Part 1 in a series on commerce, the engine that literally feeds us, and a topic area where many Americans are stuck on stupid. (Jump to: Part 2)

Preface: The talking heads on the financial shows may have fancy degrees, extensive and successful experience in the financial markets – but how often do they consider, or talk about The Basics? Never. Politicians talk about “stimulating” the economy and “creating jobs,” but can government actually directly deliver on either of those promises? No. The purpose of this series is to use a building-block approach to describe and explore The Basics of commerce and economics. Through our experience and intuition we can rediscover the consistent natural laws of commerce and economics that have been demonstrated to be governing features within any society.

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Please meet Robert and Anne. Robert and Anne both come from lines of potato farming families. They are beginning the new generation of making a living for themselves with a dream of self-sufficiency, providing for themselves through the “fruits of their labor.” They own and work the “R&A Potato Ranch.”

On the other side of town, please meet James and Helen. James and Helen both came from lines of goat farming families and are similarly in the early years of building a life for themselves. They own and work the “J&H Goat Ranch.”

Helen, James, Anne and Robert apply physical labor, knowledge, creativity, thrift, frugality, and even love to their work as they produce goods that are useful to their own physical health. To simplify, let us call all of these inputs, “labor,” but we must not forget that this includes important, intangible elements (e.g. knowledge) beyond physical labor.

The R&A Ranch achieves some measure of success in producing potatoes and the J&H Ranch achieves some measure of success in producing goat cheese. Yum, yum! We are already workin’ up an appetite after a long day of work on the ranch!

Of course no one wants to live on a diet of just potatoes, and any good mama would tell you that “no man can live on goat cheese alone” (or something like that). Eureke! We have an opportunity for commerce!

Remember, we said we are going to isolate The Basics. Therefore, for this story, there is no Piggly-Wiggly, Safeway, or even 7-11. Nor in this story is there even such an invention as “money.”

Robert and Anne are agreeable to eating many of the potatoes they grow, but they have produced potatoes in excess of their needs for starch intake. This is a good thing because James and Helen have produced goat cheese in excess of their needs as well. This has the makings of a transaction made in heaven! Now, prepare to witness the miracle of the creation of wealth!

Robert and Anne load their excess potatoes into their large wagon and cart them off to the market in town. They look upon the potatoes with some level of disdain: “All day long, potatoes; All across the field, potatoes; Silly, dumb stupid potatoes. I sure hope we find something else to eat at the market today!”

James and Helen are on their way to market in a smaller wagon, cheese is more compact therefore transport to market is most efficient in a smaller wagon. Too bad for the noses of James and Helen though! They had sliced up some of their cheese for supper last night, and this morning they are experiencing the odiferous effects of their limited diet. They are not speaking to each other. Both are thinking: “I sure hope we can unload some or this stinkin’ cheese! Goats, goat milk, goat cheese! We are swimmin’ in goats, goat milk, and goat cheese. Getting’ sick of goats, goat milk, and goat cheese. I am dreaming of luxurious potato hash browns, potato pancakes, potato fries, and it would be wonderful to make some scalloped potatoes in the oven – with just a little, little, tiny bit of CHEESE on top!”

Ok, get ready for the miracle! The owners of R&A and J&H ranches meet at the market then inspect the produce of one another.

Robert tempers his boredom with potatoes and talks them up with James: “Finest taters in the valley! Yep. Mighty fine. Some of these will keep you fit through winter.”

Helen offers a taste sample of goat cheese to Anne: “Tonight, I am fixin’ to make a fine casserole. It wouldn’t be the same without some of this fine cheese melted on top. A little of this cheese on our table keeps my James fit as a fiddle!”

The four entrepreneurs get together and negotiate a trade. The sellers start high and the buyers start low, but they eventually come to an agreement. They settle on twenty pounds of potatoes in trade for a one-pound wedge of cheese.

Who is the winner in this transaction? They all are, and let me tell you why.

Robert and Anne have little personal use for the twenty pounds of spuds that they are putting into the transaction, yet, the pound of cheese is a something they desire, and quite literally something they hunger for on a personal basis. They are not equipped to produce it on their own. In a real way, they value the cheese more than they value the potatoes. For them, they are getting a great deal!

Similarly, James and Helen are amazed at the bounty of chemical energy (starch) that they are able to acquire through the trade of a mere single one-pound wedge of their cheese. Again, from their viewpoint, and according to their personal interest, James and Helen are also getting a great bargain!

Each party in the transaction places a higher value on the thing that they are getting as compared to the level at which they value the thing that they are giving up.  This is the miracle of commerce. Each party wins in a real way. Both families go home richer and healthier as a result of the transaction. Both families are also now better positioned for future productivity within their own enterprise.

Sometimes when interested parties attempt to negotiate a transaction, they fail to reach an agreement. This is not a failure of commerce, but instead just another kind of success. Where a transaction does not occur, one or both parties have validated that the value of the thing they own, from their perspective, is greater than the value of the thing offered by the other. The failure of a transaction does not generate overall wealth, as would have been the case in an efficient market (will be described later) transaction. However, we can say that a failure of a transaction, for the right reasons, is an example of wealth protection.

Potatoes for cheese and cheese for potatoes – we can experience “Win-Win” in a free market where people are making decisions based on their own self-interest.

End note:

A real economy is made up of innumerable transactions, choices, and incalculable events (like: rain storms, the early death of a person, the birth of a technical genius, etc). Each of these events sends its unique ripples through the economy. Some of those ripples dissipate into nothingness, while others interact with ripples from seemingly unrelated events to become large waves of change.

The complexity of interactions will be addressed later in this series. A study of The Basics requires that we first understand the fundamentals of the life of an economy. As the splitting, and then replication of DNA is fundamental to all animal and plant life, the Transaction is fundamental to any economy.

The author would like to make this series a dialog. So please bring on the comments and critiques and let’s work through them together.

Continue to Part 2

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