Finance:The double thank-you of capitalism

thumb|right|In a free market exchange, both buyer and seller believe they have become wealthier than before. A win-win scenario. The double thank-you of capitalism is the observation that, when a merchant and a customer exchange money for goods, each thanks the other, showing that the transaction is not only voluntary, but mutually beneficial. This is in contrast to the impression of a "fixed slice pie" that occurs in many other situations, with one side taking and the other giving, a thank-you likely to pass only one way. The double thank-you is used in economic discourse to illustrate the primary benefit of a free market, that where all actions are voluntary, any transactions must benefit both sides, and this enriches the general community.

Mutual benefit increases overall wealth

This idea has been around for some time, at least as far back as Adam Smith and his book, The Wealth of Nations. Of this, Nobel laureate Milton Friedman said:

“ Adam Smith's key insight was that both parties to an exchange can benefit and that, so long as cooperation is strictly voluntary, no exchange can take place unless both parties do benefit. No external force, no coercion, no violation of freedom is necessary to produce cooperation among individuals all of whom can benefit.
— Milton Friedman, Free to Choose ”

In most other parts of life or society, one side tends to give and the other receive. There is a fixed slice pie, where the same amount of wealth exists, and is simply shuffled around. A poor person receiving aid from a social worker may feel grateful and say thanks, but the official giving the aid has no reason to say it back. A more extreme example is tax collecting, where neither side has any impulse to thank. The one that is receiving does so by threat of force, therefore feels empowered, not grateful.

But a voluntary exchange is a win-win scenario, where each side feels they have more wealth after the trade than before. The shopkeeper needed money more than his product, but the buyer wanted the product more than the money he paid.

Coining the "Double Thank-You" term, John Stossel described it thus:

“ How many times have you paid $1 for a cup of coffee and after the clerk said, "Thank you," you responded, "Thank you"? There's a wealth of economics wisdom in the weird double thank-you moment. Why does it happen? Because you want the coffee more than the buck, and the store wants the buck more than the coffee. Both of you win.
— John Stossel, No, They Can't ”

Stossel explains that this applies to not just local commerce, but even international trade. When a buyer in one country sends money to another country, he receives more than the local value of that money in goods, in return. Otherwise he would not have done it. But the seller, likewise, ended up with more money than the value of the goods he sent, as far as his own community is concerned. So a "trade deficit" is meaningless, all trade results in both sides being richer. Adam Smith said that nothing "can be more absurd than this whole doctrine of the balance of trade."

Jay Nordlinger applies this by saying that trade deals should work out for everyone, to turn out in all parties' best interest. Instead of one side winning and all others losing, everyone wins.

Economist Steve Horwitz describes the "Double Thank You" as a "habit of cooperation", where people take for granted that if they act to benefit others, the behavior will be mutual, everyone winning out in the end. He contrasts an encounter with a helpful, even generous deli counter merchant with that of dealing with a TSA bureaucrat. When retrieving one's goods from the TSA inspector, the "habit of cooperation" of capitalism may give you the impulse to thank the agent for returning your own, rightful property. But you have no reason to say "thanks", because the agent has not given you a gift, not provided you with a service of any value, there was no voluntary exchange or contract. It is pointless "government monopoly security theater with no exit option and no value delivered."

Trade creates mutual wealth

When Marco Polo or other traders traveled the Silk Road, they were bringing goods that were of relatively low value back home, and returning with goods that had been cheap where they went to trade.

The way such voluntary transactions create wealth can be understood by imagining two islands. One is rocky and dry, growing mostly grasses that provide significant grazing for herd animals. Meat is plentiful and (therefore) cheap, but fresh vegetables are rare and expensive. On another island, though, the land is rich and soft, the weather rainy, conditions great for vegetables but bad for the hoofed animals commonly raised in the area. So vegetables are cheap, meat expensive and difficult to obtain.

A merchant might buy a large amount of the cheap meat from the rocky island, then make the dangerous voyage to the rainy island with his cargo. He can sell for far more than he paid, while still charging less than any other meat in the area. He can then buy a cargo of very cheap vegetables, return to the rocky island, and sell it at a much higher price that nonetheless seems like a bargain to its populace.

After his round trip, not only is he far richer than before, but so are the citizens of each island, having access to "expensive" food at what seems to them like a bargain price. This simple trade has increased wealth for each part of two different transactions, without actually producing more goods.

This creation of wealth does not just involve geographic separation, but also information asymmetry. A trader with resources or knowledge of two different levels of demand for a good can buy in one place while selling in the other, creating wealth in both through what is known in finance and economics as arbitrage.

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