Four Economic Activities and the Wealth of Nations
Trading, forecasting, aggregating, and innovating—referred to from here on out as the Four—are activities that people have engaged in since the beginning of humanity. They are part of the human fabric because they stem from mankind’s peculiarities—heterogeneity, inclination to forecast, sociality, and inventiveness. The Four are key social interactions in human life at both the individual and aggregate levels.
In 2022, the value of worldwide global exports amounted to approximately $25 trillion at the current price. Most humans live together in urban areas, while an even larger share belongs to social groups such as families and firms. Virtually everyone must deal with forecasts and innovations (in the role of consumer, saver, voter, taxpayer, worker, and tenant). In a nutshell, the Four are ancestral, vital social interactions that each of us face not only in special moments but, rather, every day.
Why do humans perform the Four? The short answer is because each person has some peculiar gain. While it is easy to recognize the paramount role of innovating activities for both the individual well-being and system-wide performances, some words on the other three affairs seem necessary.
The division of labor allows for specialization, hence higher productivity. However, the division of labor also needs the exchange of what each produces. To the extent that trading is a free choice between partners with the same bargaining power and knowledge, it improves the condition of all participants (otherwise, why choose to trade?). Robinson Crusoe’s story puts forward the idea of the gains from trade. Centuries ago, Venice (a small city, after all) became an economic superpower, exploiting its commercial connections as part of the Silk Road network. Another way to appreciate the advantages of the exchange is to consider that sanctions banning trading activities are aimed at inflicting damages to sanctioned countries. Iran and North Korea are case history.
One way to see the gain from forecasting is considering when expectations are wrong. At the individual level, if someone believes that she has no chance of finding a job (becoming a “discouraged worker”), then she will not adequately prepare herself for the job market or will be apathetic in her job search. This forecast-induced behavior may magnify the likelihood that grim expectations—and real losses—will materialize.
Alongside discouraged workers, poor people may well get trapped in a permanent state of poverty because their own gloomy predictions of improvement steer them to be insufficiently proactive. Ex post guarantees may then reduce ex ante efforts. Finally, if employees/lenders earn fixed wages/interests, underestimating price developments in high-inflation en
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