Gains from Exchange
By David Henderson
Last month I received this e-mail from a student I taught in the Spring quarter at the Naval Postgraduate School:
Today my [deleted so as not to identify the instructor] instructor pointed out that there was a transfer of wealth going on from America to other oil countries.
You would have enjoyed the response.
I told him that there was no transfer of wealth. Both parties valued what they were receiving far more than what they were giving up. I told him if a transfer of wealth were occurring then the value of what we were receiving would be zero.
It stopped and made him rethink his statement, which was cool.
Even at age 61, I still love teaching. It’s letters like this that are one of the reasons. One of my joys in teaching is to find out, after the course is over, that the students learned enough economics to challenge other professors in other classes. We had discussed this point early in the previous quarter when I did the “Ten Pillars of Economic Wisdom.” I’m guessing that one reason the student remembered this point so well is that I tested it on my first problem set. Here was the problem:
A couple of years ago, T. Boone Pickens stated that because we (Americans) pay $700 billion a year on foreign oil, this $700 billion is a “transfer of wealth.”
(a) Are we transferring wealth from ourselves to others when we buy oil? Explain. (1 point)
(b) One critic of Pickens stated, “But exchanging money for oil at the market price is an exchange of things of equal value.” Is this quoted statement correct? Why or why not? (1 point)