Much of what passes for economics in the world is worse than nonsense. In particular, letting corporations but not people into any market is not Free Trade no matter who calls it that. As Abraham Lincoln put it, even if you call a dog's tail a leg, it still has only four legs. Calling the tail a leg doesn't make it one.
The fundamental concept of economics is that in a free market, both parties to a transaction normally make a profit. Commerce is not a zero-sum game, but a means of creating wealth out of natural resources, information, and understanding. This principle is not hard to demonstrate.
Suppose that I have two sandwiches, and you have two containers of milk. I prefer having milk with my sandwich for lunch, rather than eating two sandwiches with nothing to drink. You prefer a sandwich with your milk rather than drinking all the milk with nothing to eat. So if we trade one sandwich for one container of milk, we are both better off. (In China this might be rice and bean curd; in India, perhaps rice and dhal or paneer; in Liberia peanuts and okra; and so on.)
Similarly, if my country sells metals or crops or anything to manufacturers, traders, or anybody, and buys XOs, the manufacturers and the country are both better off.
Supply and Demand
We can use the same data to demonstrate the fundamental law of supply and demand, that exchange in a free market occurs where the supply curve and the demand curve meet. No buyer or seller can set the price, but all of them together determine a price.
Consider my preferences on supplying you with sandwiches.
- I will not give away a sandwich for nothing, if I know you have something to trade.
- I am happy to trade one sandwich for milk.
- I won't trade both sandwiches for two servings of milk, but we could discuss how much more milk you would have to give me to make me accept the trade.
and conversely for you giving up milk for 0, 1, 2, or more sandwiches.
On the demand side, I will accept some amount of free milk readily; I might trade two sandwiches for a large amount of milk; and I will readily trade one sandwich for enough milk for lunch. If you want two sandwiches for one serving of milk, it's no go, and my demand falls to zero.
We agree on trading one sandwich for one container of milk. At any higher or lower exchange rate, one of us would balk.
The supply and demand in this situation are just two different ways of looking at the same sets of preferences. The next step is to look at the effect of price on production in a market of many buyers and sellers.
So my country's supply of some product in the international market is based on how much we can produce at or below the current price, and similarly for every other producer. A mine may be shut down at one price, but in full production at a higher price, and the transition price will be different for different mines.
The full proof that a truly free market is efficient at allocating resources is accessible only at or above the level of advanced university undergraduates. We need a model that makes sense without all the math.
Creating Free Markets
No market is truly 100% free. So what good is the idea? Well, it turns out that the XO can create a much better approximation of a free market than the world has ever seen, and will result in much greater efficiency of use of material resources, environmental resources, and especially people.
- Everybody has to have full access to the market. XOs and Internet give access to e-commerce, which is a fair approximation of the market for everything.
- Everybody has to have full market information. The Internet gives free stock market data, commodity market data, and wholesale, retail, and auction prices for a huge variety of products and services. Some of this information is not published, and is disclosed only to qualified buyers. Well, at least the poor know that if they have to ask for those prices, they can't afford them. :-( Yet.
- There must be nobody able to set prices. Supply and demand must set prices. We aren't going to get around subsidies, monopolies, cartels, and other market distortions any time soon, but anybody with a computer can bid and ask right along with everybody else for the things that are traded freely, and seek to enter unregulated markets rather than suffer unfair competition.
- It must be possible for anybody to enter or leave a market. Government telecommunications monopolies and licensing are the biggest hurdle, but most of the world outside Africa has abandoned monopoly, and now Africa is moving to open up those markets. The existence of an Internet market everywhere will greatly accelerate this trend. Anyway, entering an e-commerce market with a computer can be as easy as opening an account on eBay, Shopping.com, or Overstock.com. Leaving is even easier.
- There must be substitutes for every product and service. Patents, copyrights, and trade secrets (collectively known as Intellectual Property) are the obstacles. Free Software and Free publications are growing rapidly. We have made huge progress on medicines. The poor have a strong incentive to share with each other so that everybody can become prosperous, and much less incentive than the rich have to try to corner a market.
- Everybody must have fair access to finance, based on ability to repay the loan, not just on net worth or assets. Microfinance over the Internet, in the manner of Kiva.org, is just the ticket.
These concepts indicate strategic directions for development, and for creating new businesses in developing countries. Here the XO makes it possible for the newly educated to start international partnerships, and not just look for jobs locally.