On the Importance of Trade

So if getting rich is the point of economics, it begs a very important question. How?

That is, how does one go about getting rich? And economists have a one word answer to that question: trade. It is trade that makes us rich. It is trade that differentiates us from all other living things on this planet. It is trade, and this is no hyperbole, that defines who we are.

Because it is through trade that we are able to get from others (peaceably and through voluntary exchange) that which we cannot produce, while giving to still others that which we can. In simpler words: I’ll do what I can, and you’ll do what you can, and then lets trade.

This is by no means an original idea. Quite the opposite, in fact. And yet it remains an understated, undefended idea that doesn’t receive its fair share in the spotlight. But it needs to be said, explained and emphasized: trade is good. When we trade, we’re richer. As was explained last time around: we’re both richer.

And so an economist will (or should, at any rate) say that self-dependence is not a good thing. Voluntary trade with foreigners is good. Voluntary trade within a national boundary or outside of it – it doesn’t matter, it makes the people involved in that trade better off. And so the more that people trade, the richer they, and therefore the country they belong to, get.

The average Indian earned about 900 dollars in a year in 1947. Getting independence mattered for self-evident reasons, but it mattered in an economic sense as well, because trade was rather more voluntary after that. And that worked, because by the mid 1980’s, the average Indian was earning about 1350 dollars per year. That is, the average Indian was 50% richer by then.

But when trade was not just voluntary but also free of the encumbrances that our own government used to impose on us, that is, after the economic reforms of 1991 – why, then the average Indian was able to earn about 6000 dollars per year. From the mid-1980’s until today, the average Indian was 450% richer. That’s a lot of %!

Think about what we spoke about in the previous post: we’d want India to have rapid, stable, inclusive, sustainable growth within the framework of a political democracy. If that’s the dish you want to cook, then you need that all important ingredient: voluntary trade.

What voluntary trade does is that guarantees growth, and rapid growth, at that. That much is undeniably true. China after 1978, South Korea for the last four decades of the twentieth century, Singapore after 1965, and even India after 1991 – they’re all conclusive proof that trading more leads to more, and more rapid, growth.

Trade, unfortunately, does not necessarily guarantee the other three adjectives: it does not guarantee stable, inclusive or sustainable growth. That’s why the economics profession exists, and that’s why I get to write (and you get to read!) many, many more blog posts.

But hey – without trade, we got no story to tell. Remember that.


Leave a Reply