As Trade Zones Shrink, So Does Wealth

Win-lose means lose-lose, sucker...

The ROMANS were a win-lose, hard-fighting group, writes Bill Bonner in this excerpt from his forthcoming book, Win-Win or Lose, shared with readers of his Diary of a Rogue Economist.

But once conquered, people were free to do win-win deals under the protection of the empire.

Under the Roman Empire, there was a great expansion of trade, technology, and wealth. Evidence can be found as far from Rome as Gloucestershire in Britain.

A third-century Roman villa there shows all the trappings of civilized life of the time. These included running water, central heating, and floor mosaics...as well as wine and olives from the Mediterranean, silver from the mines of Spain, and carpets from the East.

This was made possible by the Romans' vast road network and the traders who traveled it. Rome's protection of property rights removed some uncertainty. It also helped make sure contracts were enforced and violence was limited. If anyone were to be robbed or killed, it would be the feds who did it!

Another great expansion took place under the British Empire in the late 19th century. Economist John Maynard Keynes wrote about what a remarkable thing it was...

"The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole Earth, in such quantity as he might see fit, and reasonably expect their early delivery upon his doorstep; he could at the same moment and by the same means adventure his wealth in the natural resources and new enterprises of any quarter of the world, and share, without exertion or even trouble, in their prospective fruits and advantages."

A third great period of "globalization" occurred under the watchful eye of the post-Cold War Pax Americana. From the fall of the Berlin Wall in 1989 to 2007, trade boomed. The world had never seen such an increase in wealth.

In his 2010 book, The Rational Optimist: How Prosperity Evolves, British businessman and libertarian Matt Ridley explains...

"In [the last 50 years] we have gone from 75% of the world living in extreme poverty to just 9%. We have increased human productivity by some 3,000%.

"Nobody seems to know this. The late Hans Rosling [a Swedish statistician] conducted a poll in which he asked people if the proportion of the world living in extreme poverty had doubled, halved or stayed the same in the past 20 years. Just 5% of people thought it had halved, which was the right answer."

Why does globalization work so well? For the same reason the Soviet Union worked so badly.

Win-win deals expand prosperity. Win-lose deals reduce it. Adam Smith announced the principle of "absolute advantage", referring to trade between nations:

"If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage. The general industry of the country, being always in proportion to the capital which employs it, will not thereby be diminished...but only left to find out the way in which it can be employed with the greatest advantage."

More trade means more transactions, more competition, more choices, more learning, and more specialization. That's how an economy moves ahead.

It's also part of the explanation for why some groups are rich and others are poor. A rich economy is open to trade. A poor economy is closed off – either by physical barriers, culture, or politics. As the trade zone shrinks, so does its wealth.

Generally, the smaller the isolated group, the less it is able to specialize and the less rich it is. We see it up at our ranch in the mountains of Argentina. All the locals know the same things – how to plant corn, how to cure hides, how to protect the sheep from pumas, and how to build a mud roof.

In a rich society, people know different things. One knows how to program a computer. Another knows how to fix the toilet. Still another knows how to bake bread. In the modern economy, the rich guy is rarely a jack-of-all-trades; he's the one who figures out one métier better than others. Then this dispersed, specialized knowledge is brought together through trade and markets.

In 1817, British economist David Ricardo explained the principle of "comparative advantage" further, still addressing the issue of international trade.

He asked us to imagine that England was more efficient at producing cloth and that Portugal was more efficient at producing wine. The Portuguese could spend their time stitching cloth, and the English could try their hand at growing vines. But this is not the most efficient use of resources.

But if each country focuses on producing what it is best at producing, and trading with countries for goods it is good at producing, the world grows richer.

There is no qualitative difference between trade across borders and trade across the street. As long as you are free to trade with whomever you want, on whatever terms you want, you will always try to expand your trading circle to get the best deal you can.

And the win-win trade is not a zero-sum deal. It is a positive-sum deal. Nineteenth-century economist Robert Torrens showed how to compute the gain:

"If I wish to know the extent of the advantage, which arises to England, from her giving France a hundred pounds of broad cloth, in exchange for a hundred pounds of lace, I take the quantity of lace which she has acquired by this transaction, and compare it with the quantity which she might, at the same expense of labour and capital, have acquired by manufacturing it at home.

"The lace that remains, beyond what the labour and capital employed on the cloth, might have fabricated at home, is the amount of the advantage which England derives from the exchange."

A win-lose exchange would have had England getting lace worth less than the broad cloth she had given up. An even exchange would have meant each side got exactly the same value in return for what it had offered. But the win-win transaction goes beyond an even exchange.

France is better at making lace. (She can make more lace of higher quality while using fewer resources.) England is better at making broad cloth. By trading, both come out ahead. Though on the surface, the exchange is registered as "fair" and "even", England ends up with more than she had before. So does France. Win-win makes the world a richer place.

There is, alas, nothing that guarantees eternal progress, prosperity, or civilization. Win-win deals proliferate, and then – here come the parasites!