Financial History Issue 133 (Spring 2020) | Page 14
being a move to more efficient, greener
and environmentally friendly production.
That means that the exact supply chains
may change, but they will almost certainly
involve multiple countries on different
continents.
Part of the need for long supply chains
comes down to specialization, something
that the founder of economics, Adam
Smith, discussed over 200 years ago. He
described the manufacturing process of a
pair of shears, which are needed to clip
a fleece from a sheep, and the specialists
required.
The miner, the builder of the furnace
for smelting the ore, the feller of the
timber, the burner of the charcoal to
be made use of in the smelting-house,
the brick-maker, the brick-layer, the
workmen who attend the furnace,
the mill-wright, the forger, the smith,
must all of them join their different
arts in order to produce them.
Put simply, Smith showed that special-
ization works well in production because
each expert can work more efficiently by
concentrating on a single task.
It was another man who supercharged
specialization and, with it, globalization.
Self-taught 19th-century Scottish econo-
mist David Ricardo discovered a phenom-
enon known as comparative advantage. It
showed that there’s a benefit to trade even
when a specialist can do everything better
than can others.
For example, even if the United States
can manufacture every item better and
cheaper than all other countries, there
is still an advantage for everyone to
trade. He also showed that comparative
advantage would lead to an increase in
total output. That theory supercharged
international trade over the last two
centuries.
We know this by looking at global
exports as a percentage of GDP. Because
all exports must go somewhere, the total
12 FINANCIAL HISTORY | Spring 2020 | www.MoAF.org
of all exports from every country must be
equal to the total volume of imports. In
short, we are safe in looking solely at the
export side of the equation, at least in this
case. Net exports as a percentage of world
GDP grew more than three-fold from 7%
in 1827 to 24% in 2014, or almost a quarter
of world GDP, according to the recent
data. That means trade more than tripled
as a portion of economic output. For ref-
erence, peak trade hit 26% in 2008.
There was one period when trade did
decline for a few decades and that also
coincided with a period of military con-
flict and severe economic downturn in
some leading economics. On the eve of
World War I in 1913, combined global
exports reached the then peak of 14%
of global GDP. Then the world went to
war, an event that would naturally sty-
mie trade. But even after WWI ended,
trade kept declining through the 1920s
and 1930s.
The 1930s, in particular, suffered the