One of the more fun classic economics papers is Radford’s “The Economic Organization of a P.O.W. Camp“.
The key paragraph:
We reached a transit camp in Italy about a fortnight after capture and received ¼ of a Red Cross food parcel each a week later. At once exchanges, already established, multiplied in volume. Starting with simple direct barter, such as a nonsmoker giving a smoker friend his cigarette issue in exchange for a chocolate ration, more complex exchanges soon became an accepted custom. Stories circulated of a padre who started off round the camp with a tin of cheese and five cigarettes and returned to his bed with a complete parcel in addition to his original cheese and cigarettes; the market was not yet perfect. Within a week or two, as the volume of trade grew, rough scales of exchange values came into existence. Sikhs, who had at first exchanged tinned beef for practically any other foodstuff, began to insist on jam and margarine. It was realized that a tin of jam was worth l/2 lb. of margarine plus something else; that a cigarette issue was worth several chocolate issues, and a tin of diced carrots was worth practically nothing.
Let’s think about that padre for a moment.
Russ Roberts always insisted to those of us who took his class that we assume the padre had been a fair dealer; he hadn’t lied and he hadn’t strong-armed anyone. The exchanges were voluntary. If so, Roberts, asked us: did he make his trading partners better off? If so, how?
The quote already makes it clear. It’s about information. If you know that someone doesn’t smoke, but likes jam, you have an opportunity. You can go to them and say–I will give you a few spoonfulls of jam if you will give me all of your cigarettes. Since they don’t care about the cigarettes (perhaps they are even disgusted by them, and would have just thrown them in the garbage) they are perfectly happy to make the trade.
You still have most of the jam, and now you have a lot more cigarettes. If you then go and find someone who feels the equal and opposite way about cigarettes and jam as the first trading partner, you can double up on your jam, too.
The key thing here is information. You have it, they don’t. You are not making them worse off with your trade—on the contrary, they have something they want, and got rid of something they either didn’t want, or didn’t want as much as what you gave them. In the narrow world of the exchange, it was mutually beneficial—that was Roberts’ main point.
The reason that middlemen are so hated, and commerce in general treated as morally suspect, is because from the outside or in retrospect we can see that the padre’s trading partners weren’t made as better off as they could have been—if they’d known all of the information that the padre did.
There are two scenarios that come to mind that would have allowed the padre to get such a windfall:
- He was simply a shrewd bargainer. He was careful to tease out what people cared about before even introducing the idea of a trade, and then made his first offer on the terms most favorable for himself. He got what he wanted because people aren’t very careful about such things by default.
- He had most of the information he needed about everyone up front, from conversations he had had with them before the parcels even arrived. Based on that, for every trade he already had another trading partner in mind for what he was getting.
A combination of, or middle position between, the two is of course possible. Probable, even.
But I think people have different moral intuitions about 1 than 2. 1 feels like basic prudence; maybe it’s a bit aggressive but both people are on relatively equal footing. The padre’s trading partner could demand better terms, if they’d just thought about the possibility of using what they had for future trades. In short, the failure is largely of their imagination; the padre could have helped the guy out by pointing this out, but few people think that’s his duty.
But the second scenario feels a bit like dishonesty. The padre knows with some certainty that his trading partner could get better deals elsewhere, but says nothing. His taking advantage of this knowledge and being sure to get in with the first offer feels like taking advantage. If only everyone had the information that the padre had, the whole group could be made much better off than they end up being. But the padre chooses to keep it to himself so that he can maximize his windfall.
There’s some truth to this intuition, especially in small group settings and among family members. If we all horded information to try and maximize our individual private benefit in every context, group action would be all but impossible to any meaningful degree. Even the conduct of business depends to no small degree to those willing to give in an open and uncalculated way.
But negotiation, hard sells, and prudent bargaining have their place. In a time where commerce has connected businesses and billions of strangers the world over, that place is quite large.
Moreover, the information that the padre obtained is hard to get. Especially on a global scale. Providing the incentive to uncover it is part of what leads to long run betterment for everyone.
Radford’s article gets to this point. In the quoted paragraph, you can already see that people have learned to be more prudent after the initial rounds of trading.
Later in the article, the prisoners converge on cigarettes as the common currency. They list what they have in terms of cigarettes, so the information that was precious when the padre had it is now trivially easy to come by.
In such a situation, how is arbitrage even possible?
Let’s say that someone figured out—or just speculated—that there might be a week that the parcels failed to come, and stored their parcels in order to sell at a premium on such a week. They certainly make a profit if they are right in their guess or their information is reliable.
And look at how much better this is than the padre: we have someone who takes all the up-front risk on themselves; it may turn out that they delayed consumption for no gain at all. But they’re performing a valuable service for the community: hedging against the possibility that there will be a shortage in the future. And they only get compensated for their efforts if they are right.
“The profit motive” is extremely socially valuable in very specific contexts. This is such a simple point, but so many opponents and would-be friends of commerce ignore one or both parts of it. Some refuse to see is that it is valuable, and others refuse to see that it is valuable in very specific contexts.
If you ever find yourself talking past an ideological opponent on this matter, I implore you to look at what has been said on both sides and ask whether either or both of you have ignored some part of this point.