The global economy

by Sam Selikoff February 15, 2010

It may seem at times that Americans are getting fat off of the labor of others in the world. But once you understand the mutually beneficial nature of free markets, you’ll see this picture quite differently. Americans used to be just as poor as everyone else. But nearly 100 years of unfettered free markets and little government intervention gave rise to 19th century America, in which there was more economic growth and more people escaping from grinding poverty than during any other 100-year period of time in all of human history. It is a truly amazing phenomenon, and something I think we should keep in mind when talking about this kind of poverty and how it still occupies many countries in the present.

Bangladesh is a particularly good case study, because they gained independence after a war in 1971. For a couple of decades they suffered famines and extreme poverty, but democracy was restored in 1991. Since then they have experienced tremendous economic growth, and poverty has fallen dramatically. I think economic freedom has a huge part to do with it. That freedom allows them to trade with countries that are richer than them so they may develop more goods and services for themselves. It allows them to compete on a global stage on the basis of cheap (to us) labor, and rewards them for this competitive edge. This is the hallmark of a well-lubricated international market system, and it benefits all of its participants through specialization, the same way it benefitted America in the 1900s.

You raise an ethical issue about Americans’ detachment from the production of our consumer goods. On the surface, I see how it could come off as a negative. But if you stop and think about what’s happening, I think you’ll see this as a side effect of an increasingly larger and more global marketplace. Consider for a moment the price system. Prices do more than just tell a consumer what something costs. Price changes reflect shifts in demand and supply. Suppose I am a firm that produces cans, and I buy my tin from Indonesia. Then suppose that either supply contracts or demand increases (either one will have the same effect for our purposes, which is important). Tin has become more scarce. Accordingly, the price increases. This signal tells me that one of my inputs (tin) has become less productive, which means I can substitute some of my resources into another input (perhaps aluminum). All of the buyers of tin adjust accordingly. And the producers of aluminum will also adjust to fill in this new gap – which means they are shifting the balance of their inputs as well; and so on, throughout the entire system. The whole acts as one market, because the price system allows all of their particular knowledge to transmit to each other.

This same price system is what gives Bangladeshis work. Since Americans are wont to buy cheap goods and services, and firms are wont to use cheap inputs, people in Bangladesh that have recently been introduced to the global economy can compete and sell their labor. It is truly incredible when you think about how producers and consumers in America are continually and voluntarily making mutually beneficial trades with people in Bangladesh, Peru, China, and all over the world. Free markets and prices allow this to happen.

But what’s really at the heart of your concern is the question, what ought we do about the world’s poor? Is American consumption really the best means to utilizing our wealth and knowledge to help the destitute? To this I would respond that this is not the first time this question has been asked. Indeed, one of the answers given by intellectuals and bureaucrats came about at the beginning of the Progressive Movement in the early 20th century. Their answer? Soviet Russia. They saw the manifestation of Marxian theory as the answer to “evils” like the income gap and the emergence of a middle class. But we know better. The 20th century is behind us, and freedom beat the most adverse circumstances and central planners such as Hitler, Stalin and Mao. Since the end of WWII most of the world has integrated democracy in some form into its present system of government, and the result has been tremendous decreases in poverty and death on a global level.

Markets aren’t perfect. But every system that has been developed to help the poor, whether US welfare or Chavez’s Venezuela, has done precisely the opposite. Even if these programs offer goals that are ostensibly more noble than that of a free market (helping the poor vs. economic self-interest), you have to look not at these honorable intentions but the actual results. There is yet to be discovered a system of organizing economic resources that holds a candle to the productive capacities unleashed by free markets, which allows the ordinary man the best chances to improve his lot in life. Modern-day trade among the US and other countries, and their subsequent increases in prosperity, is simply an example of this.


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