I’ve been having an interesting chat with my blog friend, Wyrd Smythe about the discovery of fire, and other game-changing advances in human civilization. We both agree that trade is of fundamental importance, but where we have differing views is whether trade is natural or whether it counts as an invention, like the wheel.
I’m going to argue here that trade isn’t at all natural or obvious, and should be considered one of humankind’s greatest inventions, on a par with writing, farming, and computers.
First of all, why is trade so important?
Trade probably began in the Stone Age, with the exchange of stone tools and the knowledge of the techniques used to make and use them. Without trade there would have been no Stone Age, since stone axes would never have spread beyond the inventor(s) and their immediate relatives. Civilization would never have got started!
Trade is what allowed specialization – some people working as farmers growing crops; some tending animals; others making goods, brewing beer and crafting weapons. No single person or family group could ever have hoped to manage all these diverse activities. In parts of the world where subsistence farming is the norm, poverty is the inevitable result.
In ancient times, trade via the Silk Route enabled East and West to exchange goods, and in the 16th and 17th centuries, Spanish, Dutch and Portuguese traders sailed around the world, powering the growth of Europe into modern times. In the 21st century, global trade is what enables you to buy your Taiwan-manufactured iPhone designed in California so you can listen to British singer Adele on your German-made Sennheiser headphones. It’s also the reason why the number of people living in extreme poverty has decreased dramatically in the past three decades.
But is trade in any way natural, or even obvious?
What’s obvious is co-operation (although some people do seem to struggle with the practicalities.) Helping your family and friends, sharing resources with your neighbours, and working together as a team to complete a task is something everyone can easily grasp. But it should perhaps be noted that small children are usually hopeless at co-operation and have to be taught to share, so perhaps even this simple step isn’t as inevitable as it may first appear.
But trade isn’t at all obvious. Throughout history, many – perhaps most – countries and societies have imposed restrictions, tariffs, duties and outright bans on trade with their neighbours. Even though the economist David Ricardo demonstrated mathematically that trade always benefits both parties, even if the terms are unfair, with his Law of Comparative Advantage back in 1817, many people alive today still refuse to believe it.
*Cough. Bernie Sanders. *Cough. Donald Trump. Two politicians with enormous popular appeal.
Sanders’ website claims that, “the North American Free Trade Agreement (NAFTA) has led to the loss of nearly 700,000 jobs. Permanent normal trade relations (PNTR) with China has led to the loss of 2.7 million jobs. Our trade agreement with South Korea has led to the loss of about 75,000 jobs.”
Oh dear. I’m guessing that when Bernie was reading about economics he didn’t get past chapter one. In fact, he didn’t even read chapter one.
For despite Sanders’ doom-and-gloom claims, the truth is that the number of jobs in the US has risen under every presidential term since Herbert Hoover in the 1920s. Under Reagan, 16 million net new jobs were created; 22 million more under Clinton; more than a million under Bush, despite the global financial crisis; 9 million since Obama came to office. So ignore politicians who tell you that trade destroys jobs – what an absurd idea!
Trump, who you might have thought knows a thing or two about business, claims on his website that, “Since China joined the World Trade organization (WTO), Americans have witnessed the closure of more than 50,000 factories and the loss of tens of millions of jobs. It was not a good deal for America then and it’s a bad deal now.”
But at least Trump is in favour of what he calls “fair trade.” Although, as Ricardo demonstrated, trade is beneficial even when it isn’t fair. And who’s to say what fairness is anyway? How many goats is an iPhone really worth?
Trade is fundamentally different in nature to helping your friends and family. Instead of ties based on kinship and working for the common good – motivations that are notoriously difficult to scale – trade harnesses those dependable and universal motivators of all human beings: self-interest and greed.
Yet it isn’t obvious that if I give you a sheep and you give me 10 quarts of beer in return that we are both better off. There is always the fear that somehow we are being cheated. What’s incredible and completely counter-intuitive is that even if we are being cheated, trade still benefits both of us.
Ricardo’s analysis demonstrates this clearly.
So trade is an extraordinary and powerful machine. It transmutes human self-interest from a problem into an opportunity, and makes everyone a winner.
Trade unleashes co-operation between individuals, groups, corporations and even countries in a completely scalable manner that “helping a friend” and wishful thinking can never achieve. It doesn’t require us to like each other. It doesn’t require us to be blood relatives. It doesn’t even require us to be nice people. But what it does demand is trust. Without trust, there can be no trade.
Humans are not designed to trust each other. Many species of apes kill apes from other family groups on sight. Humans aren’t much better at times. So how can trade work?
There must be a code of conduct. Trade must be based on a clear set of rules that are enforceable for both parties. The rules must be fair and transparent to both parties. This is another reason why the emergence of trade was a powerful force for civilization. It still is today.
We may not like our neighbours. We may be motivated by pure selfishness and greed. But if we want to thrive, we must trade with our neighbours and follow the rules of trade. Trade requires strong government and international agreements, but it also requires governments that permit and protect economic freedoms, so that individuals and groups are free to decide when, what and with whom they trade. What a powerful force for good trade is!
But history teaches us that trade isn’t natural, obvious or inevitable. Revolutions in countries like France, Russia, China and dozens of others threw trade away and condemned the citizens of those countries to decades of poverty. To survive from one generation to the next, trade must be understood, valued and maintained. Let’s hope that today’s politicians can do that, whatever silly things they may tell their supporters.