In Trade We Trust: Mobilizing Minds Across the Ocean

These challenges of securing adequate food, clothing and housing create the opportunities for farmers, craftsmen, and entrepreneurs to provide these goods and services, from growing and harvesting food, to textile workers weaving fabric and sewing clothes, to developers, builders, remodelers in the business of providing and improving shelter.

With early family farms people grew much of their own food, sewed their clothes, darned socks, and often built and repaired their own homes. It’s possible still for families and small villages to produce most of the goods and services they consume. But those who are self-supporting due to ideology or isolation live very poor lives. Extended division of labor and specialization enabled by trading networks and markets allows the exchange of goods and services. Markets mobilize disbursed information and specialized knowledge. That may sound abstract but the next paragraphs will help explain as can Don Boudreaux’s Everyday Economics video series.

For a video explanation of this story, see Don Boudreaux’s Everyday Economics series at Marginal Revolution University, beginning with “The Hockey Stick of Human Prosperity.”

What separates developed economies of the modern world from earlier pre-industrial societies, or from developing economies like much of China, and others around the world today?

Modern societies send electricity and clean water to homes through the day and families rely upon cars, bicycles, buses, and now perhaps Uber for each day’s travel to jobs producing and or visits purchasing goods and services.

Networks of enterprises innovate and manufacture the myriad home appliances, furniture, books and bookcases, and endless other goods and services purchased each day. The flip side of our lives as consumers is our role as producers joining the enterprise and exchange networks making goods other people need and want.

In an open economy, all this producing of and consuming of stuff is coordinated by the bids and asks of markets that generate prices. These prices in turn signal information and generate incentives for producers and consumers.

Students can make these concepts more concrete by looking at a single day in the life of their own family. The dance of consuming and producing begins each morning waking from bed with sheets and blankets made by unknown people usually in distant lands. And through the day, in developed countries like the United States, lives and appetites are satisfied to an amazing degree by people we don’t know and will never meet. In exchange father, mother, and others in the family are responsible for various tasks, including producing the goods and services that improve lives around the planet, most of whom, again, you’ll never know or meet.

Leonard Read tells part of this story from the viewpoint of a pencil:

I am a lead pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write.* 

Writing is both my vocation and my avocation; that’s all I do. 

You may wonder why I should write a genealogy. Well, to begin with, my story is interesting. And, next, I am a mystery—more so than a tree or a sunset or even a flash of lightning. But, sadly, I am taken for granted by those who use me, as if I were a mere incident and without background. This supercilious attitude relegates me to the level of the commonplace. This is a species of the grievous error in which mankind cannot too long persist without peril. For, the wise G. K. Chesterton observed, “We are perishing for want of wonder, not for want of wonders.” 

I, Pencil, simple though I appear to be, merit your wonder and awe, a claim I shall attempt to prove. In fact, if you can understand me—no, that’s too much to ask of anyone—if you can become aware of the miraculousness which I symbolize, you can help save the freedom mankind is so unhappily losing. I have a profound lesson to teach. And I can teach this lesson better than can an automobile or an airplane or a mechanical dishwasher because—well, because I am seemingly so simple.

Simple? Yet, not a single person on the face of this earth knows how to make me. This sounds fantastic, doesn’t it? Especially when it is realized that there are about one and one-half billion of my kind produced in the U.S.A. each year. 

Pick me up and look me over. What do you see? Not much meets the eye—there’s some wood, lacquer, the printed labeling, graphite lead, a bit of metal, and an eraser.

The knowhow for all this production of peanuts to pencils to iPhones, is distributed across hundreds, thousands, or millions of people scattered across the planet.

Among the many, many challenges producers of goods and services face are distances and barriers separating them from consumers. Sock factories in China are thousands of miles away from millions of customer feet in the U.S. and Europe.

The wages earned by people working in sock factories in China follow from the value their dexterity adds to the sock-making machines at factories. The textile and sock-shaping machinery is sophisticated and expensive, and other expenses include electricity, the raw cotton and polyester, and rent for the land. After the socks are produced, they have little value at the factory so must be transported by truck or train to warehouses for retail stores in China or to ports and by ship to other countries and again by truck or train to retail stores.

One barrier is distance from consumers, but another is formed by political barriers that tax or otherwise restrict sock imports to other countries.

Students researching and debating trade policy with China, Japan, South Korea, or Taiwan are researching and debating political barriers to exchange between the producers and consumers in these countries and the producers and consumers in the United States. Trade reforms that reduce political barriers will allow more exchange and more gains from trade. And policy reforms that increase political barriers will reduce opportunities for future gains from trade.