On Markets and Trade

It helps to start tonight’s article with some basics of markets and trade. Back in the olden days, when one farmer had some seeds but needed a cow, and another farmer had a cow but needed some seeds, the two farmers swapped. This was trade and it was beneficial to both farmers.

However, maybe one of our farmers doesn’t need seed, but instead needs wheat. In that case, the farmer with the cow can trade with the farmer with the seed, who in turn can trade that seed for wheat. Again, everyone benefits from mutually beneficial trade, everyone is a winner.

But it’s hard to scale when you have to offer one product for another. What we really need is something that all parties accept as a medium of exchange. What we need is money. Instead of bartering over the trade of a cow, seed, and wheat, each seller and buyer accepts money. Money has been around for a while; in fact, the first coins are estimated to have been used around 1,000 BC. 

The idyllic image we’ve conjured up here is of sellers and buyers trading goods and using money as a medium of exchange. These mechanisms determine the supply and demand for goods and prices. 

What we have is a market. 

One market can subsume another market. In our idyllic setting, suppose there’s a surplus of wheat, but in the next valley, just down the road, there’s a deficit of wheat. Our intrepid, entrepreneurial farmer should take the short journey and sell their wheat in the next valley, almost certainly at a higher price. There’ll be slightly higher costs to get the wheat to the next valley, but even so, our farmer has a higher profit. Each valley is a market. And together the two valleys are a market for wheat.

This beautiful market scene is recognisable the world over. In any city in the world, you’ll have a market square and market sellers buying and selling livestock, clothes, food and everything in between. It could be the Medina markets of Tunis, the flea markets of Riga, the electronics retailers of Akhihabara or Wall Street in New York City, it could be anywhere and yet it’s everywhere.

Whilst the market square still exists, the proportion of trade that exists through traditional market squares is minuscule. Modern online markets such as eBay, Alibaba and Amazon now dominate retail. We have the majestically enormous supermarkets and hypermarkets, like Tesco, Carrefour and Walmart. Then, there are markets where price fluctuations are the source of immense interest and speculation, such as the stock and commodities markets. There are intermediary markets, such as wholesalers, who buy from manufacturers in bulk and sell to retailers. Then there’s the banking market.

In our idyllic setting above, we assumed that every player had the money they needed. But that’s not always the case. Retail banks exist to match those who have money (depositors) with those who don’t. They match the supply of money with the demand for money. Banks serve a tremendously important role in our economy in more ways than one. 

Markets exist, and people and businesses benefit from mutually beneficial trade. We recognise that the intersection of supply and demand determines the price level. But here’s the strange thing - this simple, factual understanding of the mechanics of a market and how markets and trade benefit us is forgotten when we move out of the market square onto the international scene.

We wrongly view global markets and international trade differently from local trade. We bizarrely insist on putting in place trade barriers and additional taxes. We incorrectly think that trade somehow becomes zero sum. We irrationally see selling our produce to someone within our country as different from selling the same produce to someone outside our country. It’s stupid.

This aversion to global trade didn’t exist at the turn of the 1900s. Instead, highly protectionist policies of the 1920s during the Great Depression were implemented as countries wanted to boost domestic spending and felt preventing imports would help economic recovery.

This was particularly the case for the European powers at the time - Germany, Spain, France and the UK. This continued through the 1920s, 30s and, of course, the 40s, when usual market economics gave way to total war economies. 

The trend of economic protectionism went hand in hand with other policies: in the 19th century, passports were not required to travel around much of Europe. But in the 1920s, stricter border requirements came into force, again limiting global trade. 

After World War Two, global integration increased, and in 1947, the General Agreement on Tariffs and Trade was signed. This agreement was designed to increase global trade and reduce trade friction internationally. In 1995, the World Trade Organization superseded it. 

During the second half of the 20th century, global trade increased dramatically, bringing with it a dramatic increase in living standards, bringing millions out of poverty, increasing wealth, and bringing about substantial progress. 

But this only happened because we globalised our markets, we opened up to more buyers and to more sellers. We’d do well to remember that.