks for some time of the commodity money - where wheat or salt or another substance becomes a common medium of exchange. He also speaks of the various reasons that cause most societies to gravitate toward precious metals as their money commodity. Money allows production in one time and place to be easily transported to another. (EN: I'm skipping much, as this is a common rumination and Bastiat brings nothing new to the discussion.)
More germane to his point, barter and trade facilitates the specialization of labor by enabling people to do as they are best suited. A farmer could take time away from his wheat field to raise cotton and make cloth - but if it takes him less time to raise additional wheat to trade for cloth, then it is more efficient than weaving the cloth himself.
And again, there is a bit of marveling about the progress of his time, when the products of villages on opposite sides of the Earth are exchanged with one another. Economics has swelled from the management of production in a house, to that of a village, to that of a nation, to that of the entire world.
Limits of Exchange
The goal of exchange is to decrease the amount of effort we must undertake to satisfy our desires. Therefore it follows that when exchange cannot satisfy our desires, there is no interest in exchange. It also follows that when it is easier for us to satisfy our desires by producing for our own consumption, then exchange is not of interest.
He considers the vast amount of infrastructure and effort is necessary for trade: roads, rails, ships, sailors, coachmen, and the like. And so it follows that the cost of exchange must be significantly more favorable than self-satisfaction because the difference must pay for all of this equipment and labor to move goods about.
An aside, there is much call for legislation to interfere in trade, and it is of little use. People will of their own volition seek their greatest advantage. It is not necessary to threaten them with punishment if they purchase a good at a higher cost than they could have made it - but quite some threat is necessary to get them to act against their own interest. "Governments are always disposed to believe that nothing can be done without them" and refuse to acknowledge that men tend to live in harmony without their assistance.
Another aside: people tend to gather in villages and cities to overcome the costs of transporting the goods that they trade with one another. It is easier to barter in a market in town than visit each of twenty farms individually. It is easy to gather men to perform labor if they live close together rather than travel to the worksite from remote places. It is likely that economics drives the urbanization of society more than any vague desire to be close to others - men gather for practical purposes first.
Loose quote: "This intervention of force in human transactions is always accompanied by countless evils."
The Moral Force of Exchange
He rails again against the "puritans of socialism" who are primarily upset with commercial exchange. They are quite interested in money, and entirely interested in having things given to them, but do seem indignant at the suggestion that they give anything in return to those from whom they propose to take.
It is entirely ironic that they regard others as "materialistic" or "self-centered" when they expect to be repaid for their labors. The act of exchange is one of equality and fairness to both parties, and must be so: if there is an action that has no reward, men have no desire to undertake it. It is only because he expects to benefit that he undertakes an action. As such, to take the product of his work without providing any value in exchange is to remove the motivation for him to work, to exchange, or to interact with others at all.
The value of exchange, and the force of its morality, is that the interests of the community are only seen in the aggregation of the interests of every individual that comprises that society. We categorically reject those forms of society, such as tyranny and slavery, in which some are relegated to self-sacrifice for the benefit of others. And therefore we can extol only those methods of exchange in which the interests of both parties are served. The same is true on any level of society: man to man, family to family, nation to nation, and so on - they are only moral if they are voluntary, and they are only voluntary if they are mutually beneficial.
He goes on for a while about this, then arrives at the notion that free exchange is natural in that it does not require any compulsion, nor any central control. Men who wish to engage in trade with one another need no assistance. It is only when the natural order is violated by some "contrived social organization" that force is necessary to compel men to comply with demands that are against their own interest. (EN: This goes on for quite some time - I'm skipping much of it, as it's more in the nature of politics than economics.)
Disastrous Fallacies Derived from Exchange
Some random bits to address fallacies about production and exchange:
- Exchange is the only reason for society to exist. Men did not come together and then discover that they could collaborate, but instead the benefit of collaboration caused them to come together.
- Specialization, meanwhile, happened the other way: living apart from society, every man must be a generalist to provide for his own needs. It is only in a sizable enough society that some can become cobblers or a masons.
- Free exchange is not parasitic. Each person involved in a trade may opt not to exchange unless he feels it is in his favor. Force or threat is the only way to compel a person to enter into a bargain that is not in his favor.
- There is no such thing as a non-productive member of a free society. Each person produces something that someone wishes to consume, and must do so to enter into exchange with them.
- Wealth is the consumption of past production. Any person who has wealth has produced more than he consumed in the past, or has been bequeathed the surplus of someone else who did.
- Idle time is not waste, but a value men enjoy. The only time that is wasted is spent in unpleasant activity to produce something that is not needed for consumption.
- Value is created in the satisfaction of want, not in the production of things.