When we trade with other countries, we all become richer
The prime minister tells us that Bangladesh is developing to the point where we’ll all no longer be dependent upon others.
In one sense the PM is, of course, correct. But in another, economic, it is necessary to, very gently, point out that we should be thinking the other way around. This is also the message from HSBC when they tell us that Bangladesh will soon be the world’s 26th largest economy -- soon being well within the lifetimes of most reading this.
What the prime minister means is that the country will be able to stand upon its own feet, not need to beg for the charity of others. Something to be devoutly desired of course, just as a general principle. But my insistence on the other direction of thinking is dependent upon that too.
For exactly what the PM means is that the country will have grown rich enough that people will desire to send us money simply because they desire what we can provide them with in turn. We’ll not depend upon charity, we will be self-supporting. But this means a much greater dependence upon other people in turn.
Yes, I know, I’m being contrary. But economists will insist upon the value of the division and specialization of labour. Adam Smith, near the founder of the entire subject, was insistent upon it. A little later David Ricardo told us how to work out who should specialize in what, but that’s just an elaboration of Smith.
In fact, there’s a tagline that all economics is just footnotes to Smith or wrong.
HSBC does indeed insist that the country is going to climb into those ranks of the largest economies on the planet. Their prediction is simple enough -- continue current growth rates in a place with this large a population and by 2030 the country will indeed be in the top 30. The trick will be to make sure nothing silly is done to stop it rather than having to have some clever plan to gain it.
But the underlying point being made is that each Bangladeshi will be dividing up the labour and specializing ever more -- this is the process that will create that growth and increase in wealth.
To grasp this, consider the man who relies upon no one. He grows his own food, makes his own clothes, built his own house, owes nothing to anyone and trades not at all. Do we consider him to be rich? No, he’s poor, obviously, a starveling wretch an Andaman Islander will look down upon as being the poorest of the poor.
Which was very much Smith’s point -- we become wealthier by dividing up life and work into discrete tasks, us of each then specializing in just the few of them. We become richer as we reduce that number too.
For the more we specialize, the better we shall be at it. If we’re better, then we do more within the same hours of labour. And if everyone is doing that, then there’s more of everything from those same hours of labour -- we’re all richer. Trade is just the swapping of our production.
An obviously necessary part of course, for if we’re each handling only one task, then we need to send our surplus off to gain the deficit we have of everything else.
That is, the route to greater wealth is divide, specialize, and trade. That is the lesson of the pin factory Smith described, and which has tortured every economics student ever since, the major lesson of which actually made it to the quote on a banknote, the 20 pound one. Once we divide labour, and so specialize, we can produce more from the same input of labour. We’re richer.
But as pointed out, and as is obvious if we spend our lives making pins (or the heads of them, or drawing the wire etc) then we need to swap our pin output for the food, clothes, buildings, and everything else we desire. As others are also specializing -- we’re making all the pins and they don’t have to -- there’s more of all those other things to be traded for too, we’re all richer.
That is why we have to trade.
The thing about this is that there’s no point at which this stops. Once we accept it at any level at all, say in a household where mother will comfort the children, father chastise them when necessary, or care for them and provide as the example pleases you, then this is applies to everyone.
What applies within the household applies between them. What applies between households applies across villages and wards, up through union councils and municipalities to the district, division, and country -- and it doesn’t stop there, it applies just as much across national boundaries too. Once we accept the division and specialization of labour, then it applies to all 7 billion of us across the globe.
There was actually a time when I was the global specialist in one metal (scandium for those interested) and I handled some 50% or 60% of the world’s very small indeed annual usage. And for a couple of years, 100% of that was used by the global light bulb industry (perhaps 150kg for the world, a small business as I say).
Everyone else didn’t have to worry about that part of life at all. True, near nothing else is ever done by just the one person globally, but that would be a platonic ideal of that division and specialization.
Trade of such production makes us richer. It is also true that to become richer, we must be doing that trading with other people. We must, therefore, rely more upon other people in order to become that much wealthier. And being wealthier is a sign that we are so relying too.
The prime minister is quite right in that Bangladesh will not have to be dependent upon the goodwill of others, their charitable impulses. The country will become richer when they desire our production, and we can demand in turn theirs as of right. But we will be more dependent upon other people just as they become more dependent upon us.
Tim Worstall is a Senior Fellow at the Adam Smith Institute in London.