Adam Smith gave us an excellent metaphor when he compared free market forces to an “invisible hand” that guides each of us — in the pursuit of our own interests — to promote the interests of others.
But Smith, in some ways, set economic thinking back by embracing some mistaken ideas. For example, Smith believed that the value of a thing sprang from the amount of labor that went into its making. Before Smith, several economic thinkers realized that a thing’s value was in the eye of the beholder, but Smith stepped into this mistake nonetheless.
Smith also erred in believing trade springs from an inclination among men to “truck and barter.” In other words, Smith argued that people exchange with each other because of some innate human tendency to swap.
More convincing is Austrian economist Ludwig von Mises’ explanation for why people trade; namely, they recognize that the expanded division of labor made possible by trade makes them better off. As Mises wrote:
“The fundamental facts that brought about cooperation, society and civilization and transformed the animal man into a human being are the facts that work performed under the division of labor is more productive than isolated work and that man’s reason is capable of recognizing this truth. … In a hypothetical world in which the division of labor would not increase productivity, there would not be any society. There would not be any sentiments of benevolence and good will.”
Trade, therefore, promotes human civilization itself.
Many people misunderstand trade and — especially when trade takes place with people of another political jurisdiction — distrust it. Yet trade is always viewed by the trading partners as beneficial. It always involves giving up a state of affairs we value less for a state of affairs we value more.
If I agree to trade you a baseball card for a magazine, I clearly believe I will be better off as a result of the trade. A mutually agreed-to trade then benefits us both. It’s true one or both of us may regret the trade after we make it, but, at the moment of the trade, we both believed we would benefit more from trading than not trading.
For this reason we can see that trade promotes human well being. Even with no increase in production or physical things, a trade can leave the trading parties feeling better off.
Some believe we should only trade with our neighbors, fellow Hoosiers or fellow Americans. Yet this attitude sacrifices one of the key benefits of trade, namely, allowing us to have more goods at lower cost.
For instance, we could make a law that all Hoosiers must only buy gasoline made from oil drilled in Indiana. This would be a boon to Hoosier oil producers and would shift resources from other productive endeavors to oil production. Yet, oil is not an easy thing to produce in Indiana. It is much more costly than, for example, buying oil from Venezuela, Russia or the Middle East. In the end, the law would make Indiana less well off by forcing Hoosiers to pay more for oil and gasoline than they would have to pay on the world market.
We also could make a law that families must only hire their own members for jobs around the house. For instance, we could make it illegal to hire a neighbor kid to mow our grass. It must be done by someone in the household. This would promote employment of our family members, but would not necessarily be the best, least costly, use of our time and energy.
Free trade allows us to find the least costly way of doing things. This increases overall productivity and raises overall standards of living.
Nor is international trade something to fear. It not only increases productivity and standards of living, but it also promotes cooperation among people of different countries. Trade promotes a sort of mutual dependence that promotes peaceful cooperation.
In short, free trade is merely an exercise in the freedom to use our resources, our time, our labor and our energy as we see fit. Free trade promotes wealth creation, cooperation and peace. We should not want to avoid international and other trade; we should want more of it.
Arthur Foulkes is a Terre Haute native and longtime resident. The Tribune-Star reporter writes a column on business and economics. He can be reached at (812) 231-4232 or arthur.foulkes@tribstar.com.
Business
Arthur Foulkes: Many people misunderstand free trade, and so they don’t trust it
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