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Beauty of Global Trade

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9/14/2011 9:39:22 PM
Posted: 5 years ago
Here's an excerpt from one of my favorite economists, Milton Friedman demonstrating the beauty of global trade and free markets. It's a long read but it's a very interesting one and my favorite speech on capitalism and free trade.

"We need an understanding of the real nature of freedom. Economic and political, and the interrelationship between the two. We need really to have a greater understanding of the kind of system, the kind of principles that have enabled us to get this great achievement of the past 200 years. We need to understand how it is, that a free market, works, to enable millions of people to co-operate peacefully together.

I know no better way to bring this out than by a very simple example. This is the only prop I have. As you can see it's a plain yellow pencil. It's a funny thing, there's nobody in the world who knows how to make a pencil. Now that seems like a silly thing to say. This is just the most obvious thing; it's only a piece of wood with something black in the middle and a little red tip at the end. What do you mean nobody knows how to make a pencil? Well suppose you were to start to set out to make a pencil. First of all you have to get some wood. Where do you get some wood donate you? You have to go to the Pacific Northwest probably and cut down some trees. How do you cut down some trees? You have to have some saws to cut it with. Where do you get the saws? You have to have some steel. Where do you get the steel? You have to have a steel mill. In order to have a steel mill you have to get the iron ore. You can add all the rest. So in order to know how to make a pencil, you would have to know everything there is to know about how to start from iron ore and coal and get iron and convert it into saws and cut down some trees. But that's only the beginning. This black stuff in the middle that we call lead isn't lead, its graphite. I'm told it comes from some mines in South America. So in order to get that black stuff in between, you would have to take a trip down to South America and know all about how to extract graphite from the mines in South America. Now this little red tip at the top, that's rubber. Where does it come from? Well a major source of natural rubber is Malaya. That's quite another distance. And I don't know how many of you know that the rubber tree was not native to Malaysia. It was originally imported into Malaysia by private enterprises trying to make some money, and they transplanted it from somewhere in South America, I think it was Brazil but I don't guarantee that, and they brought it over into Malaysia and established the plantations there and got this rubber. So somehow or another in order to make the pencil, you'd have to know about the rubber. Now there's a little brass tip around here and I've run out of my own technological knowledge I don't have the slightest idea where that comes from. Nobody knows how to make a pencil, but the miracle of this pencil isn't that nobody knows how to make it; the miracle of the pencil is how did it get made?

Who told that fella over in Malaya to tap his tree and send a little bit of rubber over here to put at the end of this pencil so I can have a pencil in my hand? What's happened, what is it, that has enabled this little elementary transaction to take place. What happened when I go down to the store and put down my money and get a few pencils? I am trading with thousands of people all over the world, people in Washington State who are cutting down trees, people in South America, people over in Malaya. I'm making a deal with them. Now how is that brought about? Is there some commissar sitting in some central office who is sending out orders to these people in Malaya, to these people in South America, to the people in Washington? How is it that they are lead to co-operate with one another?

That's the miracle of the price system. Because note, these thousands of people who have been lead to engage in this simple transaction with me, not one of them has been forced to do it, nobody has had a gun to his head. They've all done it why? Because each one of them thinks he's better off in this transaction. And somehow I've done it because I think I'm better off. Everybody has benefited, there has been no central direction, these people who have co-operated with one another, don't speak the same language, they're people of are all of different religions, they may hate one another in every respect, but this hasn't prevented them somehow or other from being lead to co-operate together. It hasn't prevented some kind of a wonderful machinery from bringing together these various components all together into this little pencil. What is that machinery, what is it that has induced people to do this. How has it been brought about? That machinery is the price system. That machinery is what the story is all about. That machinery is what enabled the United States to develop as it did. Because it's this price system which as the great virtue that it doesn't require any central direction, it doesn't require any commissar, it doesn't require people to be able talk the same language, it doesn't require people to be of the same religion. In fact the beauty of the price system is that when you buy this pencil you have no idea the religion of the people whose work went into it. When you buy your daily bread, you don't know whether the wheat was grown by a black man or a white man, by a china man or an Indian or anybody else. And as a result the price system enables you to have co-operation among millions of people peacefully. Co-operating on one little phase of their life while each one goes about their own business in respect of everything else. It works so well, it works so efficiently, that ordinarily we're not aware of it. It's like your car; it never occurs to you what a complicated business it is until 3 o' clock in the morning on a dark road it stops functioning, and then suddenly you realize it's a complicated mechanism. It's the same way with the price system. So long as it is working, so long as it's operating, so long as it's bringing people together, it doesn't even occur to you that it's a complicated mechanism.

How is that it achieves this bringing of people together. Fundamentally at bottom, the essential idea of the price mechanism is that both parties to a transaction can benefit, provided it is voluntary, and not coerced. There's this a terrible tendency, and most economic fallacies derive from that tendency, to think of everything as what the game theorists have come to call it as "zero sum gain";, to think that there's a fixed pie, and if I get more you must get less. If somebody was able to make a fortune for himself, he must have done it by grinding under his heel, the poor people, because the pie is fixed and he takes a bigger part.

The great insight behind the free market, the great insight of Adam Smith's great book, "The Wealth of Nations", was that it is not a zero sum game. That it is possible for both people to afford a transaction to benefit. And that this insight can be used to organize people's activities over a very wide area. It's very easy to see that principle operating if you think of two people under any circumstances making a voluntary deal, I'll trade my penknife for your roller-skate. Clearly, that isn't a deal unless both people are better off. It's much harder to see how that same principle is involved in the far flung transactions that went into making this pencil. And yet the same principles are there. The price system operates in this way, because it doesn't require orders, it operates in this because it can transmit information in a very efficient way without any person having to send an order. That is why the operation of the free market is so essential not only, to promote productive efficiency, but even more, to foster harmony and peace, among the peoples of the world."
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9/15/2011 10:32:47 AM
Posted: 5 years ago
At 9/14/2011 9:39:22 PM, darkkermit wrote:
The price system operates in this way, because it doesn't require orders, it operates in this because it can transmit information in a very efficient way without any person having to send an order. That is why the operation of the free market is so essential not only, to promote productive efficiency, but even more, to foster harmony and peace, among the p

It's all well and good.

But this price system is the main reason why in the third world, where the resources mainly are, and where advancement has not yet taken place, get all these dictatorships and authoritarian rules.

The people who need these resources have the money and it benefits them to give this money to a less number of people.

Imagine that no one trades with any country that does not take it's people's opinions into account. Do you think that oppression will take place there?
You will say that I don't really know you
And it will be true.