Guinea pigs are very interesting creatures. We are cute and fluffy and tell good stories and turn into pancakes when we are relaxed. ​ Humans are very interesting, too. They are so interesting, that even THEY are interested in themselves. And they are the MOST interested in their own well-being. If they weren't, well they wouldn't have lasted very long, would they? Guinea pigs are interested in being well, too. It is WAY better than being unwell. As for example, we do not like being lonely, or getting eaten by scary animals, or starving to death! These are all considered very bad things for a guinea pig to experience. So we spend most of our time making sure we do not experience them! The rest of our time is 100% dedicated to doing the things that make us happy. Like gnawing on crunchy things! And napping on soft things! And debating the merits of different economic theories. ​ The first principle of most economic theories is that everyone is Self-Interested. They are motivated by their desire for personal gain. Or, in other words, their desire to increase their own well-being. The idea that everybody wants to stay alive and be happy may seem too obvious to mention. But obvious things can still be powerful when we follow them to their logical conclusions. For a free market economist - the logical conclusion of economic actors pursuing their own well-being is the well-being of society as a whole. This can be demonstrated mathematically, using the highly abstracted conditions of the Perfectly Competitive Market. Under those idealized conditions, allowing people to pursue their own well-being to the exclusion of anything else results in the most well-being there can ever be, for everybody. So you might hear free market advocates saying things like, "Greed is good." or that being selfish is okay. But that is not what an economist means by Self-Interest. Selfishness and Greed are Psychological constructs. They have no meaning in an economic sense. Promoting the idea that Selfishness and Greed are good for society is not a part of any economic theory. It may be a part of an ideological one, but an economist, dedicated to using a scientific perspective has no opinion about what it means to be Selfish, or Greedy. What IS part of a scientific perspective on Economics is the assumption that people will always pursue their own Self-Interest. We have a lot of observational support for that. And when you think about it, what else would they be pursuing? Some people will argue that there is also observational support for the idea that people behave in unselfish ways, like being generous, or self-sacrificing. But just like Selfishness, Unselfishness is a Psychological construct. What we commonly call "unselfish" can easily be understood as Self-Interest in disguise. Our friends in Psychology could explain to us why helping other people often makes us feel good. As economists, we're not going to worry about WHY that is true, we're just going to accept that it is, because of how SO MANY people report that they DO, in fact, feel good when they help other people. And if we accept that feeling good is a part of our own well-being, it is easy to see, that helping people at our own personal expense, can result in a net INCREASE to our own personal well-being. Then there are more practical considerations. Humans, like guinea pigs, are social animals. That means they depend on each other at different points in their lives. At the very least, all humans benefit from the care they receive as infants. In a technological society, they also benefit from the thousands of inputs from other humans that make a modern society possible. Therefore, it is perfectly reasonable to say, that making sacrifices to help people in need is not just about the warm and fuzzy feelings we get from it. It is also about sustaining a society that creates many personal benefits for the people in it. Creating and sustaining a well-functioning society is a very Self-Interested thing to do, and it may in fact be the reason that social animals feel happy when they help each other. ​ Whatever the reason, we can observe that people DO fell happy and DO get concrete benefits from things we would at first regard as self-sacrificing. It is easy to re-conceptualize these behaviors as Self-Interest in disguise. Self-Interest is not a bad thing. ​ It's not a good thing either. It's just a thing. ​ It's a thing a social scientist observes. And a social scientist does not place a moral value on the things they observe. That is for politicians and religious leaders to do. Which is why I have taken so long to get around to even MENTIONING the word "Rational." But now that I have, let's talk about why. If you are already a fan of studying Economics, you will have noticed that the word "Rational" usually appears immediately preceding the term Self-Interest. That is because there is a traditional belief among some economists that some economic actors are "irrational". If that sounds judgmental to you, I agree!!! And it is WEIRD for a scientist to be judgmental. ​ But to be fair, what is usually meant by "irrational" is that someone makes a decision that goes against their financial interests. ​ If all of a person's well-being were summed up by their financial interests, then it would be true that doing something that costs you money would be irrational. But if we observe that a person's well-being is NOT summed up by their financial interests alone, there can be MANY reasons someone makes a decision that leaves them worse off financially. It is essential to use an economic analysis when it comes to your finances, but finances are only one sub-set of Economics. The principles of Economics apply to ALL decision-making. Money is a very clever technology humans invented about 5,000 years ago. But it is just a technology. It is just a stand-in for what we all actually want: the ability to pursue our own well-being. And non-monetary ways of pursuing well-being still exist. There are lots of them! ​ Leaving those non-monetary sources of well-being out of your analysis is a TERRIBLE thing to do. So don't do that! And don't base the idea of someone's "Rationality" on whether they come out ahead financially. There is so much more to life than that!

Guinea pigs enjoy being alive. It is really great! So it makes sense that we enjoy the things that make it possible for us to be alive. Like food! And water! And the love of our friends. All these things have a lot of Utility for us. Utility is an economic term that relates to how useful or satisfying something is. When something has Utility, it is useful for helping you satisfy your goals. That makes things with Utility very enjoyable! We enjoy reaching our goals! You will notice that the word Utility is an extra fancy version of the word Useful. And that is one way to think about it. The amount of Utility something has is a measure of how useful it is in helping you reach your goals. Here is something else to notice about the word Utility: it is a noun. We say that things “have” Utility or that you “get” Utility from something. If you wanted to make it an adjective – well you just wouldn’t – that’s weird. Another thing that sounds weird is making it plural. That’s because Utility is a concept like well-being or satisfaction. Different things can contribute to your sense of well-being, but you don’t have well-beings. You just have well-being. When you are adding up the amounts of Utility you get from different things, that comes out to – more Utility, not utilities. Even though the concept of Utility starts with the idea of Usefulness, it does not stop there. A second way to think about Utility is as a level of satisfaction. After all, when something is useful, we find it satisfying. And the more useful it is, the more satisfaction we get from it! But even more than just satisfaction, you could take Utility to be a measure of well-being itself. And here’s why. Utility is something that moves you towards your goals. And although people have many specific goals in life, they all come down to one basic thing: increasing your own well-being. That's what all self-interested actors do. Check out the Self-Interest topic for more on why. And if it is true that all of your goals are self-interested, then reaching any of those goals will increase your well-being. So you could take Utility to mean the increase to your well-being that happens when you’re able to reach your goals. Not every economist defines Utility in exactly the same way, or agrees on its ultimate meaning. But how we approach the concept of Utility is an important part of how we understand the market economy. Because what the market economy is famous for doing is maximizing Utility. So let’s think more about what Utility is, by using a couple of examples. Example One: Hidey Places You may not know, but guinea pigs do not like being eaten by scary animals. So, we hide! We hide a lot! It is very useful for us to stay alive. Some hidey spots are better than others. They are more useful for hiding, and I am much more satisfied with their protection. But how do we determine how much Utility a hidey spot has? We could convene a panel of experts to rank which hidey spots have the most Utility. It would be very easy for them to come up with an objective list of things that make a hidey spot better at being hidey. And that is how some economists think about Utility, a thing that can be objectively known and is an inherent quality of the thing under consideration. But another way to think about Utility, is that it is not something about the hidey spot itself. It is the satisfaction I experience as a result of being hidden. In a world with perfect information, the difference between some objectively true amount of usefulness an object has and the subjective experience of satisfaction that results from using it, would track pretty closely together. We could have a very technical discussion about what could cause those two things to be different. But on the question of whether Utility is a quality that things have, or a quality that people experience subjectively – Guinea Nomics comes down on the side of Utility being a subjective experience. People’s economic behaviors are driven by their own internal beliefs about how much Utility something has. I might listen to experts about what makes for a good hidey spot, but when it comes down to it – I’m going to decide where to hide based on what I think is a good hiding spot. Could I be wrong? I guess, maybe? Certainly if I don’t have enough information I could be mistaken about how well I will be hidden. But if I have perfect information, then, no. I can’t be wrong. I could just value different aspects of safety differently than the experts do. And when it comes down to it – well, it’s my safety we’re talking about. It seems like it should be my values that govern how important it is to me. Guinea Nomics takes the perspective that each economic actor decides for themselves how much Utility something has. And although it is possible for them to be mistaken if they are using bad information, they can’t be wrong in the sense that there is no objective way to tell someone their preferences or value system is “wrong.” That seems very unscientific. That is not the conclusion all economists will come to, but that is the Guinea Nomics way to think about Utility. But if we take Utility to be a subjective experience that nobody has access to except for the person experiencing it - then how can an economist possibly measure it? Example Two: Strawberries. Even though nobody has figured out a way to take a direct measurement of another person’s internal experiences, there are ways to infer them. An indirect measure of Utility is how much you are willing to trade for something. I don’t get any Utility from beef jerky, so I’m not willing to give up a single thing to get it. I do get Utility from strawberries, so I’m willing to give up - my nap time to eat them. But when it comes to parsley. It is hard to imagine something I would not give up to get parsley. So, you can infer, that the Utility I get from parsley is WAY SUPER HIGH and the Utility I get from Strawberries is Kindof Maybe High, and the Utility I get from beef jerky is, zero. When I choose one thing over another, I am showing the world that I find it more useful or satisfying than the thing I passed over. It has more Utility for me. So we can measure how much Utility a person gets from something by the cost they are willing to pay for it. Those costs could include their time, their effort, their money, missed opportunities, or a combination of all of those things. If we accept that people always act in their own self-interest, then they will never willingly give up more than what they expect to get in return.

Utility is a fuzzy little concept that doesn’t lend itself very well to mathematical analysis. It isn't immediately clear how one should go about quantifying it. But economists did find a way - and that way is called The Util. The Util is the unit of measurement for Utility. But it is not a standard unit, like inches or grams. It is an arbitrary unit that economists just sort of – invented – because they needed to..... Let's start by thinking about how we measure things. If I told you that my cage is 4 by 2, you might think – ‘Wow - That’s really tiny. Four inches by two inches is way too small for a guinea pig.’ Or you might think – “That’s ridiculous. 4 kilometers by 2 kilometers is WAY too big.’ Telling you that my cage is 4 by 2 only tells you one thing: that one side of my cage is exactly two times longer than the other side of my cage. We know that, because whatever units we are using to describe my cage, it is four of them in one direction, and two of them in the other direction. We don't need to know the size of our unit to say mathematically true things about them - because we know that our units are all the same size. That's true of a standard unit or an arbitrary unit. That is what it means to be a unit - to be a constant size. My cage is 4 panels by 2 panels. Each one of the panels in the set my owner bought swaps out for any other one of the panels in that set. The 4 panels on the west side of my cage are exactly equal to the 4 panels on the east side of my cage. And it doesn't matter how big these panels actually are. We know they will work together to build a cage because they are all the same size. And if everybody who builds guinea pig cages always uses the same size panels, that size becomes the "standard" panel size. We can compare our cage sizes very easily, because we are all using the same unit of measurement. But what happens if my owner goes on-line and buys a new set of panels without reading the description thoroughly? Well, I happen to know, because she happens to have done that. And she happens to have bought a set of black panels that are most definitely not the same size as our original set of white panels. Which means she cannot mix and match these black and white panels together to build one big cage. She can build my cage entirely out of the white panels, which are all the same size, or entirely out of the black panels, which are all the same size - but she can't build them out of both. They won't match up at the corners. They are two different units. And when she builds my cage out of theses non-standard black panels, I can no longer know how my 4 by 2 cage compares to your 4 by 2 cage. We are no longer using the same unit of measurement. And that's the way it is with Utility. However we go about defining a Util, we will never be able to compare my Utils with your Utils. I don't know how my experiences of Utility matches up with yours. We can never mix or match our Utils together. We could overcome our measurement problem with the cage panels by using a ruler to determine that the white ones are 14 inches across and the black ones are 11.5 inches across. That let's us set up a unit conversation rate (which is roughly 1 White Panel = 1.2 Black Panels) to work out how to use them both together. But that’s because we have a ruler that can take an objective measurement of length. Physical dimensions like length, width and height are part of our shared external reality. As long as we are all using accurate measuring sticks, whichever unit we are using will add up just fine. A meter here is a meter there. And both of them are always equal to 3.28084 feet. But that’s not the case with Utility. We don’t have an objective measuring stick for Utility. Utility is a subjective experience. We infer that people experience Utility based on their behaviors, but we don’t have an instrument that can directly measure it. Utils are like something off the internet that has no clear description. We have no way of knowing how "big" they are. We just know that however big they are, they are all the same size, because being the same size is what it means to be a unit. But we don't have to know how "big" they are to be able to do math with them. We just have to make sure we do the right kind of math with them. We have to treat them like ratios. --------------------------------------------------------------------------------------------------------------- Consider this example for how to create a Util: If I set my enjoyment of sitting quietly at one Utility Point, I can then compare whether different things give me more or less than one Utility Point, based on whether they give me more or less enjoyment than sitting quietly. I would say that eating one blueberry gives me about 5 Utility Points on that scale. And eating one sprig of parsley gives me about 12 Utility Points on that scale. I can come up with a rating system of how much Utility I get from different things based on this unit. But instead of saying "Utility Point", I will call it a "Util" - because it's easier to say. Using this example, it is clear that the Util is fundamentally a ratio. It is the ratio of how much I like some base experience (such as sitting quietly) to how much I like any other experience (such as a eating a blueberry). I could just as easily make sitting quietly equal to 10 Utils. That would make eating a blueberry equal to 50 Utils, and eating the parsley 120 Utils. I have not changed the amount of Utility I get from these different things. I have just recalibrated my scale. As long as the ratios between these different experiences stay the same, I am conveying the same information. So if Rosie says she gets 1,000 Utils from eating a blueberry - that doesn't tell me anything. It certainly doesn't tell me whether she gets more Utility from blueberries than Pumpkin does. Even without the idea that Utils are ratios, we don't have a unit conversion rate between Rosie and Pumpkin anyway. There is no such thing as a generic Util. All Utils are specific to the person experiencing them. We can look at the Utils one person gets from different things. We can add and subtract and multiple and divide these Utils – if we are sticking with that same one person. But just like the guinea pig cage panels, we cannot mix and match one person’s Utils with somebody else’s Utils. We won’t get anything meaningful out of that.

Some economic terms are hard to describe. University professors could go on for hours without scratching the surface. Doctoral students toss and turn at night worrying over how to properly define them. Diminishing Marginal Utility – is not like that. It can be summed up in just five words: I’m getting tired of that. That’s really all it means. There’s not a lot of other ways to put it. We all know the feeling of getting tired of something. You might be getting tired of me trying to make this joke. Even though Diminishing Marginal Utility is a very basic phenomenon we have all experienced, it is an incredibly important part of how the market economy functions. It affects almost all of our decisions. From small things like whether to get a second college degree, to really big ones – like whether to fight your cage-mate for a blueberry. Me – I will fight anyone for that first blueberry. And I will fight evenly-sized guineas pigs for a second blueberry. I can be pretty forceful when it comes to the third. But after that…. I am very generous with my sharing of blueberries I no longer want. So on the question of whether I would ever fight my cage-mate for a blueberry: The answer is yes. On the question of whether I would fight my cage-mate for that blueberry? I don’t know. It depends. And it should. My decision should depend on how much that particular blueberry means to me. And how it means to me will change depending on how many blueberries I have already eaten. We call that Diminishing Marginal Utility. If you wanted to, you could call it diminishing marginal benefit. “Utility” is a more precise way to talk the concept of receiving a benefit from something. It is the satisfaction we get from something that is useful. Blueberries are very useful for being delicious! (And for the Vitamin C.) I wrote a whole topic entry about the concept of Utility. Go read it if you haven't yet! One of the biggest reasons the concept of Utility is so useful to economists, is that it can go on a graph. Even though there may be some controversy over the finer points of what Utility actually is, it is well accepted that whatever it is, there are meaningful ways to represent it mathematically. And you can look at some of those representations on our Graphically Speaking page. Sticking to just the words here, I'll just say that when I find a pile of blueberries and I get to eat them, the first one tastes SUPER AWESOME. And the second blueberry tastes Really Awesome. I would say that the third one is also in the range of Awesome. But the amount I enjoy each blueberry, gets smaller every time. We say, it diminishes. Even though I have diminishing Marginal Utility, my Total Utility still increases each time I eat another blueberry, because my Total Utility is the sum of all the Marginal Utilities. And my Marginal Utility will always be above zero - otherwise, I'd stop eating. I only keep eating blueberries for as long as I keep enjoying them. If we lived in a world without cost, I might eat a zero-benefit blueberry. I would be ambivalent about it. But in reality, there are always costs, and I’m always going to stop before the Marginal Utility disappears. I stop when the Marginal Utility is equal to the Marginal Cost. Not all guinea pigs get tired of eating blueberries at exactly the same rate. Each guinea pig will have their own specific Marginal Utility curve for blueberries. That’s why it’s so important to remember that the Utility is not in the blueberry itself, just waiting to be eaten. The Utility is created when the guinea pig eats it. It exists within the guinea pig’s mind, and tummy, and deep in their hearts. –It’s somewhere in the guinea pig’s experience is all I’m saying. Since we can show Diminishing Marginal Utility on a graph, you might think that would let us compare the Utility curves of different guinea pigs so we can determine which one likes blueberries the most. But we can’t - because the way we graph Utility is by using a an arbitrary unit called a Util. If you read more about the Util, you'll see that they can't be used to make comparisons between different people. Since we don’t have a standard unit of measurement for Utility, so we can’t compare one person’s Utility to somebody else’s. But what we can do, is compare somebody’s Utility for one thing to that same somebody’s Utility for something else. I can definitely say that I get less Utility from the second blueberry than I did from the first. And if you watch my behaviors, you can confirm that that’s true. Although we can't enter another person's subjective experience to take a direct measurement of their Utility – we do have a way to take an indirect measurement, and that is by observing how much someone is willing to give up for something. When we look at people’s behaviors, it becomes obvious that everyone experiences Diminishing Marginal Utility. We can see that people are less willing to pay “full-price” to get a second item, than they were for the first. Diminishing Marginal Utility is a big part of the reason that prices go down when supply goes up. We’re just not willing to pay that much to get our 50th pencil sharpener. I needed to have one, and it’s nice to have two, but I’m not getting much value out of having more than that. I might get a third one if you’re giving them away, but now I’m running out of places to put pencil sharpeners. Guinea pigs don’t really use money, so when it comes to the blueberries, my main cost for eating them is the risk of conflict with my cage-mate. Even though I love blueberries, at some point, the Marginal Utility I would get from eating the next one just isn’t worth the additional drama or hurt feelings of another squabble. But I also have less obvious costs. Even if there’s no one around to fight me for the blueberries, they still take a lot of time to chew. And if I’m chewing I can’t be sleeping. I like sleeping! Eventually, I will come to a place where I no longer want any additional blueberries because the Marginal Utility of the next one is far too low to offset even the most minor of costs. And I think that’s about all I can say for Diminishing Marginal Utility at this point. I don’t want to keep creating different examples and analogies to say the same basic thing over and over again. That becomes less and less helpful, because you pretty much got it the first time.

Ceteris Paribus is the Latin phrase for: “everything else being the same.” Things being the same may not sound very exciting, but keeping things the same is the best way to discover what happens when something changes. And discovering new things is VERY exciting!! Scientists love keeping their experimental conditions the same. They go to great lengths to shield their observations from extraneous influences. They might set their experiments deep underground to avoid cosmic rays, or suspend their instrument from a system of pulleys to eliminate vibrations, or even scrub off all their loose skin cells to keep their labs pristine. But if you think that sounds hard, that’s NOTHING compared to how hard it is to keep outside influences from contaminating your study of humans. We are not allowed to suspend them from a system of pulleys for much longer than a few hours. And when we do, they tend to act unnaturally anyway, so it’s not very helpful. What is helpful is doing the most we can to keep all conditions the same while we experiment with only one change at a time. And here’s what happens when we don’t: I like to be happy. And I know that I get REALLY happy when my cage is cleaned and I get new toys and I get a slice of watermelon, and my cage mate is in a good mood, and Mercury is just being a planet like a planet does without anybody talking about Retrograde. But because so many things are making me happy, I’m not entirely sure which things are making me happy, or which thing is making me the happiest. It is literally impossible for me to tell! You know what I could do? I could just try changing one thing at a time. And then I would know how happy a watermelon slice makes me, versus how happy a clean cage makes me. I could even try combos, like a clean cage AND a new willow ball, or a hammock AND an orange slice. There are so many valid experiments my owner could do concerning my happiness which I think she should totally do! And as my owner is experimenting with new things to make me happy, she should hold all other things constant so we are sure that the extra happiness came from the change we are studying and not some random other thing we weren’t even thinking about. Holding all other things constant means keeping everything else the same. Everything else being the same means Ceteris Paribus. As you’re learning the general principles of Economics, it might be tempting to think – well that’s not always true. This guinea pig does not know what she is talking about. I won’t say that I know everything about Economics, or that I am always right, but I will say that when learning a general principle, the thing to keep in mind is that you must respect the idea of Ceteris Paribus. When you don’t, this is how it goes: An economist says - diminishing marginal utility means that I will always enjoy the second blueberry less than the first blueberry. Somebody scratches their head and says, But what if the first blueberry was sour and the second blueberry was sweet? So the economist says – Then those are not the same quality of blueberry. I meant to say that I will always enjoy the second blueberry of exactly the same quality less than the first blueberry of that same exact quality. But somebody else says – so what if the first blueberry is right after taking a big drink of juice and the second exactly-the-same blueberry is after you ate a cracker that dried out your mouth? And the economist says – then I am eating them under different conditions. I meant to say that they are exactly the same quality and my mouth is exactly the same amount of dry. And then some Smartie Pants says – yeah, well what if you’ve never had a blueberry before and you were really anxious about it, but after you had one you realized you liked it so you enjoyed the second one more? And the economists gives a big sigh and says – Look. You are telling me I have more information after eating the first blueberry, and that I am in a different emotional state for the second blueberry. I am talking about the same quality of blueberry under the same conditions with the same amount of information, and in precisely the same emotional state. Mr. Smartie Pants opens his mouth again and the economist says “No! Ceteris Paribus.” Mr. Smartie Pants says – you don’t have to go all Latin on me. We’re just having a conversation. And the economist says – No. I do not think we were. I think you were just set on proving me wrong. Other people were legitimately confused, but you are derailing the conversation for no reason. If you need me to be extra clear, I will be extra clear. Ceteris Paribus. Whatever you are about to say next, make sure it does not violate the idea of Ceteris Paribus. And Ceteris Paribus means everything – EV ER Y THING ELSE - stays the same. As a human living in the real world, you will notice general rules of Economics seeming to be violated all the time. But it is much more likely that what you are seeing is not a violation of the general rule, but rather a special case where a more specific rule is counteracting the general rule. This happens in all of the sciences. Here’s a famous example of a special case in Physics: We know that all objects fall at the same rate regardless of their mass. Most people find that counterintuitive, because we have observed everyday occurrences that seems to violate this principle – like a feather floating gently to the ground. But the example of the feather does not violate the general rule. It is a special case. It is the case of an object falling within an atmosphere. A feather will fall more slowly than a bowling ball if you drop them both off the side of your bed, because the feather is more greatly affected by air resistance or drag. But you know what will happen in a vacuum – the bowling ball and the feather will fall at exactly the same rate. It’s true! Find a video on the internet to see it for yourself! It’s really freaky looking! Because we live in the real world, we are surrounded by special cases. And these special cases can seem to invalidate some very well understood general principles. And for that I say – Ceteris Paribus.

Mutually Beneficial Trade is a complicated term to describe a very simple thing: the Win/Win scenario. There are times in life where in order for one person to win, everybody else has to lose. Those are the rules of the game! But there are other times when nobody has to lose – like when two people make a trade that leaves them both better off. We call that a Mutually Beneficial Trade. Here’s the perfect example: It’s like giving your friend a pickle in exchange for a tomato slice. It’s a no-brainer, because (1) you love tomatoes, (2) YOU know that pickles are gross, and (3) your weird friend prefers pickles to tomatoes. You are both happier afterwards! You have both increased your Utility! That was a very beneficial trade to make, for both of you! As in mutually. Remember that Utility is the satisfaction you get from something that is useful, or in other words, an increase to your well-being. So you being more happy or satisfied is you having more Utility. And even though enjoying pickles is deeply weird, your deeply weird friend DOES enjoy pickles. So now they have more Utility, too. It’s a Win/Win, because nobody loses. Every time a mutually beneficial trade occurs, the world is a happier place. If it is true that people always seek their own self-interest, they will ALWAYS make a mutually beneficial trade. Every single time. Every single mutually beneficial trade they can make. No exceptions! It’s a giant swap meet of happiness! OK – real world. I have a moody co-worker who likes pickles but I never trade with her. She’s hard to deal with. I think we would both be happier with a vegetable swap, but she takes every opportunity to make a dig at me. Does this example invalidate my assertion that all Mutually Beneficial Trades occur? No! It does not! It is an example of a Ceteris Paribus violation. And we wrote a whole topic about that. The situation with my coworker is, that in addition to the cost of my pickle (which I value at less than zero) I will incur the cost of dealing with a difficult person. As it turns out, I value my peace of mind more than getting an extra slice of tomato. When I think about all the costs involved in this particular trade (the pickle plus the bad vibes) – it is not beneficial to me, so I will not do it. Does that mean I should learn to be more chill and let her passive-aggressive remarks roll off my back? Maybe. But not because I’m using bad economic thinking. You might think I should be more chill because it would make me a better person, but in terms of my economic thinking, taking all of my costs into account helps me make a better decision. I mean tomatoes are great but I need all the patience I can get to deal with these customers. My patience is a scarce resource and it makes sense for me to protect it. Because when I run out of patience…. Well, it isn’t pretty. If something looks like a Mutually Beneficial Trade, but is not happening – then it isn’t one. Remember that people assign their own Utility value to things. You can’t tell anybody else what their Utility is or should be. At least not from an economic perspective. For example, valuing pickles is a personal failing, not an economic one. That sort of thing needs to be worked out in a therapist’s office. Or an exorcism. It is beyond the scope of our economic analysis. Theoretically, all trade in a free market is beneficial. No one is compelled to make a trade they do not want. Even if one party would like to make the trade, if the other party will not benefit, the trade will not happen. Both parties have to agree. That doesn’t mean the trade automatically benefits both parties equally. It just means the trade benefits both parties some. But if one party is compelled to make a trade under threat of violence, government sanctions, or deprivation, those trades cannot be considered free, and we cannot assume they are all mutually beneficial. That’s a problem. Because if trades are compelled we can no longer rely on the market to reach the best outcome for everybody. Each party must be free not only to engage in a trade, but also to not engage in a trade. If your only alternative is death, imprisonment, or abject poverty, it is hard to consider those trades “free.” Our other major issue here is the quality of the information available to the people making the trade. Our first most basic analysis of market dynamics assumes that everyone has perfect information – so when they make a trade they know exactly what they are getting and what they are giving up. As it turns out, that’s not always the case. When people are mistaken or tricked about the terms of the trade, we cannot be sure that was mutually beneficial either. If we want to rely on the market to deliver good outcomes, we should be working to minimize coercion and maximize information. These types of interventions in the real-world market help it to be more perfect – or in other words, help it deliver the best outcome possible for everybody.