Trade as a Technology

A while back, I threatened to put together an introduction to economics that runs counter to the “seeing like a state” tradition in textbooks that Paul Samuelson started. I call this “teaching emergent economics,” and as my thoughts develop I will post them in this category. Here are thoughts on trade as a technology.

1. David Friedman in his textbook, The Economics of Everyday Life, pointed out that we can grow automobiles in Iowa by growing grain, putting it on ships to Japan, and having the ships come back with automobiles.

2. In theory, we do not need to produce anything in order to have an interesting economy. Suppose that several of us receive regular endowments of different goods. Trading among ourselves can produce gains.

3. In an actual economy, we engage in production. However, we engage in production primarily for exchange. Centuries ago, a farmer produced for subsistence. But in the past two hundred years, in advanced countries farmers have produced for exchange.

4. In fact, production for exchange is so important that GDP only measures production for exchange. It counts goods and services that trade at market prices, not the value of home cooking.

5. The fixed-proportions concept of production is very misleading. It is particularly misleading as a way of describing an entire economy. When people think in terms of fixed proportions of resources needed to produce goods, they imagine running out of resources. Instead, as some resources become scarce and their prices rise, substitution emerges. People make different consumption choices. Producers come up with different recipes for producing goods and services.

6. Even without fixed proportions, a production function can be a misleading concept. If you have two economies with identical production capabilities, one economy can be much better off than the other. If the first economy takes optimal advantage of trading opportunities and the second economy does not, then the first economy will be better off. It will appear that the first country has greater “total factor productivity,” although its advantage has nothing to do with production per se.

7. If an entrepreneur invents a new product or a new production process, that necessarily creates a new trading opportunity. If an entrepreneur invents a new trading opportunity (think of eBay), that is equivalent to inventing a new production process.

8. Thus, we can think of entrepreneurs in terms of how they affect trading opportunities. They alter trading patterns in response to price changes that in turn signal surpluses and scarcities. And they test new trading opportunities, sometimes in the form of new products or production processes.

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7 Responses to Trade as a Technology

  1. roystgnr says:

    Are there any good attempts to estimate something-like-GDP which includes self-produced goods rather than merely traded goods? I wonder how much less impressive GDP-PPP-per-capita comparisons would be, both between countries and between time periods, after correcting for the fact that the poorer side of the comparison is almost invariably having its production relatively undercounted via the omission of a greater fraction of untraded work.

    • Andrew' says:

      I will often point out how the US has greater gdp per capita than country x in some debate about how we should do something like them.. But I also realize your question. But one thing I also think is our higher gdp means we are churning through patterns at a higher turnover. Hopefully we keep the good ones and toss the rest.

  2. roystgnr says:

    GDP growth numbers during periods of increasing trade should be subject to the same problem, right? When Mom starts going to work and paying a day care or a nanny to take care of the kids, the actual increase in utility produced is less than “Mom’s salary minus childcare expenses”, but the measured increase in GDP is “Mom’s salary plus childcare expenses”.

  3. David R. Henderson says:

    Beautifully done, Arnold.

  4. Slocum says:

    Very nice. I’m reminded of Matt Ridley’s discussion of growth & trade in ‘The Rational Optimist':

  5. Andrew' says:

    4. Well, heart bypasses boost gdp.

  6. Bryan Willman says:

    Some time ago I came to think of language as the greatest of human technologies, because it is the instrument of information dispersion.
    I think trade is second. Note that trade also disperses lots of information.

    Note that in the “GDP doesn’t really measure well being” there’s another problem, the size of which I don’t know. Which is that in the ages of books, libraries, wide publication, the web, and now web video, there’s a lot of information distribution that shows as very small on GDP (very low dollars to the creator, very low dollars paid by advertizers) but which has potentially a quite high well being value.

    As in, you watch some video, and it shows you how to safely fix something in your circuit breaker box. Which lets you get it fixed and back to life on Sunday. Safely. This will show as *less* GDP because you don’t have to pay the electrician to come do this. But the net wealth adjusted for time, risk, hassle, etc is clearly UP not down.

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