On The Importance of Trade and New Economic Growth

We’re sorry we’ve been tardy on posting another installment of the Daily Reckoning Video Series — but we think this latest addition will make up for it. In this exclusive video, Alex Tabarrok, Professor of Economics at George Mason University and research director for the Independent Institute, talks about how the story of economic growth is rapidly changing. For the first time ever, he asserts, the global economy is firing on all four cylinders – and this opens the door for new ideas, innovations and discoveries.

I’m Alex Tabarrok.  I’m a professor of economics at George Mason University, and Director of Research for The Independent Institute.

I’m the editor of a book called, Entrepreneurial Economics: Bright Ideas from the Dismal Science.  It’s a bunch of clever ideas for using incentives, for using economics to improve the world, to reduce the shortage of human organs, to improve the patent system, to do a whole variety of clever improvements.

The story of economic growth has changed.  But when you say innovation, you also mean change, and that has two sides.  Sometimes people are afraid of the change.

So during the Great Depression, in that crisis, there was definitely world retrenchment in trade.  We had those things like the Smoot Holly Tariff, and trade just declined all over the world.  Fortunately, in this last recession, we have not seen that to anywhere near the same extent.  So that is an optimistic point.  That is a good point.  That is something that we have done right.  We have not seen a lot of trade wars.

It’s something we need to be concerned about because, yes, any time other people start to get rich, people begin to wonder about their own position in the world.  They begin to fear.  But so far, I think we’ve been – I think we have learned actually some lessons from the past, and we have not cut down on trade as much as we have done in the past.

Trade is absolutely critical.  Think about it this way.  The reason trade is important is because it makes markets much larger, and that increases the incentive to do research and development.  So I like to say, you know, if China and India were as rich as the United States is today, then the market for cancer drugs would be five or six times larger than it is now, and that means five or six times the purchasing power, the incentive to do research and develop new drugs.

So part of what we have to understand is that when other countries get rich, that is a benefit to us.  That is not a cost.  When other countries get rich, they start to contribute to the incentive to do research and development – to research and develop new drugs, new computers, new software, all kind of ideas.  And this makes us rich as well.

Think about the world economy as a massive parallel computer.  Well, for most of the last century, most of those processes were offline.  We had more than a billion people in China and India not contributing.  A processor being offline.  Today those processes are coming back online and are finally contributing to the world economy.

Well, I’m really very optimistic about the future.  And, really, for the very first time, in at least a 1000 years, the world economy is really operating almost on all four cylinders.  Think about it this way.  For well over a 100 years, most of the world economy has been driven by the United States, Britain, Japan, a few other countries.  Today, we have China and India coming online.

So what I mean by this is that we have billions of people in these countries who have been cut off from the world economy, whether through communism or whether through abject poverty, they have basically been, simply, producing enough agriculture to feed themselves, sometimes not even that, and that’s it.  They haven’t been part of the world economy.

Today that’s changing.  Today, for the first time, we have billions of people in China and India who are beginning to contribute ideas, innovations, new discoveries, who are beginning to contribute to the world economy.