Sorts of Deals - Econlib - American Focus

At its core, a deal represents an agreement where something is exchanged for a consideration. However, the realm of deals is vast and varied, and not all exchanges are created equal. In fact, a deal does not inherently equate to a free exchange, nor does a free exchange automatically imply a free-market transaction.

The pinnacle of all deals is the free-market exchange: a voluntary transaction where multiple buyers and sellers are present. While perfect competition is not a prerequisite for a free market, it does require that alternatives exist at reasonable costs.

This distinction becomes apparent when considering the hypothetical scenario of a parched traveler who stumbles upon an oasis in the desert. Faced with the choice of purchasing a glass of water for an exorbitant $10,000—complete with a credit card reader—the traveler is in a predicament. Regardless of whether he accepts or refuses the offer, and whether the oasis owner is encouraged to lower the price to prevent a customer’s demise, this situation exemplifies a free exchange. Each party retains the autonomy to accept or decline, yet it lacks the hallmarks of a free-market exchange.

Many find such extreme scenarios unsettling. A free exchange can feel inherently unjust, and extreme cases often fail to robustly test theoretical frameworks. Nevertheless, an unjust exchange may still be preferable for the less powerful party compared to a prohibition that denies them the opportunity to act in their own self-interest. As Michael Munger discusses in “What Does ‘Voluntary’ Actually Mean?” (The Daily Economy, June 25, 2019), in a free society, such limited alternatives would be rare, as indicated by their prevalence in countries with greater versus lesser freedom.

Conversely, there exist deals that are unequivocally unfree and unjust for at least one party involved. A true free exchange necessitates that a party opting out faces no repercussions; punishment—whether in the form of fines or imprisonment—renders an exchange anything but free. Consider a Berlin Wall deal: if you leap over the wall, you risk being shot; if you remain within bounds, you avoid the bullet.

In a similar vein, we encounter the kidnapper’s deal. Here, an individual is abducted and held captive by a kidnapper who presents a grim ultimatum: pay a ransom of $100,000 or face death. Should the victim agree to the ransom, it may technically qualify as an exchange benefiting both parties relative to the coerced starting point. However, in the broader context, this is anything but a free exchange.

It’s essential to note that a deal can be a one-sided free exchange, where one party operates without coercion—perhaps a government isn’t taxing them heavily—while the other party remains constrained by external forces. For instance, when I say, “I got a fantastic deal on my Lenovo ThinkPad,” it unequivocally describes a free-market exchange for me, assuming I wasn’t subjected to tariffs by my own government. Meanwhile, the seller may very well be operating under the thumb of their own government. A theory that categorizes any exchange as unfree solely because of the unfreedom of others would lack practical utility. The fact that North Koreans are barred from engaging in the global dating market doesn’t render it unfree for Americans, although broader access to a free market generally enhances opportunities for all.

Lastly, we encounter a type of transaction that blends elements of both the Berlin Wall deal and the kidnapper’s deal: the rulers’ deal. This occurs when rulers negotiate on behalf of their subjects, imposing terms with a simple: “Here’s your deal. Take it or leave it!” While the rulers may anticipate mutual benefit, their subjects may not share in that expectation. Imagine two slave owners negotiating the terms of their slaves’ labor: “Your slaves will toil for me under these conditions, while mine will do the same for you.” It’s far too simplistic to assert that being a slave to the majority isn’t still slavery.