A turbulent week in the economy is a very good time to write about fundamentals. Trade, its origins and its benefits are a timely topic. I must warn readers that these ideas aren’t very hard, but rather shockingly simple. They will challenge what you’ve heard in the media and on the campaign trail.
The elemental essence of human interaction is trade. From our earliest days as a species, family groups organized themselves to conduct tasks, dividing them among members based on some comparative advantage. Faster, stronger people hunted, others watched children, gathered food and prepared meals. Those roles changed over a lifetime, as individuals grew and aged or became hurt. The big key was that this arrangement was cooperative, not competitive.
Over centuries, these family groups grew into villages and towns. Trade was organized much the same way. Individuals knew one another and exchanged goods and services to get what they wanted. The presence of more people in a small area allowed workers to focus on fewer and fewer different skills, becoming better at just one task. The 18th century economist Adam Smith called this the Division of Labor, using the example of a pin factory to illustrate the point. In his example, a single worker performing each step of making a pin could scarcely produce a single one in a day. In contrast, 10 workers each focusing on just one task could make many thousands in a day. Again, this is inherently cooperative, not competitive.
This specialization of labor leads to other types of productivity enhancements as workers learn more about the work they do. This is true in everything we do as humans, as an example from athletics illustrates. In the 1968 Olympics, the gold medal in the 100-meter breaststroke went to Don McKenzie from Indiana University. Last week at Indiana Swimming’s Senior State Meet, 20 different young men beat that time. Trust me; I have reasons to know that this is not from better genes. This is the effect of the Division of Labor, but not just of the athlete. The coaches spend more time learning training that is more specialized. Athletes receive more focused nutrition and weightlifting, and the swimmers wear highly technical suits that shed water and provide muscle compression. There were even studies of the effects of hair, and the optimal time for swimmers to shave before competing; hence no more glorious Mark Spitz mustaches.
In the case of swimming, the Division of Labor that enable detailed study of nutrition, exercise science and textile engineering all contributed to this huge human improvement in swimming. Moreover, the extra income and wealth created by centuries of growth meant more kids could swim competitively, instead of having to gather berries or hunt for their tribe.
It is worth noting that the only innovation in trade that has occurred since about 3,000 B.C. is the widespread introduction of currency. This is necessitated by the absence of face-to-face exchange. In a local barter economy, currency is helpful, but not required. Once you can no longer trust the person with whom you buy and sell, you need money. It does not have to be the same money; it is easy to agree on an exchange rate. You just need money.
Today we trade with people we never meet. Even simple items like a piece of fruit or an office chair involves the skills of dozens, if not hundreds of people. There is no central organizing body. These things come about through spontaneous arrangement of hundreds of men and women, speaking many languages and living in many places, simply trying to make a living. This process is inherently cooperative, involving significant trust from field or mine, to factory and store. The opposite of war is not peace; it is trade. When you hear a politician describe trade with China as some vast competition between two large powers, you can be certain one of two things. They either are stupid or think you are.
This brings us to today. Tariffs are taxes on trade. For much of the world’s history, tariffs were popular because there was no other easy way to collect taxes. As technology permitted governments to collect sales, income and property taxes, tariffs began to disappear. The average tariff rate has dropped by five-fold worldwide since 1900. Tariffs became less popular as more nations came to appreciate the benefits of specialization of labor and more aware that tariffs are mostly used to prop up unproductive domestic businesses.
It is worth noting that maintaining unproductive businesses make us much worse off over the long run. But, over the short run it does benefit those who own or work in that business. The process of unproductive firms closing, whether through trade with China or Kentucky, or through automation can be difficult. It often displaces workers and disrupts families and communities. This may well call upon the resources of government to better train and educate workers and insulate families from these events. That we single out trade with a foreign nation, but not automation or trade with Kentucky, is a comical side note to our understanding of labor market disruption.
Today we have embarked on a Trade War, whose primary benefit is reminding us of the immense benefits trade brings. The cost of this trade war is simply the suspension of the benefits of trade. By raising taxes on products 10-30% the trade war is forcing firms to pay rising prices or move their suppliers to different, more expensive places.
Alone, none of these things is sufficient to cause a recession. However, the uncertainty surrounding new tariffs and the shift of thousands of product lines from one nation to another, combined with wholly predictable retaliation by our trading partners is enough to slow economic growth. Whether it is sufficient to cause a recession is a question time will shortly answer.
Michael J. Hicks is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University. He can be reached at email@example.com.