Trade

Why is the world today so much richer than it used to be any time in the past — whether a few years or a few centuries ago? There are many factors that contributed to the wealth of the world. However if forced to answer in one word, I’d say “trade” or “exchange.”

We trade all the time. We trade our labor for stuff. We earn income by giving up some our leisure time to produce stuff and then exchange the income for stuff we wish to consume. Meaning our production is the means we use for the end goal of consumption. All of this is just common sense and not quantum mechanics.

Trade is a superpower that only we humans possess. In his 1776 masterwork “The Wealth of Nations,” Adam Smith wrote that it was “division of labour” that created the “general opulence” we enjoy. But he stressed that this specialization and division of labor is not because humans figured it out through their wisdom but because of “a certain propensity in human nature . . . : the propensity to truck, barter, and exchange one thing for another.”

We truck, barter and exchange all the time instinctively.

Exchange is at the core of the economics discipline which is also known as catallaxy or catallactics. Catallactics is the most developed part of a broader discipline called praxeology which is the study of human action and conduct. Never forget that economics is the study of human action. Trade is what humans do — instinctively.

Being an economist I naturally have an uncommon attachment to trade. Besides, I chose international trade as my minor in graduate school. So I like to read and think about international trade a lot.

Much of the basic lessons of economics is counter-intuitive. We are most of the time wrong in our untutored understanding of the world. Economics helps in having a better understanding of the world because it explains how the world works and why.

One area that most people, including some who should know better, trip over frequently is international trade. In the US both Democrats and Republicans often appeal to protectionism. People all across the world, not just in the US, are persuaded by the argument that to protect domestic jobs and prosperity, imports should be restricted.

Another worry that policymakers appear to get worked up about is “trade deficit.” It scares the bejesus out of them. The fear of international trade and the fear of trade deficit are of course related: to reduce the trade deficit, reduce imports and hence reduce international trade.

My point here is that trade is good, and that international trade is trade. There’s nothing particularly strange about international trade; it’s just trade but across political borders. The principles that apply to trade apply equally to international trade.

It’s important that non-economists understand why trade is beneficial, and why international trade is beneficial too even though at first blush it may appear that there’s an essential difference between the two. There isn’t. And if through popular misconception the voting public thinks that international trade is bad, then politicians will enact policies that are harmful to the public.

Don Boudreaux wrote a brilliant piece titled “Trade Has No Losers” over at Econlib. He begins —

International trade, it is commonly said, has winners and losers. Consumers in the U.S. gain when they buy wine imported from France while winemakers in California lose. C’est la vie, counsel economists.

He goes on to write,

Fortunately, the common claim that “trade has winners and losers” is emphatically not correct. . . . There’s nothing unique or special about trading with foreigners that causes some businesses to lose profits and some workers to lose jobs. Every change in economic activity has these effects.

Boudreaux distinguishes between costs and losses. That’s an important, consequential distinction. Subjectively it feels the same to us but on deeper reflection, they have different implications.

The worker in a market economy who loses her job to imports – or to labor-saving technology, or simply to changes in consumer tastes – pays the cost of admission and participation in this economy.

This piece is just are a few introductory remarks related to a few articles that may be of interest to those who wish to understand one of the core principles of economics. The rest of you can ignore these.

Here’s a November 2010 article “Free Trade and Globalization: More than “Just Stuff”” by Don Boudreaux that explains a good deal about the apprehension that some people feel about globalization. He writes:

One of the chief concerns expressed by anti-globalization activists is that freer trade leads to worldwide cultural homogeneity. Paris, France, according to this view, will become just like Paris, Texas, and both will be dreary. Travel will become pointless. Why travel if every place you can visit differs little from where you are now?

He concludes that —

The fear that globalization makes the world less interesting culturally is baseless. The effect of free trade is twofold: first, it gives us more prosperity and, second, this prosperity creates diversity and dynamism. Both of these effects are good reasons for opposing the antediluvians who would obstruct international trade.

Another piece that I recommend: Free Trade by Alan Blinder. He writes:

A slogan occasionally seen on bumper stickers argues, “Buy American, save your job.” This is grossly misleading for two main reasons. First, the costs of saving jobs in this particular way are enormous. Second, it is doubtful that any jobs are actually saved in the long run.

Go read it to understand why.

Thank you, good night, and may your god go with you.