How Free Exchange Allows People to Flourish

Have you ever looked at a satellite map of the Korean peninsula at night? If you haven’t, I would encourage you to stop what you’re doing right now and head over to Google Images. Each time I see this picture, it amazes me. What you’ll see is that South Korea is fully electrified at night. If you Google “nighttime satellite image” then fill in the blank with your favorite major city in the U.S., it looks very much the same as South Korea at night. In North Korea, only the capital city of Pyongyang is lit up at night. Up until 1945, Korea was a unified country, meaning the culture, resources, institutions, and history were largely similar. Yet the 1945 split has resulted in two countries with widely divergent economic outcomes. What’s the difference between the two countries? In short: openness to markets.

If you were to ask the average student in a college economics course to define the term “economics”, she’d probably say it has to do with how we allocate scarce resources among competing ends. Indeed, according to many college economics textbooks, she’d be right. Over the years, economics has become increasingly concerned with this allocation paradigm. Yet if this is all economics is, it seems we might as well leave it to the applied mathematicians.

James Buchanan, who won the Nobel Prize in Economics in 1986, encouraged economists to return to the roots of the discipline, which was focused largely on exchange and the institutions within which exchange takes place. Adam Smith, widely considered to be the father of modern economics, thought that human flourishing was the result of the uniquely human “propensity to truck, barter, and exchange one thing for another.”

Exchange is important because it allows each of us to do what we do best, then trade for the rest. In econ-jargon, this is known as the principle of comparative advantage. North Korea is poor, in part, because they have pursued an aggressive agenda of self-sufficiency for many years. South Korea, in contrast, is fully integrated into world markets. According to the World Trade Organization, the country is the world’s 9th largest importer of goods, and 7th largest exporter of goods. Recognize the names Kia, Hyundai, and Samsung? These are all South Korean companies which are now household names around the world. Exchange allows people from all around the world to be made better off by gaining access to South Korean ingenuity, and South Koreans are made better off by their participation in world markets.

Economists don’t just care about exchange for exchange’s sake. We care about exchange because we think it is one of the most important tools people have for rising from poverty into prosperity. Empirically, countries that have been more open to market activity have seen both faster economic growth and higher levels of growth. Countries that have closed themselves off from the benefits of trade, or have instituted punitive trade barriers, have not enjoyed the same sort of prosperity. If you don’t like the North Korea-South Korea comparison, pick two other countries with greater and lesser proclivities toward trade, and see if the same story plays out. Look at the different economic histories of Chile and Bolivia, for example. Look at Poland and Ukraine. Look at the United Arab Emirates and Saudi Arabia. In each set of countries, the country which has opened itself up to global markets has seen higher living standards as a result.

If all economists cared about was how to allocate scarce resources, our discipline would be really boring. Maybe not to economists, but certainly to the general public. Even the father of our discipline didn’t think this was the key insight economics had to offer. Though we usually hear his magnum opus referred to simply as The Wealth of Nations, the full title is actually An Inquiry into the Nature and Causes of the Wealth of Nations. Many economists are acutely concerned with trying to figure out what makes some places rich and other places poor – which varies not only from nation to nation, but also within nations. Openness to markets, and the sophisticated coordination global markets provide, is a key part of the puzzle.