The free market economy is not a straightforwardly intuitive process. To understand it requires getting down in the weeds of what it is and how it works. Otherwise, it's too easy to resort to tired and misleading cliches and platitudes.

Elsewhere I defined the free market economy as based on the principles of voluntary exchange. To grasp what a free market economy is, though, it is essential to understand the functional effects of that principle. And the key effect is a general increase in social wealth.

On the matter of social wealth, though, let me explain. This term should not be misinterpreted as referring to some collective good. It is used here to refer to the aggregate wealth in a society, based upon the total wealth of the individuals who constitute the society. Voluntary exchange increases the wealth of the most people. It is only in this sense that I refer to social wealth.

How then does voluntary exchange achieve this growth of social wealth? Many people have difficulty understanding this because they labor under the illusion that any goods exchanged, to be exchanged, must be of equal value. The assumption is that neither economic actor to a trade would exchange if what they were selling might be valued higher than what they were buying. Thus trades of non-equivalent value either can't happen or only happen when someone has suffered a loss. And, in that case of course, the total social wealth would be unchanged.

This assumption is precisely mistaken. The analytical failure lies in confusion over a pair of essential economic facts: 1) transaction costs and 2) subjective preferences. Trades entail costs that are intrinsic to the transaction. Remember that in all trades both actors simultaneously buy and sell. Money, after all, is just another commodity being exchanged .

If one of the traders valued what he was buying equal to what he was selling that would be a straight up exchange, with no value gained. However, because of the transaction costs of the exchange, he would be losing.

Imagine you're strolling along the sidewalk, approaching your local grocer's shop. Now, let's say you value the dollar in your pocket and the apple you might buy for it in the grocery store equally. If that were true, it would be of no consequence to you which of the two you had in your possession. If that was truly how you felt, would you take the detour from your stroll to enter the store, make your way to the apple bin, examine them, looking for one both ripe and free of bruises, then walk over to the cashier and wait for the line to inch along until your turn to pay?

All these expenditures of your time and energy are the transaction costs you incur when deciding to buy an apple. Why would you spend your time and energy in this way if you were truly indifferent to whether you had the dollar or the apple?

2) Here is the second point usually ignored in assuming exchanges of equal value: subjective preferences. If you're having difficulty getting your head around how two people exchange goods, with both being able to buy a good more valued that what they sold - that is, both can become more wealthy from the same exchange - it is this matter of subjective preference that you're missing. People have different values at any given moment in time.

You might in fact feel hungry approaching the local grocery store and as a consequence value an apple more than that dollar in your pocket. This greater valuation of the apple could be so much greater than the value you attach to the dollar that you are happy to pay the inevitable transaction costs (entering the store, choosing an apple, waiting in line).

That does not thereby make the apple objectively more valuable. This is just a manifestation of your current subjective valuing of the apple. Yesterday, while passing the grocer's, following a big lunch, not being at all hungry, subjective valuing of dollar and apple likely would have been quite different.

Also, of course, the grocer has a big bin of apples, which have already been purchased. To earn the profit necessary to make the store a going concern, the grocer wants to sell the apples. Thus, the grocer values your dollar more than the apple you receive in return. That's why the grocer is willing to incur the transaction costs of keeping the store clean, heated and well lit.

A useful lesson arises from thinking about how often at your local grocers that funny moment occurs when, at the conclusion of the exchange, you both say thank you. Is someone confused here? Not at all! You both say thank you because you are both thankful. Each of you received a good that you value more in exchange for one that you value less. They call that a win-win. You are both wealthier thanks to trading goods.

The result is that indeed total, aggregate social wealth has increased. Furthermore, this is not some anomaly but the guaranteed outcome of voluntary transactions. The secret of the free market economy is this win-win situation of voluntary exchange. And, the freer the market economy is, the greater the total social wealth that is generated.