One of the economic concepts that has stayed with me since school is about why we trade, and the benefits of it. Benefits that are so strong that they have built modern society and the great advances and comparatively long lives we enjoy today.
Back in the very old days (I’m talking cave dwelling and wearing animal skins here), we did everything ourselves. Each family unit was an island. Members ate what they killed or grew, and moved on when food was scarce.
Unsurprisingly, this was a highly inefficient existence. Some people were better at hunting, others were better at growing things. After a very long period of “beggar thy neighbour”, the concept of bartering developed. As a good fisherman, I’d swap fish for my neighbour’s corn at an agreed rate, and so on. When that started everyone’s quality of life began to improve, as people specialised in what they were good at.
However, what turbocharged trade was the development of currency. Prior to money coming along, it was almost impossible to swap your goods with more than one person. Every transaction involved bartering to establish the value.
The development of paper money (effectively promises of future payment) meant I could sell my fish for a written amount of “value” in dollars and cents and then hang on to that until there was something I needed to buy from a different person (rice perhaps, rather than corn). They would accept my currency and use it to buy what they wanted from a different person. Everyone was better off by specialising and achieving the best value they could for their skills.
Just as it developed with individuals and families, trade became a thing between geographic locations. Towns, regions and ultimately countries began trading with each other. Some countries were good at spinning yarn, others at growing food. They specialised in what they were best at and used their currency to trade with each other and make their citizens better off.
In our case, we are damn efficient at turning grass into milk, and by selling our milk we can buy other things. Consumers in countries that aren’t so good at growing milk can buy it at a cheaper price and higher quality than if they grew it themselves. Everyone is better off.
Incidentally, in case you think it is all about commodities, we are also good at other things, like niche tech products where ingenuity and flat structures tend to favour innovation.
With trade and currencies, it doesn’t matter if you buy more from one country or another. A two-way trade imbalance is irrelevant to a country’s wealth and strength. It doesn’t matter if you buy more from the US and sell more to China, because currencies themselves can be used to buy from different countries to the ones you sell to. In fact, it’s important to buy off and sell to the consumers that get the best value from the trade. The main thing is that by specialising in what you are good at, everyone is better off.
You would think the world wouldn’t have to relearn these basic economic lessons in the second quarter of the 21st century. But here we are.
The most powerful country on the planet is led by a President who is either wilfully or ignorantly disregarding this economic equivalent of gravity, thereby imperilling his own voters and consumers and their quality of life. In using irrelevant two-way trade imbalances to bully countries into doing things he wants, each time he is dampening the case for wealth-enhancing, cross-border investment and trade.
He has also set himself up as a standard-bearer for the use of tariffs, a type of taxation that falls on his own consumers, and impedes the very trade that has lifted standards of living and longevity around the world, especially in his own country.
This is not a first. Brexit was another recent case of economic self-harm, where voters in the UK turned their back on the benefits of access to the world’s largest single market for illusory economic benefits that quickly turned to dust. Or even here, where in 2017 we decided to turn back time to the economic policies of the 1970s, and quickly discovered that the same results of debt and stagflation are available as an outturn of the same policies. As the saying goes, those who forget history are doomed to repeat it.
This is not to condemn all that is happening as a result of the populist wave that is currently sweeping the world. Brexit was about social independence from Europe as much as economic independence, and that part is understandable. Ideally, if Britain had its time again it would probably have developed its EU relationship as an economic one rather than everything else as well.
Similarly, US voters clearly felt that social progressiveness had gone too far and needed a correction. They also believed the Washington swamp had got too big and was consuming far too much of their hard-earned taxes, and were frustrated that the government-industrial complex was proving impervious to their wishes.
And the Trump/Musk mantra of being prepared to move fast and break things is a lesson to governments all over the world, including our own, about the restlessness of voters and their desire to see real change and quickly.
I just wish we didn’t have to relearn basic economic concepts at the same time. In Trump’s case, his tariff-rattling may ultimately be bluster but if he behaves like an economic schoolyard bully, he licenses others to do the same, and that beggars the world. Prosperity depends on specialisation and free and unfettered trade. Through this tumultuous period, all of us need to remember that.
