What exactly is it that markets do? Here’s the big idea. You have some stuff. Other people have other stuff. They want some of your stuff more than you do. You want some of their stuff more than they do. So you swap some of your stuff for some of their stuff. Hey, presto! You’re both better off, because now you both have stuff you want more. These benefits you get from reallocating stuff to its better uses are called the gains from trade.
And that’s what markets do: They reallocate stuff—resources, goods, and services—to better uses, generating gains from trade. That’s it. It’s a simple idea, but it’s also amazingly powerful.
Obviously I’ve simplified, so let’s connect the dots a bit more. Of course you don’t directly trade your stuff for someone else’s. Instead, you buy and sell goods and services using money. But money is just a convenience that allows you to engage in more complicated trades. When you sell an hour of your labor to your employer for $15, and then use that $15 to buy food, you’ve effectively traded your time for food. You gain from this trade because you want that food more than you want another hour of time to do something else. In fact, everyone gains. Your employer gains because the work you did for her boosted her profits and now she can buy more stuff, just as the grocery store owner that sold you the food also gains, because he can spend your $15 to buy goods that he values more highly.
When I say that markets allocate “stuff,” think about that idea broadly—they allocate all sorts of resources, goods, and services, including time. When people buy and sell their labor, they’re using markets to allocate people to tasks and tasks to people. Let’s explore this idea a bit further, as we turn our attention to how markets create gains from trade by effectively allocating tasks. We’ll start with a simple but delicious task: cooking dinner.