How Self-Interest Drives Global Prosperity

With this quote, Schwab captures the modern, well-intentioned zeitgeist. Who wants his neighbors to be “left behind“? The desire to help the less fortunate is deeply ingrained in our culture, and that’s admirable. Unfortunately, this admirable impulse can lead to tyrannical ideas such as “stakeholder capitalism,” which, according to Schwab’s World Economic Forum, is “a form of capitalism in which companies seek long-term value creation by taking into account the needs of all their stakeholders, and society at large.”

While this definition sounds lovely, who is to define “the needs of all their stakeholders, and society at large?” As if meeting the demands of customers isn’t complex enough, now everyone engaging in a trade must consider the well-being of every living being on the planet? Each farmer at the weekly market, each local merchant, each small business owner needs to consider what would benefit people on the other side of the world?

Team Davos doesn’t support free trade due to their self-professed global compassion. On the other side of the coin, Team “America First” doesn’t support free trade because they’ve become convinced that protectionism is the way to bring back jobs and restore American industry to its former preeminence.

“America is being ripped off,” President Trump intones, and Republicans, though their party platform speaks of “championing free-market principles,” follow his lead. You get a tariff, you get a tariff, everyone gets a tariff!

Free trade is the grand choreography of cooperation, transcending borders and languages. The shared logic of voluntary exchange stitches humanity together. The quote “When goods don’t cross borders, soldiers will,” attributed to Frédéric Bastiat, captures that logic. Most people, motivated by their self-interest, understand that they don’t profit from stealing from each other and assaulting their neighbors, but from the voluntary exchange of goods and services.

A simple, voluntary exchange of goods and services across individuals, businesses, and even countries—that’s free trade. No one forces anyone. No one imposes his will. Each side agrees to the trade because they believe they’ll be better off. No one who engages in a transaction needs to take “into account the needs of all their stakeholders, and society at large” to benefit himself and, in turn, “society as a whole.”

The simple act of two people coming together and exchanging goods voluntarily “increases the total welfare of society,” as modern economists like to say. The calculation for this is easy: Both participants are parts of society. After the exchange, both are better off, and no one is worse off. Hence, society is a little bit better off.

Of course, the whole equation changes when force, such as a given regulation, is involved. This phenomenon of uninvolved, uninvited third parties imposing their ideas of “fair trade,” forcing their will on others, is exactly what Mr. Schwab advocates.

The Romans, the Spanish, the Ottomans—all were convinced that wealth is a zero-sum game. You can only advance by conquering new lands and extracting its resources. Mercantilism, popular from the sixteenth through the nineteenth century and a major force driving the colonization of Africa and South America, taught that a country’s wealth is determined by the resources it can extract—a recipe for conflict, destruction, and perpetual wars.

Adam Smith’s The Wealth of Nations, which argued against protectionism and introduced the idea of the invisible hand guiding self-interested humans to create wealth for others, was critical in laying the groundwork for modern free trade. Such teachings slowly replaced mercantilism. At the same time, the Industrial Revolution led to reduced transportation costs.

Businesses, now able to serve a larger population, wanted to expand their consumer bases. They weren’t motivated by charity, by what’s best for “society at large.” A businessman’s primary ambition was the prospect of increasing his revenue. Ultimately, this led to global cooperation, interconnected markets, and the founding of organizations to ensure the permanence of free trade. Today, we profit immensely from the global exchange of goods, but at the same time, the advantages of free trade need to be rediscovered.

Free trade includes the freedom to choose according to one’s own moral judgments. You don’t like that a certain item has been shipped around the globe three times before it arrives in your supermarket? Don’t buy it! Your local small business owner, just as much as any global manufacturer, will only produce what their customers demand. You deem a product’s manufacturing process to be so unethical that it shouldn’t continue to be sold? Don’t call your favorite politician to pass a bill that imposes your moral standards on everyone else. Instead, persuade your peers to stop buying the product. Remove businesses’ incentive to produce it.

By forcing companies to “do what is best for society at large,” by hindering free trade, central authorities can only destroy value. They don’t add anything. Free trade has lifted billions out of extreme poverty in the past century—neither by charity nor by command. “Greedy capitalists,” focused on how they could advance their private wealth, soon discovered that they could best achieve this by unleashing the creative force of human cooperation.

Have you ever engaged in a skill swap? “I’ll fix your sink if you tailor my collared shirt.” You offer your plumbing skill. Your neighbor offers his sewing expertise. Now, through this simple trade, both of you are happier. No one thought about how this helps all the people who aren’t part of this simple exchange. You found a way to get what you want by offering what someone else wants—something you can do well.

On a national level, this is no different. Countries can specialize in what they’re good at and trade for what they aren’t. Concentrating on what you do best increases the “welfare” of everybody. Japan makes cars, Colombia grows coffee, and Germany builds machines. Free trade makes your world larger than your local geography. Economic nationalism achieves the opposite.

Participating in modern civilization, you can notice the wealth created through free trade all around you. After an alarm clock, assembled in China with materials from Australia, wakes you up from a good night’s sleep on your Italian mattress, you prepare fried eggs from a local farm. You grind coffee made from Ethiopian beans, sweetened with maple syrup from Canada, and slip on a T-shirt sewn in Vietnam from American cotton.

All of this occurs before the clock strikes eight. None of it happens because anyone is worrying about “those who have been left behind.” It is the result of entrepreneurs, white-collar workers, blue-collar workers, and farmers working together. The prospect of improving the position of themselves and their families is the only motivation needed for this.

Prosperity does not require conquest but cooperation. This cooperation happens as a result of different people, most of whom don’t even know each other, working selfishly to improve their own wellbeing. Voluntary exchange works—not because every participant considers “the needs of all their stakeholders, and society at large,” but because they toil to provide the best value to their customers.

Hence, for worldwide prosperity, people must be allowed to create, exchange, and thrive—without borders standing in the way. Next time you sip Colombian coffee in a Japanese mug while scrolling through your American phone, remember: Free trade is the best mechanism of peace and a force for abundance.