Is free trade natural?

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.

Advertisements

19 responses to “Is free trade natural?

  1. “. . . trade harnesses those dependable and universal motivators of all human beings: self-interest and greed.”

    It certainly does Steve. irony

    • Maybe you missed what I was saying here, Hariod. Trade underpins civilization by transforming us from disconnected self-interested and greedy individuals into collaborating groups working for the common good. Even though we are still self-interested and greedy, trade is the magic glue that enables us to work with people we don’t care for.

      Whenever economic freedom was swept aside by revolution, human rights were always next to be jettisoned. Trade is a precursor to human rights.

      • I think I caught the gist of your argument Steve, and wouldn’t argue with your thesis in its totality. The concept of ‘trade’ has many manifestations – some acting for the human weal, some deeply exploitative and oppressive. As I see it, the majority of global trade is coalescing around fewer, more powerful, private interests, such that they even successfully challenge or outright dismiss the intent and scope of legislative controls of democratically elected governments as regards taxation, competition law and privacy. I think Neoliberalism is increasingly proving that case – Enron and scores of other corporate criminality cases prove the point year after year.

        Trade, barter, fair exchange, all seem quite natural outcomes of human rationality and survival instincts, but I think the link to your ‘human rights’ (whatever they are) is a little vague – do you refer to China, and its peculiar style of Capitalist Socialism? Are you saying that localised communities cannot function with a social cohesiveness without international trade?

        • So, I think the negative aspects of trade that you identify are perhaps damage to the environment and exploitation of workers.

          I would say that damage to the environment as a result of industrial activity is not caused by free trade, but by a disregard for what economists call “externalities”. This can happen under any kind of economic system and in fact the worst polluters have often been communist countries, where economic activity is consciously directed towards the common good. Do I need to give examples of this? In most countries there are laws to prevent the worst abuse, and pressure from consumers also plays an important role.

          As for exploitation of workers, there are two factors at play. First, there is sometimes genuine exploitation. Nike’s supply chain in the 1990s used child labour to make its products. Under pressure from consumers, Nike brought an end to this practice. It is perhaps worth noting that child labour was a common feature in the countries involved, not a new phenomenon introduced by Nike.

          Secondly, is it exploitative to pay a worker what seems to be a small amount for a job, if that amount is normal for the country involved? In my opinion, it is not. The alternative of paying a large wage to a British or American worker to do the job would mean that the overseas worker is left without a job. The theoretical possibility of paying Western wages to workers in developing countries is not going to happen, unless people like Gandhi start applying for jobs as CEOs. Pretending that this is an option is false. We must choose between options that are real. In the long term, whether you like it or not, this process is lifting billions out of poverty in a way that centuries of religious piety, wishful thinking and idealism never did.

          “the majority of global trade is coalescing around fewer, more powerful, private interests”
          That, if true, would be a bad thing. But is it true? A quick glance at the 30 companies that make up the Dow Jones Industrial Average reveals that a third of them are new entrants that were not in the index before the year 2000. Less than a third of the companies were there before 1980. So it seems to me that vested interests are healthily being pushed aside as new and innovative companies and industries take their place.

          And you know that to hold up Enron as an example of how companies behave is like putting the Kray twins forward as typical Londoners 🙂

        • I didn’t mention the environment specifically Steve, nor even allude to it; I referenced taxation, competition law and privacy issues specifically – none of which you addressed. It seems you’ve set up something of a Straw Man in introducing it. It’s a related issue, but if we get into that then I expect we’d soon disagree on AGW, and there’d be a pointless to ‘n fro about privately-owned Western industrial transgressors as against those state transgressors of the former Soviet Bloc, or China. It’s another argument, not one I’m making here and now.

          I’m glad that Nike were innocent of exploiting those children, and that they were merely adhering to local custom. How were they to have known that consumers of their products deeply objected to their benign cultural adaptations? And as you say, why not “pay a worker what seems to be a small amount for a job” for it only ‘seems’ that way to us – right? The worker is perfectly content with the arrangement – right? The worker accepts the imposition of foreign capitalists into their country and the consequent eradication of their prior means of production, along with their social traditions and culture. It’s all good, as is the American cultural hegemony they now find it all but impossible to escape. Yes, I’m being facetious: Nike, Coca-Cola, Levi Strauss, Adidas, H&M, C&A, Walt Disney, McDonalds, Foxconn et al – you are all a force for good with your trickle-down altruism! “If you feed the horse enough oats, some will pass through to the road for the sparrows.” In other words, let them eat shit.

          Again, I don’t see that your response to my assertion that global trade is coalescing around fewer, more powerful, private interests is related Steve. I made no claim about new entrants or the age of those interests I mentioned, so it’s another Straw Man argument I’m afraid. That said, the owners of those new entrants tend to be the owners of those they succeed. The money stays where the money is, only the name on the share certificate changes.

          I’m sorry I cited only specifically Enron in respect to criminal corporate activity, but felt it best not to spend the day listing them all. If you look up ‘corporate crime’ and also ‘corporate scandals’ on Wikipedia it’ll lead you to scores more Steve. Of course, those are only the ones that’ve been caught out. Or are all the rest ethically impeccable?

  2. I generally agree with you here. Free trade is almost always a net positive for the economy of a country. The problem is that it can be a negative for specific industries or specific groups of workers. Some people lose, and lose big, even as the country as a whole wins.

    That doesn’t mean we should put a stop to free trade, but I think countries that enter free trade agreements should try to help those citizens who get the short end of the stick.

    • Thank you, James. It can certainly be a negative for specific industries and groups of workers, and those people need help from the state to transition to new areas of employment – areas that are growing and offer better opportunities in fact.

      When a factory closes and workers lose their jobs, the negative outcome for those individuals is very apparent. However, what is invisible is when trade does not take place, and factories or offices that would have opened never do so. It is almost impossible for most people to imagine things that never happened.

  3. Very well said Steve. Explaining the benefits of trade is always difficult, because the losers are usually much easier to see than the winners. Although as you point out, history shows how catastrophic ending or heavily restricting trade can be for a society’s standard of living.

    Whether trade is natural or an invention is an interesting question. I suspect it depends on how broad or narrow a definition of “trade” we want to use. As reciprocity between individuals, it’s prehuman, with primates trading turns grooming each other and other mutually beneficial arrangements among animals.

    But trade between tribes? I’m not aware of anything like that happening outside of humanity. (Although again, definitions. There are at times inter-species “cooperation” in warning of the approach of predators and other dangers, although I think we can exclude this kind of thing because it isn’t done in an conscious strategic manner.)

    • Very good. There are in fact examples of symbiotic relations between different species. As you say, this is not done consciously, but does illustrate that individuals can work together with mutually beneficial outcomes (the “common good”) even when that is not their intention.

  4. I can only echo what Mike said (including the compliment).

    I suspect the spread of stone axes falls as much under “learning” as trade. Various chimp tribes use tools, and there is some variation between tribes. When an individual leaves one tribe and joins another (as often happens to young males who can’t find a mate) they often bring the technique of their tribe to the new one where it often spreads.

    What no animal other than humans seem to do is improve on those tools. Once chimps learn a tool (from others, or sometimes through personal discovery), it tends not to ever evolve.

    Something similar likely happened with humans. Trading in stone axes (which take a long time to make) would have been one thing (and we don’t really know, of course), but the spread of information and techniques is quite another and the result more of contact than trade.

    I very much agree that, depending on how you define it, “trade” extends back into our pre-history. Further, I do think it follows as a natural solution more than an invention.

    I don’t have much of an opinion on free trade in the modern era (because I really don’t know diddly squat about the ins and outs). I suspect that some of the resistance to it comes from the perceived personal loss of jobs or technology to individuals rather than any global awareness and opinion that it’s bad in principle.

    It certainly can be disruptive of specific societies, but the overall result, as you say, is positive. It just takes a long view to see that, and a long view is in terribly short supply these days.

    • Thanks, Wyrd! The long view is always hard to see. The thing about trade is that it’s a two-way process – obvious, I know, but seemingly invisible. If we are importing computers from China, we must be exporting something of equal value to China in return. For every job destroyed, a new one is created, and both countries become more efficient as a result (we buy computers from China because it’s cheaper than making them here, so the cost of computers falls.) Of course some people will lose out in the short term and have to be helped.

      The fact that the benefits of free trade aren’t always immediately apparent, mean that it isn’t an inevitability. It could so easily be thrown away, and that would be a catastrophe.

      • “The long view is always hard to see.”

        Especially in these fast-paced impatient modern times!

        (The short-sightedness of managers at The Company was one of the banes of my work career. Invariably they’d pick meager quick results over quality results that take longer. I say this even within the context of the “need for speed” in modern business. In my cube I had that sign: “You can have it Fast, Cheap, Good… Pick Two.”)

        “If we are importing computers from China, we must be exporting something of equal value to China in return.”

        Sometimes it’s just money, but what many of those who object don’t realize is that we are exporting something very insidious and unstoppable: our ideas! Very much like the idea of making a stone axe spread, we’re spreading our way of life!

        In our discussion under my post, I mentioned that the world is becoming WEIRD (Western, Educated, Industrialized, Rich, Democratic) or — at the least — becoming very, very aware of how WEIRD the USA is.

        We export our movies and TV shows (and Facebook and YouTube and Twitter), all of which encode our WEIRDness. Our memes are infecting the world! Much to the dismay of various tyranical world leaders and even some of the democratic ones.

        The irony is that many of those here who wring their hands over Free Trade are also wringing their hands over those tyranical world leaders. They don’t make the long-view connection that the very thing they object to will eventually solve the problem.

        “Of course some people will lose out in the short term and have to be helped.”

        Yeah, and it doesn’t help that the job rate has decreased. There are more jobs over time because there are more people. But the percentage of people seeking (and not finding) work has risen. Jobs are being lost to other countries (in exchange for cheaper goods).

        But some of those jobs would be lost anyway due to technology. In some cases, entire industries have become obsolete. (Some — buring coal for energy, for example — should become obsolete.)

        In some cases, obsolete jobs exist due to unions, so companies move operations to countries with no unions (plus cheaper workers and often no benefits) to escape that. The choice almost seems unions keepsing jobs versus social aid for those who lose their jobs.

        The stress and pain are quite real to a lot of people! And good safety nets aren’t in place. The realities of Free Trade aren’t yet on par with the theory. Ultimately it will settle out, but it may hurt in the meantime.

        “…and that would be a catastrophe.”

        As people often point out to me (when I predict catastrophe), it would definitely be different, but not necessarily catastrophic. It just wouldn’t be, what the context of the current discussion defines as, good.

        I mean, we could all go back to using wood and horses and stone axes…

  5. All excellent points.

    “Much to the dismay of various tyranical world leaders and even some of the democratic ones”
    Count the French among those 🙂

    “But the percentage of people seeking (and not finding) work has risen”
    Is that really true? US unemployment certainly rose sharply after the financial crisis, but now it is back down to 4.9%, which is lower than in 1960.
    remember also that women are no longer expected to stay at home, which certainly wasn’t true in 1960.

    “we could all go back to using wood and horses and stone axes”
    We could, but I don’t think either of us would be very happy with life in the Stone Age. No computers; no movies; and at our ages, we’d probably both be dead.

    This was a reply to Wyrd, by the way! It seems to have got put in the wrong place.

  6. Hariod, I mentioned the environment because I was trying to guess your objection, not because I was trying to create a straw man.

    I see that you are not open to the idea that western companies creating employment in developing countries can be of benefit, so let’s move on.

    As for corporate crime, I don’t know what to say. We have laws about crime. People who commit crime are criminals. Some criminals may run companies; the majority don’t. I think this is irrelevant to the discussion.

    Let’s consider taxation, competition law and privacy issues then. Governments make the laws about these issues, not companies. If you believe that all governments are inherently corrupt we may as well give up now. Usually it’s people like me who complain about governments, so this is a new experience for me.

    I was planning to write an article about corporation tax in the near future, so maybe we can discuss it in detail when I write that.

    Competition law is important. I am mystified why Apple is allowed to get away with its anti-competitive practices, while a company like Microsoft was fined for giving away free software to its customers. Intellectual Property rights I see as a real problem too. I agree that there is work to be done here.

    On privacy, I don’t have much of an opinion either way. Most privacy advocates seem to complain mainly about governments in my experience.

  7. A few strands of thought.
    1. Natural and Invention can be divided by an analytical act but the relation is probably more fluid than either/or. Invention is one of the natural products of evolutionary development – one that can be held apart for analysis, for sure, but no hard boundary there between nature and invention.
    2. Little kids do fight over stuff when they both want to play with it at the same time, but throw a few kids together here a adults there and you’ll find that kids are both quicker to cooperate and quicker to fight. Also their sense of ownership is ephemeral. They may fiercely fight to control whatever toy they’re playing with but once they’re on to the next toy, the sense of “ownership” over the previous one evaporate more quickly for kids.
    3. Trade presupposes a concept of private property. This favors your argument that trade is not natural (or in my terms, trade-as-such is a late development in nature’s evolution toward higher levels of invention).
    4. I only partly agree with your classical capitalist definition of homo sapiens as homo economicus, beings defined by greed and selfishness. That is certainly part of the puzzle, but in all the classes and countries I’ve been through, I find greed and selfishness invariably jumbled with equal parts of unselfish generosity. You can’t really reduce human nature to the one or the other side.

    • Good. We can’t of course be sure whether trade is natural or invented, or whether such terms even make sense. But I knew when I set out to write this article that I would first have to explain why trade is beneficial, and then defend it in the comments. That suggests to me that it’s not as obvious as we may imagine.
      Trade does indeed require a concept of private property. That is one of the rules that must be in place for its benefits to be unleashed.
      Greed and selfishness don’t completely define what it is to be human. Unselfish generosity is there in equal measure. Getting both elements working for the common good is rather magical, though, I think.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s