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Political Borders are Economically Irrelevant

Steve Davies has an absolutely first-rate essay on trade over at AIER. Here’s a slice, but please be sure to read the whole thing. In fact, read it twice. Thoroughly.

Economically, countries are just aggregations of individuals who live under a common legal and political order. (Politically, of course, Portugal and England are meaningful entities; that, however, is another story that also needs unpacking.)

Borders Do Not Matter

What follows from this is that in terms of the nature of the exchange and the specialization that results, there is absolutely no difference between trade across a geopolitical border and trade within such a border. If someone in Chicago consumes a steak from a steer raised in Texas, he is trading with a person or persons in Texas; if he consumes an Argentine steak, he is trading with a person or persons on the Argentinean Pampas. The nature of the exchange and consumption is the same in both cases; economically, they are identical. The difference between them is political and reflects the fact that political power has placed barriers to some kinds of trade and not others.

This perspective also means that trade and the principle of comparative advantage are fundamental aspects of social cooperation. It is trade for mutual benefit, and the specialization according to comparative advantage that follows, that connects individuals and households into a larger, complex society, with huge benefits for all.

The most striking conclusion we can derive, however, is this: outside our theoretical world of self-sufficient individuals or households, there is always free trade to some degree.  That is to say, there is always some part of the planet’s surface within which the people living there engage in free trade with each other, following the benefits from identifying comparative advantage.