I grew up on Adam Smith’s The Wealth of Nations. I was a CPA, corporate executive, and top-5 business school MBA from Mitt Romney’s era, and Smith was God. But one strange, often repeated phrase nagged at me. What was this “carrying trade” that Smith harped on, over 35 times?
The phrase is central to his über-capitalist argument about comparative advantage, and time has proven him dead wrong. And what Republican Rick Perry now calls the“vulture capitalist” arose to contaminate my idealization of Almighty Smith.
Smith divided the economic trade world into three parts – the “home trade,” with goods produced and consumed locally, the “foreign trade of consumption,” where you sell your production to a foreign country, and, finally, the “carrying trade,” the third party that cut the deal and delivered the goods, taking great risks over perilous waters to do it.
The carrying trade was central to his argument that basic home-produced goods would always have comparative advantage over competition from abroad, which would largely consist of luxury goods and agricultural products your local climate could not support. The costs of the carrying trade in getting low-priced goods to market protected the local basics from foreign competition, and even if there was a low-cost foreign competitor, your home market likely had a comparative advantage over the foreign market in another area.
Then came “logistics” (queue in the “That’s Amore” music behind the UPS commercials).
The world got really good at moving the basic, low-cost goods from one place to another. Logistics made it possible for Sam Walton to sell shoes cheaper in deep rural Iowa than could any local mom-and-pop shoe store. Walton and his competitors could even deliver fresh produce to market cheaper than the farmer down the road could get his truckload of harvest to a local parking lot for sale. “Comparative advantage” goes down the toilet.
Then came the container ship. Now Walton’s heirs could deliver Chinese-made shoes to that same rural Iowa store for a far cheaper price than any domestic shoe producer could ever hope to match. And department by department, Adam Smith’s comparative advantage argument crumbles. Smith was simply wrong, because he did not foresee the new world of global logistics.
Only one cost of production now makes any difference in a post-logistics, post-Adam Smith world. Whoever squeezes labor costs the most toward some achievable minimum now controls the world economy.
Damn! Here I am a CPA and “golden age” MBA and I’m channeling the one 19th-century writer whose name cannot be spoken in the public in the United States unless you precede it with “Groucho,” “Harpo” or “Chico.”