When is trade beneficial?
The presumption among economists is that markets for things are generally beneficial for both parties. Each person trading will only do so if they think that they will be better off after the trade than before. Suppose Alice has apples and Bob has bananas. Alice will only give up an apple in exchange for a banana if she thinks she will be better off with the banana. What she gives up is less important/valuable/gives less utility to her than what she gets, otherwise she will not trade. Trades are performed based on subjective values of future states. If Alice is allergic to bananas, but doesn't know it, she might trade an apple for a banana anyway. Since the future is unknowable, no one can tell if the trade will actually make her better off. Even after the trade is made, the results of a hypothetical future where Alice had one more apple and one fewer banana are unknowable, since it never happened. Repeated trading can ameliorate this a bit. If Alice has bought bananas before, she knows what she's getting into. Reputations are also extremely important for market transactions. Alice does not have the time to sample every type of fruit from all fruit producers, let alone all the myriad of products available in a modern capitalist society. However, by talking to her friends, Bob, Charlie and Diana, she can gather information about which firms and products are a good value. She can also use advertisements, the internet, consumer reporting groups and other sources of information to determine what she should buy.
Fraud and misdirection are reasons why market decisions may be led astray. Suppose Malice produces a low quality, dangerous product that she tried to trick Alice into buying by false advertising. How would society stop her? First, she would not get any repeat customers. In most markets that alone would be sufficient to drive her out of the market. Secondly, consumer reporting places and reviewing websites would report low quality. If the product was dangerous, the media would get involved. Scandals about products that kill people sell newspapers very well, as the recent scandal about Toyota have shown. Even though only a few people died, Toyota launched a massive investigation, recall and PR campaign. Similar outbursts occur will all dangerous products - think of the tomato salmonella scare and Firestone tires. No one wants to buy something that will kill them. Even suicidal people usually have better options than food poisoning or hoping that their tires will explode. It is really hard to make a profit selling dangerous and low quality goods. Self interest pushes people in the direction of helping society by making it hard to earn money dishonestly.
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages." - Adam Smith
If someone is forced to do an exchange, they will probably not benefit from it. Slavery falls into the category of forced trade, as does colonial resource extraction. When someone chooses to do something, they are saying that they think that their life will be better by doing it (by their own subjective standards). If Malice forces Alice to do something, all that means is that it makes Malice's life better, not both Malice and Alice.
The final category of when trade makes people worse off is the case of externalities. All market failure arguments can be reduced to some form of externality. Externalities are when any trade between two people affects a third person. Economists usually have a threshold before they consider something an externality, since every trade affects someone else at least a little. Negative externalities are those that hurt a third party and positive externalities are those that help a third party. The classic example of a negative externality is pollution. When someone produces something that generates pollution, they and their customers only suffer a fraction of the problems/negative utility from the pollution. In the case of negative externalities, people tend to overproduce the good compared to what is societally optimal. Society tends to crate norms toward people not doing the externality generating thing - don't pollute, don't be loud and obnoxious, etc. Pigovian taxes can be used to reduce the amount people do externality generating activities.
When there are positive externalities, the good tends to be under-produced. The classic example of positive externality is creating knowledge. When a scientist creates a new theory, they benefit from a more complete understanding of the world, but so does everyone else. They can not capture all the benefits from their invention. Societies usually try to encourage these activities through subsidies, charity and social approval.
Fraud and misdirection are reasons why market decisions may be led astray. Suppose Malice produces a low quality, dangerous product that she tried to trick Alice into buying by false advertising. How would society stop her? First, she would not get any repeat customers. In most markets that alone would be sufficient to drive her out of the market. Secondly, consumer reporting places and reviewing websites would report low quality. If the product was dangerous, the media would get involved. Scandals about products that kill people sell newspapers very well, as the recent scandal about Toyota have shown. Even though only a few people died, Toyota launched a massive investigation, recall and PR campaign. Similar outbursts occur will all dangerous products - think of the tomato salmonella scare and Firestone tires. No one wants to buy something that will kill them. Even suicidal people usually have better options than food poisoning or hoping that their tires will explode. It is really hard to make a profit selling dangerous and low quality goods. Self interest pushes people in the direction of helping society by making it hard to earn money dishonestly.
"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest. We address ourselves, not to their humanity but to their self-love, and never talk to them of our own necessities but of their advantages." - Adam Smith
If someone is forced to do an exchange, they will probably not benefit from it. Slavery falls into the category of forced trade, as does colonial resource extraction. When someone chooses to do something, they are saying that they think that their life will be better by doing it (by their own subjective standards). If Malice forces Alice to do something, all that means is that it makes Malice's life better, not both Malice and Alice.
The final category of when trade makes people worse off is the case of externalities. All market failure arguments can be reduced to some form of externality. Externalities are when any trade between two people affects a third person. Economists usually have a threshold before they consider something an externality, since every trade affects someone else at least a little. Negative externalities are those that hurt a third party and positive externalities are those that help a third party. The classic example of a negative externality is pollution. When someone produces something that generates pollution, they and their customers only suffer a fraction of the problems/negative utility from the pollution. In the case of negative externalities, people tend to overproduce the good compared to what is societally optimal. Society tends to crate norms toward people not doing the externality generating thing - don't pollute, don't be loud and obnoxious, etc. Pigovian taxes can be used to reduce the amount people do externality generating activities.
When there are positive externalities, the good tends to be under-produced. The classic example of positive externality is creating knowledge. When a scientist creates a new theory, they benefit from a more complete understanding of the world, but so does everyone else. They can not capture all the benefits from their invention. Societies usually try to encourage these activities through subsidies, charity and social approval.