To follow this completely you need to read my previous post, “My ‘Occupy Monterey’ Talk, Part I.” (One thing I forgot to mention in that post is that I pointed out that Congress had voted to give the U.S. military the power to imprison us indefinitely and that Obama’s only objection was that it took away his power.)

Gains from Exchange

In discussing the principle of gains from exchange, I pointed out that the way to test a principle is to push it to its limits to see if it breaks or bends. So I gave them this hypothetical (which I made up in this article.) The hypothetical has become a standard part of what I teach when I teach gains from exchange.

You’re out in the desert dying from dehydration, crawling along on all fours. In the distance, you see a sign, “Rita’s Friendly Oasis.” As you get closer, you realize that it’s real. If you can have a quart of water, you will hydrate enough to make to Addis Ababa 10 miles away and get on an airplane home. You have your American Express card: no limit. “Rita,” you say, “may I have a quart of water?” “Sure,” she says. “Oh, thank goodness,” you say. “The price of that quart of water is $50,000,” says Rita.

I asked the audience what they would do. The young woman who was one of the organizers and later intervened to defend my right to speak yelled out, “I would hit her over the head and take her water.” “You sound like my Marines,” I said, “but remember you have very little energy and let’s say you have no weapon and Rita is armed. What do you do?” I asked. Someone else yelled out, “I’d buy the water.” “Right,” I said, “and are you better off?”

Some people in the audience said, “Yes.” Here, though, some of the audience got upset and one asked, quite reasonably, “How come Rita owns the water?” “Good question,” I said, “I don’t know.” “Well she shouldn’t be allowed to own the water,” said someone. “OK,” I said, “maybe I can’t convince you on property rights but are we agreed that if for whatever reason she does own the water, you would pay $50,000 to get enough to save your life?” “Yes,” she said, grudgingly.

Then another woman interrupted–I don’t remember what she said but she kept interrupting so that every time I started to talk she yelled out. I turned away from the mike, fuming, and my anger showed. I decided to take a big risk. I looked at her and said, “You have a lot of power. You can decide whether I continue this talk or not. If you keep talking and interrupting, I leave. If you stop, I stay. Which do you want?” “I want you to stay,” she said. And then she acted fine from then on. (Later, after the whole thing ended, we had a nice talk. She was a retired government-school teacher and, because she did clean up her act, I won’t name and shame her.)

“Back to the water example,” I said. “Notice that the principle stood up to a strong test. I took one of the most extreme examples you can think of of a monopoly and even in that case, both sides gained from the exchange. The principle is not that both sides gain equally. One side might gain a lot and one a little, but both gained. In fact, in this case, one side did gain more than the other but which one gained more might surprise you. Who gained more?” “The person buying the water,” said someone in the audience. “Right,” I said, “if you value your life at more than $100,000, then you gained over $50,000, whereas Rita gained $50,000 minus a few pennies.”

“Now that was a made-up example,” I said, “but here’s an example that’s not made up. There are corporations that subcontract to companies like Nike. These corporations go to poor countries and hire people, often children, to work long hours for low pay, sometimes less than a dollar an hour. In some instances, the people who work there are slaves, but in the vast majority of cases, the people work there voluntarily. Do those corporations gain from that exchange?” “Yes,” yelled out a bunch of people, some with angrily. “And do the people who work there voluntarily gain from that exchange?” There was a pause. “Yes,” said some people, some more tentatively than before.

Well, that was too much for some of the people, especially some of the older people. Some looked angry and someone yelled out something about “wage slavery.” I said, “The problem most Americans have with this is that we wouldn’t want those jobs and we wouldn’t want our kids in those jobs. But the people in those countries don’t have our choices. No one is offering them a green card to come here. I would like to offer them millions of green cards and open our borders, but so far I’ve been unable to convince 95 percent of my fellow Americans that that’s a good idea. So meanwhile they’re choosing the best of a bunch of bad options. And when you take away the option someone chooses, as I pointed out in a debate with Robert Reich when he was Secretary of Labor, you make him worse off. (Pause.) The person who tries to get you fired (me waving my finger Dikembe Mutumbo style) is not your friend.”

“Moreover,” I said, “reporters from NPR and the New York Times went to some of the factories where these people worked and reported on what they saw. You could tell from the tone of their reports that they had expected to see misery and, instead, saw that people working there were the envy of their friends who didn’t have such jobs. The jobs they had typically left were agricultural jobs at even lower pay and longer hours. Talk about sweat. One worker had bragged about the fact that he had put on 30 pounds, which, in those countries, is a good thing.”

Next: Part III.