James d. Gwartney

Read:
Specialization and Wealth by Dwight Lee
The importance of trade in our modern world can hardly be exaggerated. Trade makes
it possible for most of us to consume a bundle of goods and services far beyond what we
would be able to produce for ourselves. Can you imagine the difficulty involved in producing
your own housing, clothing, and food, to say nothing of computers, television sets,
dishwashers, automobiles, and telephones? People who have these things have them largely
because their economies are organized in such a way that individuals can cooperate, specialize,
and trade. Countries that impose obstacles to exchange—either domestic or international—
reduce the ability of their citizens to achieve gains from trade and to live more prosperous
lives. It is true that a dynamic global economy will mean shifts over time in the jobs in any one
country. Economists almost universally agree that the proper response is to facilitate workers
moving to new jobs rather than shutting off imports.
Video:
Economics of Voluntary Exchange

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27
Transaction Costs Matter
Voluntary exchange promotes cooperation and helps us get more of what we want. However,
trade itself is costly. It takes time, effort, and other resources to search out potential trading
partners, negotiate trades, and close the sale. Resources spent in this way are called
transaction costs
(?)
, and they are an obstacle to the creation of wealth. They limit both our
productive capacity and the realization of gains from mutually advantageous trades.
Transaction costs are sometimes high because of physical obstacles, such as oceans,
rivers, and mountains, which make it difficult to get products to customers. Investment in roads
and improvements in transportation and communications can reduce these transaction costs. In
other instances, transaction costs may be high because of the lack of information. For example,
you may want to buy a used copy of the economics book assigned for a class, but you don’t
know who has a copy and is willing to sell it at an attractive price. You need to track down
someone willing to sell a used copy: the time and energy you spend doing so is part of your
transaction costs. In still other cases, transaction costs are high because of regulatory obstacles,
such as taxes, licensing requirements, government regulations
(?)
, price controls, tariffs
(?)
, or
import quotas
(?)
. Regardless of whether the roadblocks are physical, informational, or
political, high transaction costs reduce the potential gains from trade.
People who help others arrange trades and make better choices reduce transaction costs
and promote economic progress. Such specialists, sometimes called middlemen
(?)
, include
campus bookstores, real estate agents, stockbrokers
(?)
, automobile dealers, and a wide variety
of merchants
(?)
. Many believe that middlemen merely increase the price of goods and services
without providing benefits. If this were true, people would not use their services. Transaction
costs are an obstacle to trade, and middlemen reduce these costs. This is why people value
their services.