Wednesday, August 30, 2006

Free trade raises the standard of living

Free trade is a general concept where people are free to perform voluntary exchanges, transactions and decisions. Nothing more or nothing less. It intuitively sounds like a healthy idea, like a great way for people to pursue happiness and what they value.

No doubt that some people make mistakes. Some people make bad decisions. Some people take actions and make decisions that have a negative impact on their health, or happiness, or opportunities. No system of government can ever change that. Individual decision making, on a large scale, is what forms an economy.

Millions of people make billions of decisions a day. Some are simple but some are complex.

People deciding where to eat, whether to walk or drive, where to work, how to unwind and what to do with their leisure time, whether to study, read a book or watch a movie, whether to turn on the heating, how much exercise they do, whether to smoke or drink alcohol, whether to pay for education or child care. These are all decisions.

And who is best equipped to make the informed decision - the state or the individual ?

Could the state decide for each individual ? Certainly not. Everyone is different, has different needs and valuations, goals and desires, resources, time and priorities.

Some people make bad decisions, like smoking excessively. It's pretty clear that it harms your health. Millions of people are deciding not to smoke based on the adverse consequences. But why tax cigarettes so heavily ? Is it the role of the state to discourage harmful behaviour ? Doesn't a person have a right to do what they want with their body ? Don't 2 parties, (tobacco companies + a smoker) have the right to exchange money for goods without government intervening and imposing a hefty tax on the goods ? Doesn't an automobile owner have the right to purchase 50 litres of petrol from a station without paying 40-50% tax on top of that ?

The core idea is: So long as 2 willing parties are voluntarily engaging in a transaction, what business is it of anybody else ?

All of a sudden, the tax has distorted behaviour and decision making. Cigarette smokers now try to purchase goods from overseas or via duty free to avoid the oppressive taxes. Domestic tobacco companies have to fire workers and scale back production if their sales are harmed. Local stores sell less of the item and their profits are harmed. As for smokers themselves, on top of the adverse health consequences, they are hurt financially.

The bottom line is: Imposing a new set of consequences on an action/decision will then change the decision making patterns of people.

Ok, so whats the problem then with free trade, it certainly has merits. Why doesn't it naturally appeal to all thinkers ? Easy answer - it would mean drastic change from the status quo.

All economies trust the state to efficiently allocate resources to health, education and roads. Most also have the state managing and regulating the media, the arts, sports, cultural events, technology, roads, transport, tobacco, alcohol, drugs, medication.

How can one monolithic body (a government) allocate resources as effectively as the millions of individual agents who go about their lives making billions of informed decisions as to whats best for them ?

There is a line of thinking that says "We should expect people in a rich/lucky country to be able to have their needs met". Today in 20o6, these thinkers suggest those needs include drinking water, housing, clothing, basic medicine, education, roads, sanitation, food and drink. The argument is that the state should guarantee these "needs" to all people. The concern is that without this guarantee, without state provision, some people would not have their needs met. The implication is that it has to be done through some pretty heavy taxation.

Where was this line of thinking 20 years ago ? 50 years ago ? 600 years ago ? Wouldn't you sound foolish advocating free health care for all citizens even 100 years ago in England ? The only kind of health care that 19th century England might provide is a few potions or ointments, and to saw off broken limbs. What about education ? Perhaps only 10% of the population could read or write. How could you suggest a 19th century society should give everyone a good education (by today's standards) ?

Before the industrial revolution, only a king or emperor would have all these things. And yet still not as good as the average working person has them today.

Why is that ? Why can we now think in terms of "needs" that would have been luxurious extravagances in the past ? Why perhaps, would our standards of living in another 100 years time be so much better, that there will be a new range of "needs" that today are considered extravagant luxuries ?

It is because our economies have developed enormously. We have built up masses of wealth, of savings, of innovations. Opportunities abound, more than ever. Anyone willing to work can earn enough to pay for shelter, health, sanitation, books, heating, water, electricity, televisions, radios, toasters, ovens, microwaves, clothing and footwear. And on top of that, they only have to work 8 hours a day, and the rest is leisure. And then on top of that, weekends are free !

Talk about productivity! Human societies have learnt to allocate resources where most valued. Farmers no longer use the ox and back breaking labour, but instead, the tractor. 500 farmers with modern technology, can harvest what 50,000 farmers used to harvest. Previously, a housewife might have spent the best part of their life performing back-breaking labour for 16 hours a day. Now, for the cost of several thousand dollars (which can be earnt in the space of months), appliances can be bought which can avoid the lifetime of hardship. A washing machine, dishwasher, oven, heater, kettle and toaster and microwave - these save hours of labour each day. People no longer need to chop firewood, heat a pot over a fireplace, just to make coffee or tea.

You would have had to work 30 hours in a day only 50 years ago to earn these things. Yet there were no governments telling people "a standard working day cannot be more than 8 hours labour". 95% of people had to struggle to save and get by, to chop firewood, to buy meat and vegetables, just to meet their "needs". Yet they were still better off than our cavemen ancestors.

The reason we individuals perceive that an entire society "can guarantee/expect a range of needs to be met" is because we are surrounded by an abundance of wealth. By building wealth, as our parents and ancestors did, we have more opportunities today than they could have imagined. We can exchange our labour in so many different tasks, we can utilise our time in so many different ways, we can so easily afford needs, comforts, luxuries, leisure, transport, travel and entertainment.

So how do you build wealth ? Well our society would be 50% - 60% wealthier if government stayed out of our private lives, and kept to its key roles of police, law and order. Once government stops intruding into commerce, people are free to allocate resources, time and labour, money and savings into activities that will benefit them the most.

Now if so many people value health and education, imagine how many new innovations and breakthroughs would occur if government stopped confiscating tax, regulating and funding it. Well the point is that you couldn't imagine, that the whole point of free markets. 100 years ago, people could never have imagined what we have available. But once Western society put in place the key ingredients to building wealth - property rights and freedom - humans have improved their circumstances incredibly, and now the spread of prosperity extends to historically poor countries through trade and interaction.

In a free and open market, hundreds of enterprising individuals would compete to provide people with what they value, and people would have more savings to direct to these things that they value. These indicators are the key to wealth. Prices are signals. They signal very important information between all the agents in an economy. Between businesses and consumers. Let them allocate their resources to build a better future.