The Point of Trade

[Eliezer Yudkowsky]

(Content warning: econoliteracy. Dialogue based on an actual conversation, but heavily idealized and simplified and stripped of surrounding context.)

Myself: - seems unreal because it is unreal. But there’s a river of reality running through it. If somebody reports that something complicated feels unreal and difficult to get a handle on, usually the first thing I prescribe is going back to the very very basics, and playing around with those to solidify the grasp there. If mathematics seemed unreal to someone, I’d take somebody back to premises-and-conclusions. In the case of complicated modern economical structures, I’d maybe start with trade. What’s the point of trade? What does it do?

Them: The point of trade is that sometimes people get different amounts of value from things, so they can get more value by trading them. Like, if I have an apple, and you have an orange, but I like oranges more than apples, and you like apples more than oranges, we can trade my apple for your orange, and both be better off.

Myself: Yes, that is the horrible explanation that you sometimes see in economics textbooks because nobody knows how to explain anything. But when you are trying to improve your grasp of the very very basics, you should take the basic thing and poke at it and look at it from different angles to see if it seems to capture the whole truth.

In the case of the “people put different values on things”, it would seem that on the answer you just gave, trade could never increase wealth by very much, in a certain basic sense. There would just be a finite amount of stuff, only so many apples and oranges, and all trade can do is shuffle the things around rather than make any more of it. So, on this viewpoint, trade can’t increase wealth by all that much.

Them: It can increase the utility we get from the things we have, if I like oranges a lot more than I like apples, and you like apples a lot more than oranges.

Myself: All right, suppose that all of us liked exactly the same objects exactly the same amount. This obliterates the poorly-written-textbook’s reason for “trade”. Do you believe that, in an alternate world where everybody had exactly the same taste in apples and oranges, there’d be no further use for trade and trade would stop existing?

Them: Hmm. No, but I don’t know how to describe what the justification for trade is, in that case.

Myself: Modern society seems very wealthy compared to hunter-gatherer society. The vast majority of this increased utility comes from our having more stuff, not from our having the same amount of stuff as hunter-gatherers but giving apples to the exact person on Earth who likes apples most. I claim that the reason we have more stuff has something to do with trade. I claim that in an alternate society where everybody likes every object the same amount, they still do lots and lots of trade for this same reason, to increase how much stuff they have.

Them: Okay, my new answer is that, through trade, you can get strawberries from far away, where they wouldn’t be in season at all, where you are… no, that doesn’t actually make more stuff. My new answer is that you can build complicated things with lots of inputs, by trading to get the inputs. Like if it takes iron and copper to build circuits, you can trade to get those.

Myself: If it takes 1 unit of effort to get 1 unit of iron either way, how can you get any more stuff out, at the end, by trading things? It takes 1 unit of effort to make 1 iron ingot, so go to the iron mines and mine some iron, then chop down the wood to prebake the iron ore for grinding before you put it into the bloomery. All of that has to be done either way to get the iron ingot. How can trading for somebody else’s iron, instead, cause there to be more stuff in the economy as a whole?

Them: Because task-switching has costs.

Myself: Okay, suppose an alternate society of people who are really good at task-switching. They can just swap straight from one task to another with no pause. They also all have exactly the same tastes in apples and oranges and so on. Does this new society now have zero use for trade?

Them: Um… hm. (Thinks.) But they’re not actually in the same place as the iron mines. So if they have to walk around a lot -

Myself: Suppose a society in which everyone has exactly the same taste in apples and oranges; everybody is really really good at switching tasks; and furthermore, the society has Star Trek transporter pads, so you can get to the iron mine instantly. Is there now no more use for trade?

Them: Some people are better miners and others are better fruit-growers?

Myself: Suppose a society with identical fruit tastes, and perfect task-switching, and Star Trek transporters, and furthermore everyone has identical genetics, as if they were all identical twins; which, as we know from identical-twin studies, means that everybody will have around the same amount of innate talent for any and all jobs. Like that case where two identical twins, separated at birth, who never knew each other, both ended up as firefighters. As we all know, studies on separated identical twins show that happens every single time, with no exceptions. I claim that even this society still has to do a lot of trade in order to end up with modern levels of wealth.

Now, do you think I’m trolling you and that we actually did get rid of the basic reason for trade, at this point, or that there’s still something left over? Identical fruit tastes, perfect task-switching, Star Trek transporters, everyone is born with the same genetics and therefore identical innate talents. Do people now mine their own iron, or do they still trade for it?

Them: (Thinks for a while.)

Me: If the Sequences have taught you anything, I hope it’s taught you that it’s okay to state the obvious.

Them: …people learn to do their jobs better with practice?

Myself: Human capital accumulation! Indeed! So now let us suppose identical fruit tastes, perfect task-switching, Star Trek transporters, identically cloned genetics, and people can share expertise via Matrix-style downloads which are free. Have we now gotten rid of the point of trade? As far as you can tell.

Them: …yes?

Myself: Do you believe I’m going to say that we’ve gotten rid of the point of trade?

Them: …no.

Myself: Well, I agree with your object-level answer, so your meta-level answer was wrong. I think we’ve now gotten rid of the point of trade.

Them: Darn it.

(Note: While contemplating this afterwards, I realized that we hadn’t quite gotten rid of all the points of trade, and there should have been two more rounds of dialogue; there are two more magical powers a society needs, in order to produce a high-tech quantity of stuff with zero trade. The missing sections are left as an exercise for the reader.)

[Drake Morrison]

I really enjoyed this. Taking the time to lay this out feels more useful than just reading about it in a textbook lecture. The same way doing a math or code problem makes it stick in my head more. One of the biggest takeaways for me was realizing that it was possible to break economic principles down this far in a concrete way that felt graspable. I think this is a good demonstration of that kind of work.

[Vaniver]

Interestingly, I think this is pretty obviously stated in The Wealth of Nations; Chapter 1 identifies division of labor as the cause of capital accumulation, Chapter 2 identifies trade as the cause of division of labor, and Chapter 3 identifies the size of the market as a limiter on specialization.

This is… actually sort of surprising that now I have two examples of economic concepts which are really better explained by Adam Smith than they are by modern textbooks (the other is supply and demand), and this makes me even more glad that I read The Wealth of Nations in high school before I had come across any modern textbooks.

[bfinn]

FWIW I read quite a bit of The Wealth of Nations some years back, then gave it up as a waste of time since (a) modern textbooks would probably explain it better (I assumed), and (b) (more importantly) a lot of W of N must be wrong, and I won’t know which bits to skip or disbelieve, so better just to read a modern summary of the important bits.

[Daniel V]

All that just to get to the point of trade being to leverage comparative advantage into unlocking more value in the economy, which is the actual textbook reason for trade. Don’t get me wrong, this was an enjoyable read and illustrates that heterogeneous preferences is an appealing but inadequate answer to why we trade. The post also gets at various reasons comparative advantage might come about (nice), but without actually naming the broad concept that umbrellas these things together to explain the benefit of trade. Comparative advantage, whether it exists because you (or the organization, or country, or whatever entity is the unit of analysis) have task-switching costs, are closer to the means of production, are inherently better at the task, have accumulated more experience with the task, or (looking to the comments now) have accumulated more capital devoted to the task via path dependencies, is the reason for trade. The point of trade is to unlock the added value that resides in making more efficient use of scarce resources.

[awenonian]

I feel like I might be being a little coy stating this, but I feel like “heterogeneous preferences” may not be as inadequate as it seems. At least, if you allow that those heterogeneous preferences are not only innate like taste preference for apples over oranges.

If I have a comparative advantage in making apples, I’m going to have a lot of apples, and value the marginal apple less than the marginal orange. I don’t think this is a different kind of “preference” than liking the taste of oranges better: Both base out in me preferring an orange to an apple. And so we engage in trade for exactly that reason. In fact, I predict we stop trading once I value the marginal apple more than the marginal orange (or you, vice versa), regardless of the state of my comparative advantage. (That is, in a causal sense, the comparative advantage is covered by my marginal value assignments. My comparative advantage may inform my value assignments, but once you know those, you don’t need to know if I still have a comparative advantage or not for the question “will I trade apples for oranges?”)

Comparative advantage is why trade is useful, but I don’t know if it’s really accurate to say that heterogeneous preferences are an “inadequate answer to why we trade.”

[ShardPhoenix]

I feel like comparative advantage is a bit hard to understand and the concept often seems to be used incorrectly (as far as I can tell). For example, people giving career advice talk about “finding your comparative advantage” when this amounts to “do what pays the most” which seems obvious and uninteresting. (The following example that it can be better to hire someone than do everything yourself is slightly less obvious, though has caveats in the real world due to principal-agent/​search costs/​etc).

[Ericf]

Didn’t follow that link, but the conclusion is wrong. Youth should pursue their competitive advantage which is closer to “what has the best (pay+pleasure)/​effort ratio” than “what pays the most.”

[Daniel V]

I agree with you that it’s hard to understand and that a lot of times people use the term inexactly to mean something else, but neither of these is a reason to avoid using the term, especially in the exact context where it is easiest to illustrate and can be used correctly.

[Jsevillamol]

Other magical powers of trade:

1. Economies of scale. It is basically as easy for me to produce 20 sheets of paper as to produce 1 ; after paying the set up costs the marginal costs are much smaller in comparison. So all in all I would rather specialize in paper-making, have somebody else specialize in pencil-making, then trade.

2. Investment. often I need A LOT of capital to get something started, more than I could reasonably accumulate over a lifetime. So I would rather trade the starting capital for IOUs I will get from profit.

3. Insurance. I may have a particularly bad harvest this year and a very good one the next one, while my neighbour might have the opposite problem. All in all I would rather we pool our harvests each year, so that we can have food both years. So we are “trading” part of our harvest for insurance.

[goose000]

Isn’t 2 just a product of 1? If 1 were not true, couldn’t you just get started at small scale? This may be understood, but if not, it seems useful to point out the entanglement.

Also, another aspect of the insurance is spoilage: some goods preserve better than others, so it makes sense to convert excess into something stable so that you can “self insure”.

[Ericf]

Investment is independent from efficiencies of scale. Example: Given a supply of 1-foot ropes and a scissors, producing one ¹⁄₂ foot rope takes the same amount of effort as producing two ¹⁄₂ foot ropes. Carving The David required immense human and other capital investment, but didn’t have any economy of scale

[goose000]

Wait, isn’t that an example of efficiency of scale being dependent on investment? You have to get a 1-foot rope and scissors, but once you have, you can create two ¹⁄₂ foot ropes? I think the “given a 1-foot rope” is doing more work than you realize, because when I try to apply your example to the world above, I keep getting hung up on “but in the imaginary world above, when we account for economy of scale, if you just needed one ¹⁄₂ foot rope, you would just create a ¹⁄₂ foot rope, and that would take you ¹⁄₂ the time as creating 1 foot of rope.” And for The David, I feel like “sure, but that doesn’t explain why someone wouldn’t just carve their own David if they wanted one”. I think I’m bypassing some of the issue here, but I’m not entirely sure what it is.

It does, however, bring up another interesting reason for trade (and this may be part of how investment can be independent from efficiency of scale): shared resources. If a pair of scissors does not scale according to how often I use them, and I only use them once per day, I can increase efficiency/​decrease required investment by trading their use so others can use them when I’m not. This applies to the the David as such: utility gained from the David is not zero sum, multiple people can utility from it without decreasing the utility the others gain; therefore it does not make sense for everyone to carve their own. So any time a resource or product produces non-zero sum benefits if it exists, we have a reason for it’s use to be traded/​trade to be involved in sharing it.

Applying this, if 5 people each carve a statue and put them in a sculpture garden in exchange for access to the garden, they can each enjoy five statues (alternatively, they could collaborate to build the statue in 1/​5th the time and share in the enjoyment of it).

Not sure this is what you were getting at, but I think I’ve talked myself into thinking that when investment has independence from efficiency of scale it’s because of the non-zero sum nature of some shared resources.

[Jsevillamol]

You are quite right that 1 and 2 are related, but the way I was thinking about them I didn’t have them as equivalent.

1 is about fixed costs; each additional sheet of paper I produce amortizes part of the initial, fixed cost

2 is about a threshold of operation. Even if there are no fixed costs, it would happen in a world when I can only produce in large bulks and no individual units.

Then again, I am struggling to think of a real-life example of 2, so maybe it is not something that happens in our universe.

[goose000]

Yeah, I think we’re in agreement. I can’t think why there would ever be a minimum, except to exceed the break-even point on fixed costs.

[Jsevillamol]

Trying to think a bit harder about this—maybe companies are sort of like this? To manage my online shop I need someone to maintain the web, someone to handle marketing, etc. I need many people to work for me to make it work, and I need all of them at once. Let’s suppose that I pay my workers directly proportionally to the amount of sales they manage to make it more obvious.

As I painted it, this is not about amortizing a fixed cost. And I cannot subdivide the task—if I tell my team I expect to make only 10 sales and pay accordingly they are going to tell me go eff myself (though maybe in the magical world where there are no task-switching costs this breaks down).

Another try: maybe a fairness constraint can force a minimum. The government has given me the okay to sell my new cryonics procedure, but only if I can make enough for everyone.

[goose000]

Hmm. I feel like it’s relevant that your example relies on trade, which we’re trying to eliminate. Therefore, if all of the other reasons for trade go away, this example would be irrelevant.

But can we recreate it elsewhere? Perhaps there is some task which is time sensitive, but cannot be done by one person (in their remaining marginal time) at a speed which does not decrease marginal gains. Information sharing comes to mind, but that seems to have already been accomplished by the society outlined above.

[MikkW]

I don’t think any of these are a problem in the magical world posited by the end of this post

[Viliam]

Things worth buying in a Matrix universe:

• Art. Even if I had the skill to make it in the same quality, I would probably enjoy art made by someone else more; for example because I don’t know how the story will end.

• Invention. I can invent a gadget, and you can invent a gadget, but if we trade, we will have invented two gadgets in one unit of time.

In both cases, the missing magic is artificial intelligence.

[Bryan Sory]

Why is the missing thing AI?

[Viliam]

I assume that the artificial intelligence would not be considered a “trade partner”, but either a private property or a public service.

Like, when your car drives you across the town in return for gasoline, we do not call it “trade”. But when a person drives you in a rickshaw, and receives food in return, this is called “trade”.

Therefore, to eliminate trade completely, you need a non-person who can provide you anything you would otherwise need from a person. In my example, surprises and new inventions.

[Rossin]

Another is leisure. People would still need breaks and want to use the work they had done in the past to purchase the ability to stay at a beach resort for a while.

[Taran]

Maybe I was projecting a smarter argument onto my economics textbooks than was actually there, but I always understood them a little differently: two people gain by trading apples for oranges when they value (not like) their trade goods in different ways. How much you value something depends on how much you like it, but also on other things too: how easily you could find or make your own without trading, how much you value something else that the thing makes possible, how much of the thing you already have, how uncertain your expected future preferences are, and so on.

I think this distinction dissolves the rest of the dialog. If you’re close to the apple orchards and I’m not, or you’re an expert apple farmer and I’m not, or you’ve invested capital in apple-growing machines and I haven’t, then you’ll have an easier time getting apples than I will and you won’t value them as much.

In this account, trade creates wealth indirectly, by incentivizing production and specialization. In a world where there weren’t any distinctions of value—where people genuinely didn’t care whether they had apples, or basketballs, or copies of Twilight—gains by trade wouldn’t be possible. I can’t picture a world like that, though; even replicators don’t seem like quite enough.

[TurnTrout]

My guess:

1. Organizational capital: even with all the assumed magic, some jobs need several people to work together. Absent organizational tech, it takes time to organize people and coordinate on a project. Firms can specialize in being well-organized and well-coordinated to produce a set of goods.

2. Other physical capital: will a well-organized group of people really be able to extract oil, just by knowing exactly how to do it? No. Even if they have the resources to pay the fixed costs and enter the market, they still have to purchase the equipment, set up the supply chains, etc (even with teleporters, since you have to organize what stuff goes where, from where—although now we’re getting into organizational capital again). Even if you and your colleagues are well-organized, you aren’t going to extract oil or build a stadium without the right equipment.

[Neel Nanda]

My guess for missing things:

Economies of scale—it’s probably easier to produce a lot of steel from a lot of iron, per unit kg of steel, than with a little bit of iron. So you want there to be concentration of raw materials.

Diminishing marginal returns—so this pushes towards a uniform distribution of everything

[Jsevillamol]

I’m confused. Why would diminishing marginal returns incentivize trade? If the first unit of everything was very cheap then I would rather produce it myself than produce extra of one things (which costs more) then trade.

[Paul Crowley]

I think this is diminishing marginal returns of consumption, not production.

[Dagon]

Yes, diminishing marginal utility plus increasing marginal production capability is the recipe for specialization and trade.

I think I agree with Eliezer (if I read correctly) that scarcity is the underlying motive—trade is only valuable if you want something and you can trade for it more easily/​cheaply than you can produce it.

[goose000]

I agree with both, but claim that they are, in a sense, the same problem: if you solve the economy of scale issue, along with the parameters above, people would simply produce the amount desired with no diminishing marginal return problem on consumption.

[EconomicModel]

“Diminishing marginal returns” is underspecified. Is this diminishing marginal returns of productivity or utility? Is it in money? Goods? Some other thing? I think it’s diminishing marginal utility in goods, but I’m not sure. Some types of diminishing marginal returns do imply gains from trade, but others don’t.

[Mo Putera]

See Dagon’s comment above.

[Measure]

Here are at least two things that add to gains from trade:

Shared Equipment:
If you have to independently produce pickaxes, trucks, rails, a smeltery, etc. before you are able to spend your N units of human effort to mine the N units of iron you need, you can gain by purchasing the (right to use the) mine and equipment someone else already produced and isn’t using right now/​any more.

and

Intellectual Property:
Imagine you have to additionally find where to mine for iron, invent a shovel, and also independently discover that there even is such a thing as iron and that it is useful for whatever purpose.

[itaibn0]

How do you make spoiler tags?

[Measure]

From the FAQ page:

In the Draft.js editor type >! on a new line, then press space, then a spoiler box should appear

In the Markdown editor, surround your text with :::spoiler at the beginning, and ::: at the end.

[Jiro]

All right, suppose that all of us liked exactly the same objects exactly the same amount. This obliterates the poorly-written-textbook’s reason for “trade”.

This is nonsensical, because whether an individual person likes something is not a constant. If everyone liked oranges just as much as apples,, trade would still be possible because the 1st orange is preferable to the 99th apple and the 1st apple is preferable to the 99th orange.

[Matthew Barnett]

Part of the confusion here is over what the word “trade” means. I’m actually pretty sympathetic to the proto-justification given that, “The point of trade is that sometimes people get different amounts of value from things, so they can get more value by trading them.” It’s just that, even in a society where everyone shares the same values, we get efficiency from specialization.

It seems like a further stipulation to refer to “specialization and transportation of resources” as “trade” if every party involved has the exact same values. Consider a colony of ants. There are various types of worker ants, and the queen ant, and each uses special behavioral tools to optimize their particular niche within the colony. Still, it would seem weird to say that worker ants are “trading” with the queen ant, given that it makes a lot of sense to view the colony as a single unit, working towards a common aim.

[Slider]

I also feel that “trade” has some extra meaning that I can’t get a handle on that isn’t covered by breaking it thus down.

I am thinking that the raise of eukaryotic cells could be understood as increased cooperation between a initially independent mitochondria and another cell. Switching context to be an dependent organelle the arrangement can be much more efficient. It is notable that eukariotic can do lot more macroscopic stuff but I wouldn’t exactly call it trade even if there is clear exchange of resources. Another maybe analogous situation would be jump from single cell organisms to multicellular organisms. It seems plausible that in order to get to multicellular life there would be a stepping stone of a cell that can do independent life but also benefits from groups.

I guess with the biological situations there is the feature that what they do is built into them. There is no consideration and acceptation or rejection of deals (or maybe some signal molecyles could be seen as such?)

If an organism can do stuff a group of cells can’t then probably a village or firm can do more than a group of people.

[[e-mail]]

Exactly. Trade increases cooperation, which adds tremendous value to human life.

[Slider]

But is all cooperation trade? Is all value increase trade?

[dkirmani]

people can share expertise via Matrix-style downloads which are free

Just because people can share their expertise for free doesn’t mean that they will. If Alice has practiced her orange-picking skills more than Bob has, it makes sense for Bob to give Alice some fruit in exchange for Alice’s superior expertise.

[Oskar Mathiasen]

Two of the removed features are removed incompletely.
Differerences in preferences. What is important for trade is the marginal preference. So to remove this motivation to trade one mus assume the marginal value (both intrinsic and instrumental) to be equal for everyone for all goods, which i think can only happen in some very weird cases (eg all gods have no instrumental value and utility is a linear combination of the products).

The difference in peoples productive capacity (which doesn’t by itself result in trade (it does when assuming diminishing marginal value to personal consumption of the same product)) is not captured completely by their human capital, it is their all their capital. So normal capital differences could cause trade in any situation where human capital could.

Trade can also be used to facilitate coordination, cooperation and information.

Trade can allow parallelization of work (a kind of cooperation), and can in general let you play with time (eg work to create a product with the intention of trading it for something later (when you have better information about what you want))

[Oskar Mathiasen]

Example world without trade.

Every person gets at birth assigned an array of 3 integers a blue number, a yellow number and a red number. Every person has 3 attributes: the speed they can increase a red number (by spending that amount of time counting out loud), the speed they can increase a blue number, and the speed they can increase a yellow number. They can increase their own numbers or anyone elses. (Note we are not assuming everyone has the same amount of red, blue and yellow points at birth or that they are all equally fast at producing them). Everyone knows that there are no ways to become better at increasing your numbers.
Everyone has the following utility function: red points + blue points + yellow points.
This world has no trade! But it does have comparative advantages!

[Richard_Kennaway]

Am I misunderstanding your example, or is this a world in which transfer of goods is impossible? If no-one can give their points to anyone else, then trade has been ruled out by definition.

[Oskar Mathiasen]

People could trade making each others numbers bigger, it’s just that it will never be beneficial for both.
Letting people increase others numbers by decreasing their own number doesn’t change the results

[Ericf]

Note that this world assumes away the fixed cost of living. In the real world, every person (even a computer simulated person) consumes and destroys some value to stay alive (either power lost to Entropy for a simulation, or food calories eaten and digested).

Also, too, that world doesn’t have any diminishing marginal returns: somehow my optimum action is increasing whichever score I’m best at, with no variety to my actions at all. This doesn’t model real preferences well, where a score of 101 Red + 1 Yellow + 1 Blue would never equal to 1, 101, & 1 and 51, 51, 1. The very definition of things being different implies that they cannot be perfectly substituted for each-other at all quantities.

If you relax either of those strange assumptions, you will see trade re-emerge.

[Oskar Mathiasen]

Yes.
The comment was meant as a proof by example that you can have no trade in a world with comparative advantages, if everyone has the same marginal value of all products the result is no trade.
Diminishing marginal returns are indeed enough to make marginal values different between people.

[Ericf]

Except, your example doesn’t have comparative advantages because there is only one “good” available (points). There has to be some difference in value somewhere to have different goods.

And note the slight of hand in the original post where Elizer goes from “people like all goods the same” to “oh, but somehow people like laptops more than apples”—if everyone really did like all things equally, there would be no trade because having “a basket of apples” would be the same as having “one apple.”

[Oskar Mathiasen]

Yes.
I agree that the original post keeps going after removing differences in values because they don’t remove differences in marginal value, which is what matters.
I am providing an example where properly removing the differences in marginal value results in no trade.

You are using a nonstandard definition of goods. Would you equally object to a market with only blueberries, apples and bananas on the basis that there is only one good available (fruits)?

The example world can be modified easily to use any utility function of the form a·red points + b·yellow points + c·blue points.

[Ericf]

The whole point of making simplified models (economic or otherwise) is to reflect some underlying truth in a more grokkable form. But, if you remove the load bearing ideas when making the model it doesn’t provide any insight.

If all goods are perfect substitutes, then there is no trade. That’s all your model is saying. And that’s the same thing I was saying, though my previous post was less elegant about it. It doesn’t matter what the production functions look like: they key factor is the perfect substituiton on the demand side. And, as you said, redefining a Red point as 1/​a Red points doesn’t change that conclusion.

[jacobjacob]

Curated. I enjoyed how this post was a little journey of deconfusion from the inside. It went through some of the actual cognitive motions one might make when trying to understand economics. (Or, rather, when trying become less confused about questions like “Why does everyone’s lives today seem so much better than people I read about in history books?” or “How is it that the guy at Papa John’s down the street can spend a few days making pizza, and then go to the store… and return with a little all-in-one pocket camera-computer-telephone-thing more powerful than devices that used to help send astronauts into space!?” And so forth.)

The questions sprinkled throughout, and the exercise at the end, also kept me curious and engaged. It’s the kind of post that doesn’t just hand down an insight, but conveys some of the skill required for generating similar insights.

[Unnamed]

A few things that seem relevant (5 things, but maybe not crystallized in the right way to be 5 separate answers to the OP’s question):

Quantity: mismatch between natural quantity produced and quantity desired. Maybe I can plant an apple tree & pick the apples, but I don’t want a whole treeful of apples. Maybe the most efficient way to make t-shirts is to build a big machine that makes a million shirts, and a process for making just 10 of them is wildly inefficient in terms of resources per shirt. (related keywords: economies of scale, capital investments)

Timing: maybe I want something now & it would take half an hour for me to make it (and what I’ll want is unpredictable, I can’t keep a giant inventory of everything I might want—though maybe the “all of us liked exactly the same objects exactly the same amount” supposition erases this issue). If I need to plant a tree and wait for it to grow apples that’ll take years. Building the giant t-shirt machine might involve more than a single lifetime of person-hours of work.

Some things you can’t do for yourself: if I Matrix-learn how to give good massages, that won’t let me get a good massage—I need someone else to do that. That requires making some kind of deal with another person (maybe I give them a massage some other time?), which is at least kind of like trade. What counts as “trade”? Some simple cases seem not that trade-like, e.g. I play tennis with someone because you can’t play a tennis match by yourself, although we could frame it as trade-like: I’m providing them with a tennis opponent and in exchange they’re providing me with a tennis opponent. The massage exchange seems more trade-like (because asynchronous?), other cases where we aren’t just exchanging the exact same service even more so.

Some production involves multiple people: Maybe it takes multiple people to carry a heavy object, or to pick apples (one in the tree & one on the ground with a basket?), or to operate a giant machine. Or people decide they’d rather do it together with other people (e.g. because the total quantity produced is more than any one person wants, or to finish the job more quickly). So there needs to be some kind of deal between the people on how to divide up what they produce. That also seems kind of like trade. Less so in some simple cases (a group of people dividing up the work equally and then dividing up the output equally), more so as it gets more complicated.

Complicated many-person coordination: Maybe a bunch of people work together to build, supply, and operate the giant t-shirt machine and divide the t-shirts between themselves. But the most efficient way to get the screws for the machine is with a giant machine that produces way more screws than the t-shirt machine needs, so most of the screws are used for other purposes. And the most efficient way to make the fertilizer for the cotton fields involves making way more fertilizer than is needed for the t-shirt cotton. Etc. So we have multiple giant teams, partially overlapping, e.g the screw-machine-makers have a small role in the t-shirt production & in the production of many other things, and so get a little share of each. With long supply chains this might look more like screw-machine-makers bartering screws for t-shirts rather than screw-machine-makers being part of the t-shirt team. And if you think about schemes for arranging all of this, those can start to look more like trade and an economy, e.g. all these people communicating & coordinating to figure out how much to make of each thing and where to send it and so on might want to use something that looks a lot like prices (related keywords: the knowledge problem).

[Richard_Kennaway]

Even in the final hypothetical world, there are still enormous gains to be had from specialisation. Gains from specialisation arise because while a person may be imagined to have zero task-switching cost, most tasks still have non-zero person-switching cost in that hypothetical world. Specialisation necessitates trade, so that each person can get what they need but do not make from the people who make those things to trade for what they need. (One could talk about trade being unnecessary in a “perfectly planned” economy, but that would be going off in a direction not relevant to the original question. The quotes are because...no, still not relevant.)

For example: My iPhone cost about £1000, which I earn in a certain number of days. Even in the final hypothetical world, I cannot see how I could make an iPhone in that many days. (First, build a fab plant...) Could ten thousand bricklayers each add one brick to a house for the same total effort as a small team adding ten thousand? Could 137672 clones of Andrew Wiles each spend (9 years * 8 hours/​day /​ 137672) =10 minutes on Fermat’s Last Theorem and collectively prove it? Could Elon Musk’s projects exist without an Elon Musk, even in these hypothetical worlds? I believe not, short of raising the hypotheses so far as to make all of humanity into a single collective intelligence.

When there is only one person, does that at last obviate trade? Perhaps not even then. Algorithms based on bidding and trading have already been used in factory scheduling, and could be part of how such a collective intelligence worked.

[goose000]

Looking through the comments, it seems like most of my thoughts have been captured (economy of scale, collaboration producing non-linear accumulation, etc) But some of the others (risk management, the time axis of logistics) helped me come up with a new one: perishability. When we combine some of the other factors (especially risk) people will at times have a perishable surplus. At these times they would seek to convert this surplus to something non-perishable or some other thing that they need at the time. If we had a society as described above plus uniform starting conditions and everyone used the same dice-rolls (i.e. everyone had the same good/​bad corn year), I believe this reason for trade would cease to exist

.

[justinpombrio]

One more magical power of trade, that I didn’t see in other comments:

Planning and logistics. It takes about a week and a dozen steps to make a pencil. (Ok, probably not all dozen of those steps need human intervention, but some probably do.) That’s not too bad; I can set a Calendar reminder to ping me when various steps are done so I can move the materials to the next one. But to use reminder software I need a laptop. How long and how many steps does that take to build? I would guess years of time and tens of thousands of steps. So even if I technically could perform all the required steps individually, doesn’t mean I could feasibly deal with the sheer complexity of the task, or with the timescales involved.

[Timothy Johnson]

Working for a salary is also fundamentally a form of trade. In my case, I trade my time and expertise in writing software, and my company pays me.

Purchasing items is also trade—I trade the money I earned to buy goods and services from others.

To completely eliminate trade, I think people would need to be able to magically wish anything they desire into existence. (If you’ve watched The Good Place, I’m imagining something like what Janet is capable of.)

At that point, scarcity no longer exists. And since the main point of economics is to solve problems of scarcity, economics doesn’t have much purpose either.

[Celer]

In advance of other comments:
1. Declining marginal utility of specific goods and non-uniform initial distributions of goods over people (this one matters).
2. There is a finite length of the production chain that one person can accomplish if something would take longer than an entire human lifetime to produce. Suppose I luck into a massive amount of unobtanium, with perfect property rights. To some extent this is 1, but I might also desire goods that I could not produce in an individual life, and by trade acquire them (this one isn’t that critical).
3. Building on 2, some goods are only possible at the end of extremely expensive or complex production chains: effectively high startup costs imply that not everyone should produce a good. For example, “an airplane” is something that a small fraction of is not nearly as valuable as the whole entity, and there are small enough fractions that are worthless as airplanes. (you might consider this solved by star-trek transporters, which deal with a similar problem and you thus consider the class of problems solved. That said, I consider this a key source of gains from trade)
4. There’s a more pedantic point that as an economist I feel obligated to make: Increasing marginal utility of two goods over a relevant range implies gains from trade (this one doesn’t matter for most understandings of trade)

After reading other comments:
Jsevillamol has a good point about insurance that I missed. Villam has a thoughtful point about R&D that I think is covered by the Matrix but arguably counts. Measure’s point about shared equipment relates to time-sharing and startup costs, though framed differently.

[mako yass]

Specialization. Yes. I’ve been making an induction puzzle game over the past couple of years. It takes place largely on the workbench of a reverseng (derivation: Reverse Engineer) employed by a drone factory that is situated in a late industrial society (a few years after creating misaligned AGI, so hardened by its state of biological warfare that it will last a few years yet).

One of the organizing principles that has allowed your world to run so terrifically fast is “Specialism”, which holds that a person’s profession should cast a long shadow over their entire lives. Most of us are edited straight from the germline, and then we begin our training at birth. The notion that a person would choose their specialization is mostly extinct, and discussed rarely, when it is discussed, it is depicted fantasistically, a little bit like love marriages in India. They happen, they’re normal in many elite subcultures, but most of us know why they wouldn’t be right for us.

Your training presents you with narratives, the narratives frame your specialization (spec) as the backbone of history, the girthiest load-bearing column, holding up the weight of the whole world. As a child, your media diet is well controlled, as it must be, and by your teen years, the media of other specs, of the same age group, will have grown incomprehensible or uninteresting to you, as if it were written in a different language, for a different belief system, dressed with an alien’s sense of beauty. When you enter the workplace, you will have to interact harmoniously with these aliens. Learning to admire them is the final part of your training. It wont be easy. They are deeply unlike you, and even though you are each proud of your spec, you need each other, they can do things you never could, you will love them for their difference.

There will be partings in these black thickets, glimpses out into a calmer world, a world that is doing a lot more rumination, and a lot less hurtling. This other world may, or may not survive these glimpses from our creatures of the black thickets. That will be up to you.

I don’t think the world belonging to Specialism is a good one. Everything moves too fast here. Philosophers, anthropologists, sociologists, have none of their hands on any of its reigns, instead, market forces looking for 20 years returns, its homesteads pumping out specials like puppies from a mill.
But I can’t help but internalize Specialism, a little bit. It is practical. I am finite. I can only be a few types of thing, I can only make a few humble contributions to the global product. Better I approach them with absolute devotion. As a forecaster I’m permitted the relief of looking out over the needs of the future and figure out where I’d fit into them. I get to figure out what I ought to be before becoming it. Most people don’t have that. It would be nice if there were some higher civic process that could give this clarity to everyone. It would have been nice if it could have given some clarity to me back when I was wandering deserts.

[Amarko]

There’s still the problem that two people can’t occupy the same space at the same time, so we need people to be able to swap places instantly. This then requires some coordination, which is mentioned below.

Some commenters have mentioned economy of scale—It can be more efficient to pool together resources to make a bunch of one thing at a time. For example, people want paperclips but they could get them much faster if they operate a massive paperclip-making machine rather than everyone making their own individually. I think this is already covered though, as if everyone has the same innate traits and preferences then they can all just operate the machine for one microsecond and collect their paperclip. This solves the coordination problem, as if everyone knows what they want and how much labor is required per person then they all just switch between each task accordingly. The only coordination is about who goes where and when.

So in the end, we have people indistinguishable by location, preferences, abilities, knowledge, and behaviour under any given local conditions. It seems that there is some sense in which the people in this world are ‘indistinguishable’ as agents (barring potentially unnecessary differences like eye colour). I think this hints at trade being unnecessary if and only if the agents are ‘indistinguishable’ in some sense.

Edit: We may also need need equivalent local conditions as well. If everyone wants a house within 3 miles of anyone else, and there is a single 3-mile-diameter circle that is the best spot in the whole world, then only one person could occupy that spot. If one person happens to have that spot, they could rent it out for a time in exchange for things they want. Boom, trade.

Or for a more obvious example, one person has all the military power. This person does no work and gets stuff in exchange for not killing anyone. It’s extreme, but probably technically an edge-case form of trade.

[Multicore]

Intellectual property seems like another important thing. For example, a game like Cyberpunk 2077 takes man-centuries of work to produce, but once it has been created, producing additional copies for trade is cheap. In the no-trade world, everyone has to recreate all the IP for themselves.

[Felix Karg]

First: I’m also thinking of ‘getting paid for a job’ as a trade, fundamentally it’s ‘generating value’ for money. It’s similar with most investment opportunities: they either provide (immediate) value or have the capability to generate value. This will stay at least until no one needs that anymore, maybe because everyone is being administered by an AGI and robots, so no one has to work.

Second: Sharing fruits of labor/​economies of scale. Basically the physicalized version of ‘expertise sharing’, e.g. I’m going to build your house while you’re out working, because I already have the trucks and everything ready and planned out. Will stay until we’re in the simulation, and we don’t have to care about (most) physical stuff.

Third: Rare Materials. Or rather: unequal distribution of resources (like food or diamonds). Even if we have the same preferences, we unlikely have the same access.

Fourth: Access to leisure experiences. If I want to go to a space hotel, that requires a few people working together for that, and not everyone has access to it or can offer it. So I’ll have to trade my leftover ‘generating value’-payment (subtracting costs for living and others) somehow to pay for their generated value—me being able to see outside a mostly black and very cold window. Same with sailing or other, someone owns the boat, someone owns the haven, they provide value for you so you’ve got to pay them.

[Yoav Ravid]

I would put it like this:

1. Comparative advantage

2. Incentive to produce

3. Distributing differential value (could be better phrased)

The option to make exchanges that increase my total value, incentivizes me to use my comparative advantage to produce new things that will be low value to me, but high value to others, so I can trade them. This increases the total value in the economy by both creating new value and distributing it in a more beneficial manner.

[Lambert]

If the textbooks you’ve read leave you needing to figure these things out on your own, may I recommend David Friedman’s ‘Price Theory: An Intermediate Text’, readable for free on his website. (I don’t know enough about econ to either endorse or anti-endorse the sections that argue against government intervention in markets but it does nicely explain his position on such things.)

[itaibn0]

A neat thought experiment! At the end of it all, you no longer need to exchange fruit, you can just keep the fruit in place and exchange the identity of the people instead.

[tcfkaj]

This is sort of hand-waving away the problem of locality. Star Trek transporter or not, there is only a finite space on which certain things can be easily produced. And this production space is embedded in time as well as space.

So you must also add to this hypothetical world that the production space(s) must be large enough to accommodate each person’s self-production at an arbitrary point in time (to avoid task switching/​ allocation friction). I.e. the iron mine must be large enough to accommodate everyone on earth at the same time.

[TedSanders]

A spatial framing:

(1) All objects have positions in space
(2) The desire by people to consume and use objects is not uniform over space (cars are demanded in Los Angeles more than Antarctica)
(3) The productive capacity to create and improve objects is not uniform over space (it’s easier to create iron ore from an Australian mine, or a car at a Detroit factory)
(4) Efficiently satisfying the distribution of desires over space by the distribution of productive capacity over space necessarily involves linking separate points in space through transportation of goods
(5) Owning an object is easier when it is near you and harder when it is far from you

Summing up, satisfying preferences requires transportation, and transportation is easier if ownership is transferred along with the physical object. Therefore it is advantageous to trade.

[Pattern]

As we all know, studies on separated identical twins show that happens every single time, with no exceptions.

points of trade

Information exchange.

Even if you have teleports, you don’t know where things are. Distribution of resources still matters even with ‘equivalent desires’ - if a car needs iron and platinum and other things and I have iron and you have platinum...neither of us has a car. (If the teleports have zero energy cost, or involve perpetual motion machines the case for ‘why trade’ just changed dramatically.)

Sharing information easily doesn’t mean reworking information, or combining info is all that easy. Joining two fields, working out the implications of information (see Hawking radiation)...

Even if ‘one brain is the same as another’ - which is ridiculous. It’s not even just about brains—then two heads can still be better than one. Whether that’s together, or apart.

Seriously, the reason these factors aren’t all the case might be worth some consideration. That’s a lot of ifs. (We don’t have the transporters or robot armies. Or do we?)

[Casper]

Can’t we simplify and say that the point of trade is to alter the entire system so that the final state is of higher utility to both participants than the initial state?

You have 2 apples and I have 2 oranges, but we both prefer the state where we have 1 of each fruit.

We both work 1 hour in the mines and 1 hour on the fields, but we both prefer the state where the skillsets of individuals overlap less.

At the end of your list the point of trade still exists, it’s just the list of viable trades has been reduced.

[Lucent]

Sometimes, in trading, one accepts a fixed value and in exchange offers something in return of near infinite value to all of society until the end of time that others build upon.

[jmh]

The title kind of threw me a bit. At first I was thinking a long the lines of at the time of trade. Clearly a different direction.

I also find myself a bit in disagreement with pretty much all the responses and perhaps the point of the post. What everyone seems to be talking about is not what I would call the point of trade. I would call them all the forces towards trading, the enablers of trade opportunities or something along those lines.

This is not to say everything said doesn’t have a place in a model. But they all seem one step away. Most of what was suggested seems to fit into Mises’ old “man has felt wants and known means”. “known means” included both the resources someone owns and all other resources they know about. Take everyone that has been said and we’re left with one remaining point of trade being ownership. Solve that with Star Trek replicator tech and now we have no trade.

But has all the really provided a clear, concise statement of the point of trade? I don’t think so.

For me, the answer to what is the point of trade is equilibration. Trade is a response/​reaction to underlying pressures or opportunities within the economy/​society. In other words, the point of trade is not all those things identified but rather the elimination of all those potentials.

[Signer]

there are two more magical powers

Zero size in 3rd dimension and time travel.

[Martin Randall]

Them: The point of trade is that there are increasing marginal returns to production and diminishing marginal returns to consumption. We specialize in producing different goods, then trade to consume a diverse set of goods that maximizes utility.

Myself: Suppose there were no production possible, just some cosmic endowment of goods that are gradually consumed until everyone dies. Have we gotten rid of the point of trade?

Them: Well if people had different cosmic endowments then they would still trade to get a more balanced set to consume, due to diminishing marginal returns to consumption.

Myself: What if everyone has exactly the same cosmic endowment? And for good measure there are no diminishing returns, the tenth apple produces as much utility as the first.

Them: Well then there’s no trade, what’s the point? We just consume our cosmic endowment until we run out and die.

Myself: What if I like oranges more than apples, and you like apples more than oranges?

Them: Oh. I can trade one of my oranges for one of your apples, and we will both be better off. Darn it.

[Erlend Kvitrud]

Some further magical powers of trade:

1 It seems to (at least under certain conditions) reduce the incentives of states to declare war, and thus reduces the massive wealth destruction that comes with inter-state war.

2 It allows new (productivity-enhancing) technologies and practices to spread faster.

3 It enlarges the potential market on which novel products may be sold, and thus improves the expected ROI from investments in technology/​ product development.

4 Positive network externalities (e.g., the value I get from my personal smartphone increases as a function of the total number of worldwide smartphone users).

[mxxun]

Many of those powers were about surpassing human difference, so I would guess towards more of that:

1. Radical transhumanism, free-shared-expertise style, to make physical properties of one’s body irrelevant to the outcome

2. Free and riskless preference modification, so that when you need a hundred thousand chairs making them yourself is a perfectly enjoyable pastime.

[jwray]

Intertemporal arbitrage: buying corn when there’s a bumper crop and selling it when there’s a drought. How do we get rid of that? Either time travel or giving everyone lots of storage space and prior knowledge of all the goods he will ever need and their future abundance/​scarcity time series.

Price signals arising from trade are also an incentive for consuming less of /​ producing more of scarce things to make them less scarce. Without the incentives of prices we’d need some other way of enforcing rationing of the finite capacity of the iron mines and communicating each person’s marginal utility for iron. A borg hivemind.

[littlebubulle]

Wouldn’t the accumulation and sharing of expertise still be a form of trade?

[Self_Optimization]

My initial ideas (e.g. cases where time are important) are pretty well captured by other comments, but in reviewing my thoughts I noticed some assumptions I was making, which might themselves qualify as additional requirements to eradicate trade:

A) I assumed that the skill-download feature includes knowledge downloading and no task requires more ‘knowledge+skills in active use at a time’ than the human brain can feasibly handle. If this is violated, specialization is still somewhat valuable despite free and presumably-unrestricted knowledge-sharing.
If you add immortality, reliable perpetual staving-off of the end of the universe, & a lack of boredom I doubt this assumption would still be required, but I haven’t thought through it enough to be certain of that.

B) I assumed that fundamental computational/​cognitive ability is not an issue (i.e. working memory capacity limits, which can be helped by group-problem-solving even with equalized IQ), either because ‘build AI to solve problem’ is among the downloadable skills or because the problems themselves do not require it. If this is violated, then cognitive enhancements will also be required to truly eradicate the inequalities fueling trade.

C) I assumed that terminal goals don’t inherently involve interpersonal conflict (the subset of conflict-space that requires multiple involved agents in order to exist). If this is violated (i.e. everyone has a passionate love for gladiator fighting) then such conflicts would likely qualify as trades (since you can’t experience them on your own, and thus are both gaining the experience from another and granting it to them).
Plus, depending on the broadness of the conflict-types desired, trade itself may be invented as an independent cultural concept, purely for entertainment purposes.

[[e-mail]]

Going to go big here:

Trade has intrinsic worth. If both parties benefit from the trade, or both perceive themselves to have benefitted, trade’s purpose has been accomplished. It’s not about the things that are exchanged, but the people doing the exchanging. People enjoy trading.

Trading is fun. It makes you feel good when you make a “good” trade. What I mean by this is a trade in which you know you have benefitted and so has the other person. Or at least you know you didn’t try to rip them off, which I think is an awful feeling that I’d never want. Why is that? I don’t know. I don’t really question it.

Trading ties directly into game theory concepts of cooperating and defecting. And it’s been shown that in game theory when you have multiple interactions with the same party, the best outcome is reached for both parties (or any number of parties in a system) when most people behave well most of the time. Thus trade encourages good, cooperative behavior, which leads to all kinds of good results. Like the prevention of war. Or limiting war.

If the thought experiment you run were true, it wouldn’t just be true that we wouldn’t need trade. We wouldn’t have any need for each other. If everyone were identical and had the same skills and the same needs, what would there be to talk about? What to do? How would we organize? We’d be Ricks in the Council world, wondering why the hell we’re the Rick who has to stand in the assembly line instead of “Cool Rick”.

Trade helps us find a place in society. Because we all have different gifts, we can all contribute in novel ways, and feel that emotion of contribution. Without that feeling, we go towards dysphoria, towards feeling that things aren’t real, or ought not be real.

So trade is “for” getting people to organize into societies of cooperating individuals each doing things that they are suited for so that they don’t have to do the things they aren’t suited for. So that they feel better, and want to keep building the society rather than rejecting society (dysphoria) and splintering off to make their own tribe.

[ChosunOne]

Are we also presuming that you can acquire all desired things instantaneously? Even in a situation when all agents are functionally identical, if it costs 1 unit of time per x units of a resource, wouldn’t trade still be useful in acquiring more than x units of a resource in 1 unit of time? Time seems to me the ultimate currency that still needs to be “traded” in this scenario.