Consequently, laws that limit exchange are always either harmful or unnecessary.

Frédéric Bastiat
Economic Harmonies

This third part is dedicated to the “limits of exchange”; Frédéric Bastiat explores what these limits are and, without naming it that way, asserts the issue of transaction costs.

He logically deduces from his thoughts that “exchange will expand indefinitely as long as the effort it requires is less than the effort it saves”. This is indeed what has been observed with the development of international trade over the last couple of decades – helped with the lower tariffs and the reduction in transportation costs, both at sea and by air, an incredible amount of goods that were profitably produced locally ended up being cheaper on international markets thanks to the lowering of transaction costs (admittedly, this was to some extent amplified by the increase of production costs in developed countries as well).

What Frédéric Bastiat was experiencing and that we could experience again as well after the Donald Trump fashion of attacking free-trade is the government intervention in order to modify this optimisation through exchange initiated by economic actors according to their free-will. The imposition of tariffs has the immediate effect of increasing transaction costs and to make some exchanges too costly to be performed. It is then harmful to the economy because an exchange, that would have taken place and thus created value, does not occur. However, if some barrier is placed when transaction costs are already prohibitive, it has no effect because the transactions are not occurring before the new legislation anyway. This is what today’s quote is emphasising.

Other quotes from Exchange:
Introduction – Part 1 – Part 2 – Part 3 – Part 4 – Conclusion – Epilogue

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