international trade

We Don’t Have Mass Starvations Like We Used To

Zachary BartschLeave a comment

Two ideas coalesced to contribute to this post. First, for years in my Principles of Macroeconomics course I’ve taught that we no longer have mass starvation events due to A) Flexible prices & B) Access to international trade. Second, my thinking and taxonomy here has been refined by the work of Michael Munger on capitalism as a distinct concept from other pre-requisite social institutions.

Munger distinguishes between trade, markets, and capitalism. Trade could be barter or include other narrow sets of familiar trading partners, such as neighbors and bloodlines.  Markets additionally include impersonal trade. That is, a set of norms and even legal institutions emerge concerning commercial transactions that permit dependably buying and selling with strangers. Finally, capitalism includes both of these prerequisites in addition to the ability to raise funds by selling partial stakes in firms – or shares.

This last feature’s importance is due to the fact that debt or bond financing can’t fund very large and innovative endeavors because the upside to lenders is too small. That is, bonds are best for capital intensive projects that have a dependable rates of return that, hopefully, exceed the cost of borrowing. Selling shares of ownership in a company lets a diverse set of smaller stakeholders enjoy the upside of a speculative project. Importantly, speculative projects are innovative. They’re not always successful, but they are innovative in a way that bond and debt financing can’t satisfy. Selling equity shares open untapped capital markets.

With this refined taxonomy, I can better specify that it’s not access to international trade that is necessary to consistently prevent mass starvation. It’s access to international markets. For clarity, below is a 2×2 matrix that identifies which features characterize the presence of either flexible prices or access to international markets.

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Other “I, Pencils”

Jeremy Horpedahl2 Comments

When the owner of X.com, also the wealthiest man in the world, posted a video of Milton Friedman explaining how a pencil is made, many economists knew exactly where that reference came from: Leonard Read’s classic essay “I, Pencil.”

If you have never read “I, Pencil,” or if it has been a while since you last did, I encourage you to read it right now. It’s quite short and easy to read, as well as easy to understand. That’s what makes it a classic. But let me also summarize what I think are the two main points:

  1. No one can make a pencil on their own — it takes thousands of people to produce all of the inputs and assemble them into a simple pencil
  2. The activities of all those thousands of people are coordinated through subtle but miraculous social institutions, such as the price system, international trade, and property rights — rather than by force through government dictate, and even mostly outside of private firms (though firms are often part of the story)

Leonard Read communicated those ideas beautifully in an essay that is, somewhat humorously, written from the perspective of the pencil itself. But many other economists and economic communicators used other examples of goods to discuss similar themes. I’ll list a few of my favorites, but please comment with yours as well. Some of these essays and videos focus more on the production of the good, some focus more on the institutions, and not all are necessarily about international trade. But these “Other I, Pencils” are great introductory readings to remind us of the power of voluntary human cooperation.

Adam Smith’s “woolen coat” — this is a short discussion early in the Wealth of Nations, describing all of the people and trade needed to produce a woolen coat for a day laborer (at the link you’ll also see a comic version of the tale).

Harriet Martineau’s “plum pudding” — Martineau was a 19th century writer that popularized many of the ideas in Adam Smith. Less well known today, her discussion of international trade needed to bring many simple foods to our table, including plum pudding, is many ways superior to Smith’s discussion (start reading at the line “You mean machines”).

Thomas Thwaites “Toaster Project” — a book and Ted Talk explaining how to make a toaster from scratch — and fail miserably despite spending over $1,000 and spending hundreds of hours, all for something you can buy for a few dollars at the store.

Russ Roberts’ “It’s a Wonderful Loaf” — a poem set to video, explaining how a simple loaf of bread is always ready for you at the bakery when you want it in the morning.

T-Shirts — many examples!

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Freedom to Trade Internationally

Jeremy Horpedahl1 Comment

How much does the US and our trading partners adhere to the principles of free trade? The Fraser Institute’s Economic Freedom of the World report includes a category that helps to answer this question. Fraser’s measure includes not just tariff rates, but also non-tariff barriers, trade regulations, black market exchange rates, and controls on the movement of capital and people. Each country is assigned a score from 0 to 10, with 10 being the most freedom to trade internationally.

Overall, the US gets a pretty good score, slightly over 8 out of 10, which ranks us as the 53rd most free trading country in the world (data from 2022). That’s pretty good, but clearly not the most open: 52 countries have more trade freedom! Here’s how the US and our 10 largest trading partners look on that measure (I’ve truncated the axis to show roughly the current range of country scores worldwide):

Countries/regions with the highest scores on this measure are Hong Kong and Singapore, and almost every European country scores higher than the US.

What if we just look at tariffs? The US has a slightly higher score at 8.3 out of 10, but our rank on tariffs is slightly lower at 59th most free in the world (this includes not just tariff rates, but also the standard deviation of tariff rates and revenue from the trade sector).

Relative to our largest trading partners, the US does look better on this subcomponent for tariffs, but is still lower than some of our trading partners (note the axis is slightly different than the first chart, to once again roughly show the international range on this measure):

Finally, we might be interested in how much these scores have changed over time. You might sometimes hear that the US has opened up more to trade, while the rest of the world has moved in the opposite direction. This might be true on some margins, but not overall according to the Fraser scores. I use 1990 as the baseline, which is before a lot of the free trade agreements and WTO changes that would happen over the next decade or so (Fraser has no data for Vietnam in 1990, so they are excluded):

Overall, the US and our major European trading partners have reduced the ability of their citizens to trade internationally, while places like China and India have opened up massively to trade. In 1990 China had a mean tariff rate of 40% and India’s was a whopping 79%. Today their tariff rates are still higher than the US: 7.5% in China and 18% in India, compared with 3% in the US. But they are the ones who have massively opened up their economies to international trade, when we consider all aspects of international trade, even if this opening up isn’t as complete as the US. The US ranked as the 12th highest on Fraser’s freedom to trade internationally component in 1990, but is down to 53rd in the most recent data.

The Luck (?) of the Irish

Jeremy Horpedahl4 Comments

Poor Ireland. Long oppressed by the Brits. Losing 25% of their population in the Great Famine due to both deaths and emigration. Today, there are possibly 10 times as many Irish Americans as there are residents of Ireland. There are as many Irish Canadians as there are residents of Ireland.

Poor Ireland.

And indeed, Ireland used to be literally very poor, at least in an economic sense. In 1960, their GDP per capita was about half of the United Kingdom. As recently as 1990, they were still only at about 70% of the United Kingdom and the rest of Western Europe. That’s all according to the latest Maddison database figures, which are probably as close to accurate as we can find. But after 1990, we probably shouldn’t use those figures, for reasons peculiar to Ireland.

Today? Ireland is much wealthier. But how much wealthier? It’s tricky. Ireland’s GDP is inflated significantly due to a lot of foreign investment. And possibly some tax evasion/avoidance. You see, Ireland is a tax haven. It has one of the lowest corporate tax rates in the world. That means we have to interpret the data with care, but only because it is such a great place to invest.

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