trade

The scale of society

/ jdc / Leave a comment

As I sit at my desk and look around me, I see a lot more than I could hope to do alone. The computer I’m typing on, the appliances in my kitchen, the coffee in my cup, the books on my shelf, the stores outside my window, the garbage cans outside my back door, the street at the end of the path… there is not a single thing that I would be able to replicate alone.

I don’t know about you, but once I start thinking about the immense web of trade, combination, and connections that make up the world we live in, I know awe. I don’t have the words to describe how the stuff I see around me came to be. It’s alchemy. (This, by the way and for the economists, is why general equilibrium theory blew my mind when I first saw it.)

Trade is an issue ever at the heart of political discourse. This year, Brexit and Trumpism have elevated its urgency in the public discourse. I won’t talk here about any specific trade deal, whose details are seldom clear-cut (see, for example, a short note on TPP from Beat the Press today). I want to instead think about the concept of trade itself. Fundamental to the issue is a deep question: what should be the scale of our society?

If I was alone in the world, I would be done for. If I was very lucky and busted my tail I might be able to Robinson Crusoe myself an existence for a little while. I am fragile: a twisted ankle could mean the difference between life and death.So let’s start by accepting the obvious truth that going it alone is not going to get us anywhere.

What about a few people? I’ll try to build shelter, you see about getting us some food. If you get sick, I have your back. We may rediscover the power of specialization to make us more than proportionately powerful together than apart.

At the level of a person, specialization and trade are simple things. Sure, there is systemic coercion in our lives, but trade, entered into willingly, is nothing more than a little win-win. A little of what I have and a little of what you have and we are both better off than before.

But we are not yet remotely close to building a toaster.

What about a small town? You know, Main Street U.S.A., with a hardware store, a bakery, a soda fountain, an elementary school, a factory. We’re specializing a little more, increasing the scale of our little society. But the scale is not just what we see in our zip code. Already our idyllic picture is cheating a little bit. The goods in the hardware store, the textbooks in the school, the lumber in the houses all took more to produce than our little town can accomplish alone.

When it comes to the stuff you consume, the borders of your society are not the same thing as the scale of your society.

We may also start to see a type of fragility creep in to our world. That factory is maybe not just working to make a thing for our town, but for many towns. Our town is specializing in that thing. We are trading that thing for the other stuff we are using but don’t make. So tell me: what is the scale of this society? And tell me: what happens if the thing our factory makes becomes obsolete?

What about a state? A country? Whole regions may be devoted to banking, or product assembly, or the auto industry, or agriculture, or mining. The scale of society through trade must become huge: a region certainly wants to eat more than just banking services. And, inexorably, now the local risk may not be so local after all. What do we do here? And what do we do when the day comes that we can’t do it anymore?

People’s lives must change with scale too. Adam Smith’s pin factory, where each person has a tiny, repetitive task, is not likely any worker’s idea of a good time. He knew this, and we know this. For most people, though, living alone off of the land in the woods is also likely to get old pretty quickly.

And, in our hypothetical hyper-specialized region, if I want to make my way in life in some other way, I have to cast myself out, to move to a place that does something different. That costs me, physically and psychologically.

Where is the sweet spot?

Would you prefer it if your town, state, or country were closed, forced to be entirely self-sufficient? What would you be willing to sacrifice to make that happen? There is nothing wrong with saying: yes, I would accept fewer things, more expensive things, in exchange for shutting us off from the rest of the world. But in my heart I don’t think this is what anyone wants. I’m not sure that people want to be isolated from the world or from the variety it brings. I think we just want a nice place to live and something to do.

I want a small town, with a Main Street rather than a Wal-Mart, and what unleashes Wal-Mart more than logistics and trade? I love being able to afford more stuff, but I hate that all I have left are strip malls. (I’m only half kidding when I say that better real estate and some interior design would be the cheapest way for Wal-Mart to buy our goodwill.)

From this angle, specialization means drudgery and local risk. From that angle, trade means variety and the freedom to pursue my own path.

Can we square the circle? I’m sure there is a connection between the increasing scale in society and Bowling Alone, but they are not exactly the same. I think that we can find some daylight between them. Maybe we could even find that, down there somewhere, trade and community share more than they seem.

Earlier I said that when I look at the stuff around me I am in awe. I see so much stuff that if you tried to explain it to someone from a few generations ago they would burn you as a witch. But I also see cooperation, community, and interdependence among humanity on a scale I can’t comprehend. Trade is a conception of community too.

If a desire for community is imprinting on politics is as part of the lament against trade, maybe we are not so far from a consensus after all. Maybe I’m overstating the case. But at a minimum, pro-social and pro-trade policies do not need to be seen as mutually exclusive opposites. Delivering both in one package would be a fine trick.

Noble goals

/ jdc / Leave a comment

Talking about growth and development yesterday made me think of the twin institutions that bear the brunt of a decent portion of the anti-growth, anti-capitalist, anti-America, anti-“economics” anger in the world. Those would be the World Bank and the International Monetary Fund (perhaps we could throw the World Trade Organization in too). Remember the Seattle riots around the WTO meeting in 1999? How I sympathize with those who would criticize these institutions, who would debate their goals and their practices. Yet here I go, so help me, to try to raise the defense.

Forget for a moment, if possible, any prejudice for or against these institutions. These were not organizations born of evil purpose. Let’s read along with the part of the Bretton Woods agreement that set up what is commonly known as the World Bank:

“The purposes of the Bank are:

(i) To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peacetime needs and the encouragement of the development of productive facilities and resources in less developed countries.

(ii) To promote private foreign investment by means of guarantees or participations in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources.

(iii) To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balances of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and conditions of labor in their territories.

(iv) To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, will be dealt with first.

(v) To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in the immediate post-war years, to assist in bringing about a smooth transition from a wartime to a peacetime economy.”

This reflects both the origins of the Bank as an institution of post-war reconstruction. The World Bank was set up to help nations and people who were in need. Don’t these goals seem kind of noble, or important?

The IMF equivalent:

“The purposes of the International Monetary Fund are:

(i) To promote international monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

(ii) To facilitate the expansion and balanced growth of international trade, and to contribute thereby to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy.

(iii) To promote exchange stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation.

(iv) To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

(v) To give confidence to members by making the Fund’s resources available to them under adequate safeguards, thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity.

(vi) In accordance with the above, to shorten the duration and lessen the degree of disequilibrium. in the international balances of payments of members.”

It’s a triumph of global cooperation that institutions like these exist, with the aims – broadly expressed – of achieving stability, development and prosperity. It’s amazing. Like I said, part of me hates playing devil’s advocate for institutions that are routinely characterized as evil tools of evil people in evil countries, but, if you don’t like these institutions, at least tell me you don’t reject the idea of these institutions.

Yes, we know that these institutions have dropped the ball – to put it mildly – in the past, and that is not an economists versus the world thing, it’s just a fact. Yes, it’s incredibly, astonishingly misguided to put headquarters of these institutions in the capital of America, and all the more unfortunate given the strong feelings that alone arouses. Yes, the balance of power in the World Bank, the IMF, the WTO, hell, the UN too, is probably a mess.

But here’s the rub: I want international cooperation that tries to tame the beast of the global economy, of the complex and difficult problems that arise when everyone in the world interacts while trying to make the best out of what they have. I want to worry about figuring out how to help countries and people who want help, and then giving it. I want to acknowledge that we’re all in this together and that our decisions matter for each other.

We – everyone – are the people who can embrace the ideals that gave us unprecedented international cooperation in the aftermath of a bloody and destructive war, and develop those noble ideals into institutions that work, practically, for everyone. I can only quote the first principle of the World Trade Organization: “The first step is to talk“. If you believe the institutions are sick, let’s cure them rather than let them die.