One Man’s Profit is Another’s Loss
There is this fixed quantity of whatever it is and if you get more, I get less. One man’s profit is another’s loss.
This dogma was already advanced by some ancient authors. Among modern writers Montaigne was the first to restate it; we may fairly call it the Montaigne dogma. It was the quintessence of the doctrines of Mercantilism, old and new. — Ludwig von Mises
Add “the Montaigne dogma” to the collection of pejorative phantoms: mercantilism and Malthusianisme, image of limited good, zero-sum fallacy, Luddite fallacy, fixed Work-fund and the theory of the lump of (labor, labour, work, jobs, output).
Except… it really ought to be the Seneca dogma since Seneca was the ancient author whose de Beneficiis Montaigne faithfully borrowed from for ‘his’ essay (find “Demades“). Even Seneca was elaborating on an older maxim by Publilius.
Is it ever true that one man’s profit is another’s loss? You bet! I just gave an example — gambling and other contests of skill or luck are typically zero sum. Your loss is my gain. Our loss is the house’s gain.
But there is a more historically-pertinent operation of the zero-sum game: bills of exchange. As I remarked in that earlier post, one of the prime motivations for early modern merchant bankers to adopt the novel and challenging technique of double-entry bookkeeping was to “prove an alibi” against suspicions of usury. The way that bills of exchange were accounted for made them one of the favorite financial instruments for avoiding an appearance of usury. Raymond de Roover explained:
As a result of the usury prohibition, bills [of exchange] were never discounted but were bought at a rate of exchange which fluctuated up and down according to the conditions prevailing in the money market. There is no doubt that interest was received by the banker who invested his money in the purchase of bills, for a hidden interest was included in the rate of exchange. Because of this subterfuge, the structure of the money market was such that exchange fluctuations were caused either by a change in the rate of interest or by a change in the terms of international trade.
Interest was thus concealed in the exchange rate charged by the banker. As a consequence, the profit on any given transaction was uncertain. A banker, however, could rely on his long-run observation of the fluctuations in the terms of international trade to achieve a high degree of predictability covering a large number of transactions.
By the middle of the 16th century, the use of bills of exchange had become common enough in trade between England and the Low Countries to raise suspicions about manipulation of exchange rates by bankers. This suspicion was articulated in the memorandum prepared for the 1564 Royal Commission on the Exchange, “For the Understanding of the Exchange,” which first noted the ‘usurious’ undercurrents of different exchange rates prevailing simultaneously in London and Antwerp:
…when the English pound is paid for a month before hand [in London], then the price thereof in reason ought to be the less; and when the English pound is not paid for in Flemish money until a month after hand [in Antwerp], then the price in reason ought to be the more. But here you may perceive that this necessary and fair name Exchange might be truly termed by the odious name of buying and selling of money for time, otherwise called usury.
The memorandum then went on to describe “how private gains may be made when the Exchange goeth too low” and “how the bankers do cunningly fall [or raise] the exchange at Antwerp.” Among the remedies proposed for such manipulation of exchange rates was to “govern this realm by good policy” such that would “temper and forbear the superfluous delicacies” of imported goods and cause English exports “to be wrought to the best value before they are vented.” The resulting trade surplus would raise and maintain the value of the English pound.
Of course not every country can run a trade surplus all the time. For the world as a whole, the balance of trade is indeed a zero-sum game.
There are, however, not one but three issues bound up together in the memorandum on exchange. The first is usury and its concealment in the exchange instrument. The second is the effect of exchange fluctuations on the profits and losses of bankers and merchants. And the third is the manipulation of exchange rates, either by bankers for the private gain or by government to counter the cunning tricks of bankers.
Nowadays, we no longer have to worry about fraud by bankers. The old superstitious prejudices against usury have been supplanted by an enlightened embrace of the unequivocal blessings of credit and debt. Comparative advantage has proven that it is economically illiterate to question the universal benefit of globalization.
Verily, we can embrace the von Mise-erly wisdom that “There are in the market economy no conflicts between the interests of the buyers and sellers.” One man’s gain is clearly the alleviation of another’s pain.
A complication in this notion of zero sum is the assumption that things and money exchanged by people have consistent objective value to the people involved in the transaction. Probably wrong. The buyer’s pleasure in his/her acquisition my well exceed or be less than the seller’s pleasure with the potential the money affords for the seller’s pleasure or use. Totally subjective stuff. Thus it always possible to have win/lose; lose/win; win/win; or even lose/lose. It’s not as though everything traded is a commodity in limited supply. The tool fashioned from the iron ore has “value added” but the value is in the eyes of the user. The flour milled from the grain has value added in the skill of the baker. And so forth.
Indeed, Jack. Another complication is perishability.The alleged time value of money assumes the liquidity of a stable currency. The time value of peaches or avocados is different. An unripe peach may be ripe tomorrow, over ripe the next day and rotten the day after.
Leets stay perfectly ripe forever. I am not seeing the problem.
Leets are better than money!
Absolutely. I mean who ever heard of a slump of leets?
“Comparative advantage has proven that it is economically illiterate to question the universal benefit of globalization.”
I would argue that comparative advantage does not work for nation states that have different labor and regulation laws.
Beene I feel that we must look much closer at the benefits of globalization and comparative advantage especially to all democratic countries. Globalization should not be able to remove a countries laws or sovereignty. Balanced trade would be much better where democratic countries control predatory globalism rather than the other way around where they recognize no borders or countries laws. We must strengthen the WTO and the congressional powers to be able to do this and not just give the executive branch fast tracking total control and the American people no recourse powers.
The problem with claiming that the truth of the argument for comparative advantage proves it is economic illiteracy to oppose globalization is that it is operating on two levels, one logically true and one using Underpants Gnome logic.
True logic. Comparative advantage proves that both national partners in an open trade relation benefit by increasing the wealth of both.
Underpants logic: Every national benefits when their nation gets richer. Because: Step one: comparative advantage, Step two: increased GDP on both sides. Step three: ———–?? Step four: Everyone can afford a pony!!
Of course the Free Trade people protest that Step three is NOT a blank, that they have a perfectly plausible mechanism that ensures that the benefits of trade get spread to everyone. The only problem being that this mechanism works both autonomously and invisibly.
Which is to say that these folks are arguing with a straight face that you are economically illiterate if you don’t believe in the Invisible Hand.
It doesn’t help that historically these same Free Traders have assured the working class that just because they don’t SEE economic justice on Earth doesn’t mean it won’t exist. Because after all the Invisible Hand’s Elder Brother the Invisible Sky Father will take care of ALL THAT. in Heaven.
Free Trade benefits Nations. Not Nationals, not Universally and not Evenly anyway. And where are my Underpants??!!!
Comparative advantage pertains to a two-nation world where other simplifying assumptions apply. The rest is speculation.
Absolutely, it gets difficult to explain when there are 10 or more or less nations competing.
William Ryan, we can agree that trade can benefit a nation; however since adopting Friedman’s ideas I do not believe we have had a positive trade balance. Since 1980 our trade deficit would look like a hockey stick on a graph.
Is it not the WTO that wants tribunals run by corporations to settle trade disputes?