Saturday, November 08, 2008

Economics, Gratitude, and Gains from Trade

A few days ago I gave a noon talk on my new book at the Cato Institute in Washington, D.C. while on my way to a conference at the University of Virginia in Charlottesville. I was due in Charlottesville by dinner time. Unfortunately, as I discovered, there was no public transportation that would get me there by then. Someone at Cato found one of their interns who generously offered to drive me down, a trip of between two and three hours.

Which raises an interesting question at the intersection of economics, emotions and etiquette. On net, who was doing whom a favor?

On the one hand, I had provided a talk in exchange for being put up for one night at a nice hotel, quite a lot less than other people have paid me for talks and, I suspect, less than Cato has often paid other people for talks. From that standpoint they were substantially in my debt; getting one of their people to give me a ride, while very nice, was not really enough to reverse the obligation.

On the other hand, they were providing me an audience for a talk intended to raise interest in my book. Not only did they sell a bunch of copies, one of the people who attended wrote a brief piece for Slate about the event, which is probably why the book's rating on Amazon shot up the next day. I expect I would have given them the talk even if they hadn't provided a hotel room; I have friends in the area who would have been willing to put me up. So, from that standpoint, I was already in their debt even before one of their people spent a fair part of his day driving me to Charlottesville and himself back.

The source of the problem, as any economist could see, is gains from trade. Almost certainly, both Cato and I were better off from the original transaction. Hence both arguments offered above are right—and wrong.

My conclusion is that we should both feel grateful, each to the other. That approach, not only in this case but more generally, strikes me as the best approach to individual happiness and social harmony.


Seth said...

Isn't that the only way a fair trade can work? If I value what I have more than what you offer, I'm not going to trade them. Likewise for you; so after the trade, we each gain something we value more than what we gave for it.

Anonymous said...

Yes, trade isn't going to happen unless both parties think they're profiting from it, but then it becomes tricky to select a "fair price".

For example, my department secretary's contract provides dental coverage, with the employee paying the full premium. I'm not staff, however, but faculty, and my contract doesn't provide dental coverage. My union has asked to get in on the same plan as the staff, at employee expense. This would benefit the faculty at no cost to the University. Should the administration go for this? Should they demand some other concession in exchange?

A "fair price" for this benefit is anything in the range between zero (the cost to the employer) and the value of the benefit to the employees. In practice, it'll be closer to one or the other depending solely on which party has a stronger negotiating position.

David Friedman said...

"Isn't that the only way a fair trade can work?"

Yes and no. People sometimes do favors for each other after all. If I had been giving the talk not in order to push my book but as a favor to the Cato Institute, the situation would have been at least a little different.

To put it differently, feelings of gratitude and obligation are part of the mechanism by which we balance trades that are fair over the span of multiple transactions, but not necessarily for a single transaction.

Seth Goldin said...

I wish I had known you were here! I'm at UVA. Give a heads up next time.

Kim Mosley said...

How do you factor in the opportunity to make the world a better place? The Cato institute is directed toward that goal, as I suspect you are.

Anonymous said...

Surely the Institute was doing the intern a favor, and you were only participating in the trade as value received?

After all, you had just demonstrated the value of about an hour of your conversation as being worth AT LEAST the price of a hotel room, and the intern received 2-3 hours, and may have gotten reimbursed for the gas used, as well.

Anonymous said...

Stossel makes a similar point about the "double 'thank-you' moment" in an old column.

Anonymous said...

Seems like game theory describes this. Specifically, iterated prisoner's dilemma as described by The Evolution of Cooperation.

Anonymous said...

Who benefits? The intern. He/she got out of the office, away from filing duties.

Mandeville said...

Exchange has nothing to do with happiness, or worse, equal happiness. People often make trades out of desperation and are quite upset afterwards while those they traded with may be estatic. People make exchanges because they prefer their expected circumstances afterwards more than if they didn't trade.