This is the fifth part in a series on Basic Economics, inspired by the work of Thomas Sowell.
As a note, my frequent use of he/she I decided is quite clumsy. From now on I will arbitrarily alternate between he or she. Unless gender is the subject of discussion, the actual gender I use has no consequence.
In my last segment, I argued that when a person becomes richer through entirely voluntary transactions, she makes others richer as well. The premise for this is that she does not enter into a voluntary transaction unless she believes the transaction will make her better off. She does not buy a cup of coffee unless she believes she is better off with the coffee than with the money required to buy the coffee.
The giant hole in this argument is the assumption that if a person believes a transaction will make her better off, it doesn’t mean it will actually make her better off. There are many reasons that her perception of the value may greatly differ from the actual value of the transaction.
- She may not have sufficient information. She may not know that the coffee will taste horrible or that the coffee shop is not sanitary.
- She may be defrauded. The coffee shop might advertise that they use an expensive premium coffee but actually are using a cheap substitute.
- She might have pre-purchased a card good for ten coffees but the coffee shop decides to discontinue the pre-purchase program and refuses to honor her card.
- She might make a poor decision such as choosing short-term impulse gratification over long term goals. Anybody who has ever tried to lose weight and eaten a whole bag of potato chips can understand that.
- She might be mentally incompetent to determine what makes her better off.
With all of these potential problems in voluntary transactions, can we truly say that a capitalist system that relies on the premise that people make decisions that better themselves is a good idea? Would it better to have a centrally planned economy where enlightened experts make decisions for the betterment of everybody?
That will be the focus of the next segment.