Boudreaux on globalisation

Donald J. Boudreaux has a short essay up at the Fraser Institute on Globalisation. He opens by saying,

Globalization is the spread of human cooperation across the globe. If not hindered by government restraints, this cooperation spreads naturally and without much attention to political boundaries. Geographic and cultural differences, along with differences in currencies and other social institutions, sometimes slow the spread of cross-border economic cooperation. But the single largest obstacle to the spread of human cooperation across political borders is politics—in particular, the difficult-to-resist pressure on each government to protect local producers from the competition of external producers.

The advantages of buying global are many,

Suppose, for example, that shirts can be made in one of two ways. The first is by hand. It costs a shirt maker using this method—regardless of how many shirts he produces—$250 to produce each shirt. Working full-time producing shirts by hand, the shirt-maker can produce 10 shirts each month. The second way to produce shirts is in a highly mechanized factory. If the factory runs at a peak capacity of a million shirts monthly, each shirt costs $5 to make. But because building and equipping the factory requires a huge initial investment, operating the factory at less-than-full capacity causes the cost of each shirt to rise. The reason for this increase is that producing fewer shirts denies the shirt-maker the opportunity to spread the investment cost over maximum output. The smaller the factory’s output, the higher the cost of each shirt.

Which method of production would a shirt-maker use? The answer depends on the size of his market. If a shirt-maker expected to serve a market of millions of people, he would use the factory method. But if he expected to serve a market of only a few dozen potential customers, he would produce shirts by hand. If each shirt-maker had access only to small markets, the price of shirts would be higher than it would if shirt-makers had access to larger markets.

So, if you want expensive shirts, or most other things, buy local. This example outline one important justification for free trade: by expanding markets beyond political boundaries, firms can take better advantage of economies of scale which results in consumers to enjoying lower prices.

But wait! There's more,

Another advantage of specialization is that it allows consumers to enjoy the fruits of resources and talents located far away. Canadians can enjoy pineapple grown in Hawaii while Hawaiians can enjoy maple syrup produced in Canada; the French enjoy financial expertise concentrated in the City of London while Londoners enjoy wines from Burgundy and Bordeaux. Although other factors are always in play, a region’s geographical characteristics—for example, its weather, topology, and mineral deposits—and the special talents of its work force determine which goods and services can be produced in that region at the lowest cost—or, as economists say, “at a comparative advantage.” The freer the trade, the more likely it is that regions will specialize in producing the goods and services they can produce most efficiently, and then import those things that are produced most efficiently elsewhere.

Free trade gives consumers the opportunity to buy goods and services from the best producers in the world. If shirts could be best produced domestically, then free trade would help to keep those producers profitably in business. Alternatively, if shirts could be best produced abroad, domestic consumers would only have ready access to those shirts through trade. Thus, free trade would encourage inefficient domestic shirt makers to use their talents for the maximum benefit of consumers by switching out of shirt-making and into other productive activities. By directing resources around the world into those tasks that each resource does best, free trade arranges the world’s resources so that they produce the greatest possible output while giving consumers maximum access to this output.

Another point to keep in mind is that free, globalised markets reduce the number of workers required to produce most types of output and thus make possible the production of goods and services that would otherwise be too costly to produce. Large globalised markets help to raise living standards by freeing workers to seek higher value jobs and by making labour-saving products and services more affordable.