image missingTrue Value Metrics (TVM)
Meaningful Metrics for a Smart Society
image missing Navigation ... HOME
Date: 2021-01-15 Page is: DBtxt003.php L070-TR-TRADE
Trade is Essential to Maximising ValueAdd

Markets have facilitated trade and exchange for thousands of years. The economic theory about trade is quite clear that free trade delivers benefit or value add. Global empires have become prosperous because of their opportunities to trade and obtain 'comparative advantage'.

In the last few years since 1980 the world's ability to trade with China enabled enormous value add that has enabled the modernization and development of China while making it possible for companies (mainly) in Europe and North America to prosper and the historically high inflation rates of the 1970s to be reduced.

But the markets of the 21st century are enabled not by the simple perceptions of the human mind and the concept of 'rational man' as in classical economics, but by automated systems that use complex algoriths to determine what it is best to buy.

This information may be very valuable and highly desirable for the party with the knowledge, but it is thr antithesis of the 'efficient market' of classical economics because the goal is to have an information advantage rather than information equality.

The industrial revolution changed everything. Clearly improvements in engineering and technology made all sorts of new inventions possible and there was a massive improvement in productivity. However, wothout trade and markets increased production would have had no incremental utility.

Wth markets and trade, it became possible for a surplus of production in one place to move (flow) to another place. This movement would automatically happen when it was in the interest of the parties to the trade to conduct the transaction. Conversely, trade would stop as soon as there was no added value in making the transaction.
In the early 1970s I had a senior management role in an American company where I was both the CFO and VP manufacturing for our factory in Georgia. The factory produced air-break switches for the electric utility industry and operated a foundry which required about 50,000 pounds of bronze every week. At that time there was very high cost push inflation courtesy of the OPEC oil shock. President Nixon was doing everything he could to get this inflation under control with Government price controls. After several fialed attempts, a very strong price control law was passed in Washington and Nixon announced that he had now got prices under control ... specifically claiming that the price of bronze for my foundry would be 35 cents/lb rather and 50 cents/lb. Within 24 hours, I learned that our long time suplier would not be delivering bronze to our foundry because they were out-of-stock ... sorry about that, even though we had a very strong supply contract with our supplier! It turned out they had chosen to sell into Europe where the prices were not subject to US Governmental control. In turn, I could not source the bronze in the USA, but I could buy my requirement (needed within 3 days) in Europe ... at the world price ... but then had to fly the material to the USA so it would not disrupt our production flow a few days later. So while the Government was talking about getting the price down from 50 cents/lb to 35 cents/lb I ended up paying around $1.50 a pound to keep my production up and running. Markets work ... and attempts to make them change their behavior do not.

The idea that free trade always delivers economic benefit should not be controversial. It is almost universally accepted by academic economists. The questions that arise in the real world is the manner in which this benefit is distributed around all the actors in the trade.
So free trade with China in the period from 1980 to the present time has been very beneficial to the economy of the world. Clearly China has had a number of major benefits from the trade between the rich countries of the Western world and itself and there have also been substantial benefits in Europe and North America. Over a period os around 4 decades, this trade has grown and grown, as one would expect when there are substantial benefits arising from the trade. For corporate business in Europe and North America, this trade opened up important profit opportunities ...and for the economies as a whole, the cost push inflation of pre-China trade ended as this China trade became substantial. Customers were able to buy low price goods and the sellers through the supply chain were all able to profit as well. The one big problem has been that the factories that had to go out of business and the workers that lost their jobs were huge losers ... and especially in the USA, rather little has been done to provide anything to mitigate this aspect of the situation.
Countries in Europe experienced much the same economic behavior as the United States. The big difference between the USA and Europe is that the countries in Europe have a far more effective social safety net than there is in the United States.

This graphic blogged by Leah Busque ... Engineer -> entrepreneur -> early-stage investor, Boston native -> SF transplant. Founder, TaskRabbit. GP FUEL Capital. Mother of two ๐Ÿ‘ฉโ€๐Ÿ‘งโ€๐Ÿ‘ฆ ...

It depicts the great complexity of a modern market

What this market is not simply 'the invisible hand' of classical economics, but a carefully crafted system that is driven by algorithms to achieve a particular objective that may or may not be beneficial to society at large but is aimed at delivering maximum benefit to the organizing party.

This may be awful .. or it may be good. It depends on the design of the algorithm ... and understanding this reality and enabling accountability is essential to a sustainable better world.
'' Open external link

SITE COUNT Amazing and shiny stats
Copyright ยฉ 2005-2020 Peter Burgess. All rights reserved.