The Iran war is the latest link in a chain of crises that is strengthening the world’s deglobalisation coalition. In an effort to secure supply chains and detach themselves from the economies of hostile states, a number of nations around the world are straining every sinew to localise production. While this is an understandable response to the trauma caused by shocks such as the Covid-19 pandemic and the Ukraine war, countries must be careful not to swing the pendulum too hard in the direction of economic closure, as the cost in terms of decreased living standards is larger than most expect.
Ordinary people, especially Americans, probably recognise the current year as the 250th anniversary of the birth of the US. However, to those working in the social sciences, it functions more saliently as the 250th commemoration of the publication of Adam Smith’s Wealth of Nations, the 18th-century treatise on what makes human societies prosper economically.
The Scottish Enlightenment philosopher was a disciple of the classical liberal paradigm that emphasised the importance of human freedom and its role in economic flourishing. While many influential lessons have been extracted from his most famous work, in the context of the current crisis in the Middle East, perhaps the most significant is the contribution that division of labour leads to economic growth.
In particular, Smith argued that societies produce – and therefore consume – much larger volumes of goods and services when they organise production in a way that uses the benefits of specialisation. Self-sufficiency – as in the case of a household being responsible for producing everything from its own food to its clothing, shelter and so on – is intensely inefficient for two reasons.
First, it requires people to do things that they lack competence in, rather than focusing on the activities that align with their core skills. Second, it means foregoing the large benefits associated with organising production at scale; when a small number of workers operating with large machines can produce hundreds or thousands of times as much as entire villages of households working disconnectedly at the familial level.
While the past two-and-a-half centuries have witnessed many economic ups and downs, there is little question that this period has been the most prosperous in human history for most nations on the planet. Technological progress has been the driving force behind the unprecedented improvements in living standards people have experienced. However, an important parallel and complementary role has been played by global economic integration.
An excellent illustration is the development of steam-powered sea travel. This technical advancement allowed goods to be transported across the world at previously unmatched speeds, allowing the most efficient factories in countries such as Britain and the US to deliver their wares at low cost to foreign markets. However, realising these potential benefits depended critically on removal of trade barriers that made transporting the commodities profitable. Economic integration was also necessary to ensure that the factories churning out manufactured goods at breakneck speed could receive the raw materials at a fast enough pace.
In fact, while ostensibly constituting a factor that is independent of economic integration, technological progress is in fact a major beneficiary of the principle of specialisation, division of labour and reciprocal trade. The advanced laboratories of modern pharmaceuticals could not command the necessary research and development resources, were it not for the ability of individual scientists to dedicate themselves to their craft, and for the companies that employed them to export to the entire world. Accordingly, it is no exaggeration to claim that global economic integration is a central cause of modern economic prosperity.
This line of thinking morphed into the accepted global paradigm during the 1990s, spurred by the US’s victory over the Soviet Union in the Cold War. However, since the turn of the millennium, the belief in the contribution that trade liberalisation makes to living standards has been eroded by a series of crises and more gradual developments. An overarching contributor has been rising immigration in western countries that has created a social backlash against globalisation. However, calamities such as the global financial crisis of 2008, Covid-19, the conflict in Ukraine and now the Iran war are collectively creating a robust deglobalisation movement, as noted by the prominent energy commentator Anas Alhajji.
The basic line of thinking among elites and ordinary people alike is that creating dense interlinkages in the global economy makes individual economies fragile and exposed to economic coercion. The antidote is a return to self-sufficiency, with much of the rhetoric being akin to what parents might tell their children about the importance of standing on one’s own two feet and not depending on others. These sentiments were echoed in US President Donald Trump’s inaugural address to Congress in 2017 when he asserted: “We will follow two simple rules: buy American and hire American.”
Human biology, most notably our innate sense of ethnocentrism, makes such arguments appear compelling. However, the reality is that our sense of self-sufficiency at the individual level is warped. While it is true that a spoiled child – who doesn’t know how to prepare a meal or wash their clothes – will probably suffer in the real world, in the grand scheme of things, acquiring these skills represents little more than an incremental shift in the self-sufficiency scale. Even the most hardy and self-reliant human eats food that they purchase from others, wears clothes made by specialists, lives in a house built by construction experts and so on. If they were to truly exhibit the sort of self-sufficiency their rhetoric espouses, they would have a quality of life scarcely better than that of a caveman from a hunter-gatherer society.
The same is true at the national level. If a small country like Singapore or Luxembourg were to strive for true self-sufficiency, it would condemn itself to extreme poverty. Even medium-sized countries would suffer a huge decline in living standards, were they to take an overly suspicious view of international trade. Larger countries such as the US or China might fare a little better, but as the Sino-American trade war has revealed starkly, even the most populous and geographically vast nations in the world lack key inputs that are critical to their prevailing quality of life.
A certain amount of self-sufficiency might make sense in specific, particularly sensitive, sectors. But the problem that intellectuals arguing for broad-based self-sufficiency face is that the costs of economic integration today are very salient and fresh in the mind, whereas the benefits are abstract and intangible. Moreover, the decline in living standards that is to be expected if we deglobalise will be slow to materialise, making it harder to compel people to act now.
The American Revolution had a profoundly positive effect on both the US and the entire world, and so many have cause to celebrate its 250th anniversary and reaffirm the principles enshrined in the US Constitution. However, humanity would arguably do better to recommit its vows to Smith’s Wealth of Nations: the principles therein are the bedrock of the comfortable lives we live today, and of the escape from poverty that literally billions have achieved during the last two centuries.
