Creating Stability with Trade

My post yesterday on drought in New England and its effect on food supply leads me to another point I wish to make, namely that trade creates stability and resource security, something that is contrary to popular opinion.

As one commentor at Cafe Hayek said:

Redundancy and efficiency are generally opposites and one of the reasons trade is beneficial is that trade promotes efficiency at the expense of redundancy. Redundancy is a method of achieving resilience. Reducing redundancy increase fragility. Is the fragility from international free trade worth the little bit of extra efficiency? How much extra efficiency is there or would there be if trade restrictions were further reduced?

His comment, while a common perception, gets the matter exactly backward.  An economy that is entirely self-reliant is extremely fragile. Famines, plagues, natural disasters, war all weigh heavily on the entirely self-reliant economy. Trade reduces that fragility by increasing supply and increasing options. If the price for apples were to suddenly increase because of a drought, the self-reliant economy would be faced with a problem. However, the interconnected economy could either import apples from elsewhere or turn to substitutes.  In short, the dichotomy he discusses is false. It’s not an efficiency at the expense of fragility trade-off. It’s an efficiency and lack of fragility gain.

The discussion of the drought in New England yesterday is a perfect example of this. If New England had no trade, there wouldn’t be resiliency and redundancy in its economy.  There’d be fragility.  Their crops are threatened and, with no where else to turn, they could be facing high prices or even malnutrition (if it persisted long enough).  Fortunately, New England does have free trade within the US and relatively free trade with many nations, and thus has many options to choose from.  The biggest issue from this drought is burnt lawns for many New Englanders.  The New England economy is made stronger and more resilient with trade, not more fragile.

One thought on “Creating Stability with Trade

  1. Jon

    Thanks to the pointer to the great discussion at the Cafe. I’m not sure how I missed it previously.

    Mr Wallach, in his lament about “Too Much Free Trade” (LOL), fails completely to recognize or understand the role of emergent order in human society, and the truism that more choice is always better than less choice.

    I believe his confusion begins with this misconception hidden in the bowels of his “Letter to Don”:

    More generally, the economists show (under certain assumptions) that a free market economy will provide the producers of various commodities with an equilibrium that will somehow optimize their well-being.

    A free market will optimize the well being of *consumers*, not producers.

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