. This means that you notice a resource fetches a very low price in Market
. Therefore, you start by removing the resource from Market
. You conclude by moving that resource to Market
where you are paid much more for it. That difference in prices is your profit margin.
Case Studies
Here is a basic example. You notice that in Country
A, oil fetches 37 U.S. dollars per barrel. Yet you notice in Country
B, parties are willing to pay 100 U.S. dollars per barrel. Therefore, you purchase barrels in Country
A and then resell them in Country
B. You make a profit of $63 per barrel. This business method is called arbitrage, and the one who practices it is an arbitrageur.
Here is another example. Maybe I want to find an old collectible or toy, maybe one Godzilla-related. But I only know of the big online vendors, such as Amazon and eBay. Perhaps an arbitrageur is more familiar with many smaller, lesser-known online vendors. The arbitrageur spends hours scouring the websites of the various online vendors. That is how she finds the collectible for sale for 40 US dollars. The arbitrageur purchases it for that price and then asks $55 for it on a bigger website with which I am more familiar. If I purchase it from the arbitrageur, that is a $15 profit before the bigger website takes a commission.
Arbitrageurs such as those described above have long been reviled as parasites. The implication is that the arbitrageur should have simply told me about the sale on the obscure website. Then I could have purchased the item at the lower price. What goes overlooked in that the arbitrageur
did perform a valuable service for me. The arbitrageur was willing to spend time and effort keeping tabs on the various lesser-known vendors. By contrast, I was not. The additional $15 I pay to the arbitrageur is for the service of doing this legwork I was not willing to do myself.
The same applies to the arbitrageur who buys oil from Country
A and resells it in Country
B. The arbitrageur is performing the service of taking oil from where it is wanted
less and redirecting it to where it is wanted
more. Absent of the arbitrageur, parties in Country
B who desperately wanted oil barrels at the lower price would have to do the hard work the arbitrageur did for them. They would have to travel to Country
A themselves to make those purchases.
The principle of arbitrage is always as follows. Because there is relatively small demand for a resource in Market
A, it fetches a low price there. Because there is greater demand for that same resource in Market
B, that is where it goes for a higher price. The arbitrageur profits from the difference by removing the resource from the smaller-demand market and repositioning it in the greater-demand market.
Bible-Age Arbitrage
Ignorant hatred for this practice goes back at least as far as the Bronze Age. Merchants would purchase items in City-State
A and travel many miles across the Middle East to resell those items in City-State
B. These merchants would were said to be cheating the citizens of City-State
B. Overlooked was the fact that those merchants performed a valuable service to citizens of City-State
B by making those items more accessible to City-State B than they otherwise would be. If not for those merchants, the citizens of City-State
B would only be able to access those items by themselves making the long trek to City-State
A.
Fortunately, Jean-Baptiste Say
understood the nature of such transactions.
The carrying trade, as Smith calls it, consists in the purchase of goods in one foreign market for re-sale in another foreign market. This branch of industry is beneficial not only to the merchant that practises it, but also to the two nations between whom it is practised; and that for reasons which have been explained while treating of external commerce.
Moneylending is another form of arbitrage. That, too, has been reviled since the Bronze Age, this time being condemned in the Bible and Koran. At this very moment, I am in urgent need of 100 U.S. dollars. My demand for that $100 is so great that, in order to access it by tonight, and I am willing to pay you $115 for it in one month’s time. By contrast, you have much lower demand for your own $100 — you are not willing to pay any more than $100 for it. Hence, we make an agreement. You hand me the $100 this moment. In turn, a month from today I pay you $115.
For most of recorded history, many people have condemned that $15 profit as something you stole from me. It is actually a payment to you, once again, for a valuable service. It is valuable on two counts. First, you make 100 dollars’ worth of resources accessible to me much sooner than they otherwise would be. Second, you yourself have to go a whole month without that $100. The equivalent quantity of resources will not be so accessible to you for that month. Instead, for that month you have turned over your control of that quantity of resources to me.
This is how you, as a moneylender, are an arbitrageur. The resource in question is the $100 at this very moment in time. My custody at the very moment is the market where the resource is in greater demand. Your own custody is the market where there resource is in smaller demand. At this moment, you need the $100 less than I do. A month from today, though, you might need that $100 more than I do. By handing me the $100 today, you remove the resource from the market that has smaller demand for the resource. By selling $100-at-the-moment to me for the price of $115-a-month-from-today, you relocate the resource to where it is in greater demand.
“Economic Migration” As Arbitrage
Any time a person changes countries for the purpose of making more money than she otherwise would, that is a form of arbitrage. That principle applies even in the unlikely instance of someone actually immigrating to a new country to go on welfare.
Suppose an impoverished woman makes zero dollars in her country of origin. It’s seldom the case that such a person has zero marketable abilities. She does have marketable abilities. The reason why she is not being paid is that, in the village where she lives, there is not sufficient infrastructure where her abilities could be put to a lot of use. She could be very productive in a factory. But, in her village, there are no factories.
Suppose this woman illegally enters a rich country and gets a job. Now she is making more money. She is an arbitrageur, and her laboring ability is the resource she has relocated. In her country of origin, there was small demand for her abilities. Hence, she moved her abilities to a new country — a new market — where there is larger demand for her abilities. Hence, her abilities fetch her more income in the new country than the old.
I have
previously disputed the old accusation that impoverished dark-skinned immigrants come to the USA and the West just to go on welfare. As a theoretical exercise, though, I will explain how even such an act would be arbitrage in practice.
In my country of origin, no one pays me anything for my presence. Hence, there is very small demand for my presence. Then I move to a rich country where I collect welfare. In this instance, I make more money than before because there is much greater demand for my presence in the new country than in the old — even if the consumer demand comes from the State officials claiming to act in the interest of the public.
Rage Toward Tax-Funded “Economic Migrants” As Misdirected
Even aside from the fact that
this phenomenon is less common than presumed, there is another reason why it’s unfair to single out Third-World immigrants as if they were the only group to profit this kind of arbitrage. If I find any type of item for a low price and then resell it to the government a profit, it is a form of arbitrage where the choices of the buyer (government officials) are likely at odds with those of the taxpayers who funded the purchase. As Christopher Cerf
noted in the 1980s, arbitrageurs often take advantage of defense spending in this manner. Defense contractors purchase tools that would be priced at a few cents at a hardware store and resell them for $80 or more to the Pentagon.
Insofar as the reader disapproves of any immigrants or their children collecting welfare, the proper solution is to agitate for reductions in welfare in particular and, more importantly, reductions in government spending in general. The act of immigrating, by itself, is not a violation of anyone’s rights. It is especially not a violation when someone whose services are less-valued in her country of origin then moves to the USA where her services are more sought-after and therefore better-compensated.
