The libertarian economist, Mark J. Perry, is particularly fond of posting a striking graphic he calls the “Chart of the Century”:

The chart plots price changes across different product categories since the turn of the century. If you wear a libertarian hat, what stands out about the chart is that the most expensive categories are also the ones that are a) heavily regulated and or b) subsidized by the US government.

Of course, both of these practices (i.e. regulation and subsides) can reduce costs and improve efficiency: imposing standard weights and measures, for example, makes trade and specialization much easier; it's also one of a handful of things the US government does that are specifically called out in the Constitution. And subsidies can also lead to lower prices in the long run, usually when they encourage the production of something that will eventually benefit from economies of scale.¹

And if you ditch that libertarian hat and instead put on an economist hat (two hats that look similar, but are by no means the same!) you might notice something else: TVs, toys, and other ever-cheaper goods at the bottom of the chart can be mass-produced anywhere and exported everywhere. These products tend to be at least partly exposed to Moore’s Law and similar experience curves, which has led to pricing declines and some measure of improvement.² Conversely, it's harder to export things like childcare, surgery, and apartments. So the chart is partly the story of deflation in tradable goods and inflation in non-tradables.

While this is a generally straightforward division, if you look closely at The Chart of the Century you’ll find that it’s not so simple. For example, "college textbooks" saw the third-highest cumulative rate of inflation, and they’re clearly a tradable good whose market is distorted by regulation. On the other hand, the persistent inflation in that category suddenly stopped around 2017. The mechanism for price inflation in college textbooks was that publishers could lightly revise books, tweak the questions, and then publish editions; students who read the old book would learn broadly the same material—subjects that are established enough to be regularly taught in schools don't change that much from year to year—but they wouldn't be able to answer homework questions. This essentially made the textbook business reliant on a transfer between teachers' time and students' money: a teacher could produce and then grade an original quiz or set of homework questions, but as long as they weren't spending their own money, choosing to make 100 students in an introductory class spend a collective $15k-20k on new textbooks seemed like a pretty good deal.

What changed this wasn't the widespread availability of free textbooks and learning resources online (which would be more disruptive to the used textbook market for self-learners than to the new textbook market for GPA maximizers). Instead, it was Chegg, which had exact answers to specific questions, and which did a great job of using search engine optimization to get them in front of paying customers. So the attach rate on expensive textbooks went down.³

In other words, textbooks were once a non-tradable product due to a confluence of regulation, public choice theory operating at the teacher level, and corporate willingness to exploit both. And then they became a tradable product, subject to the whims of the market and vulnerable to an aggressive low-cost producer. And this happens fairly often: energy-intensive businesses like aluminum smelting and crypto mining turn locally-produced electricity into a more exportable commodity. (Desalination and cement are two industries that create a hard-to-export product, but that also make any place with sufficiently cheap power a better spot for a city than it otherwise would have been.)

Broadly speaking, tradable goods have gotten a lot cheaper in the last half-century and a bit more expensive in the first few years. The culprit in both cases is globalization, both the political phenomenon of increasing willingness to rely on exports for income and imports for essential goods, and the technological phenomenon of containerization that made it much more cost-effective to do both of these.

There was a definite feedback loop at work here: circa 1960 or so, it wouldn't have mattered at all if countries had set up some kind of trade system that allowed a product designed in the US to be composed of parts made in Japan, South Korea, and Taiwan, which were then assembled in China or Malaysia. The cost of getting intermediate goods on and off the boat made complex supply chains prohibitive. But cheaper transportation, coupled with cheaper computers for tracking and modeling the need for this transportation, meant that more complex supply chains were possible. Historically, the vast majority of goods that were imported and exported were either raw materials or finished products. And that meant that for many categories, low value-added manufacturing coexisted with high value-added manufacturing (because there wasn't a way to save money by importing components). But now this production gets dispersed.

And that feeds into another factor: industrial productivity is partly a function of technology, which tends to globalize fast. But it's also a function of experience and economies of scale, and these are very localized phenomena. That applies even to fairly simple products, like a loaf of bread: the low-cost producer for the bag the bread comes in might not be in the same country as the low-cost producer for the wheat that the bread is made from. And the twist-tie that keeps it shut can easily be the result of steel imported from one country and the plastic imported from another, with the assembly happening far from where these products are ultimately used. And the complexity goes on from there! Of the top ten global exporters of plastics (via this list), nine are net importers of oil. A similar picture shows up for the steel inside of them. (And, of course, those oil companies don’t produce all of the rigs, drill bits, pipelines, geophysical models, etc. necessary to extract that oil.)

To someone in, say, 1960, the idea of moving so much material all around the world just to exploit minor cost advantages across different countries would have sounded patently ludicrous. (And, in fact, the twist-tie itself wasn't commercialized until 1961.) It's a crazy testament to globalization that the most expensive part of a bag of bread, the bread itself, is the one most likely to have been produced entirely domestically. Meanwhile, the cheapest part, the twist-tie, has a decent shot of having components that have collectively circumnavigated the earth. There are literally statues of the first person to lead a ship all the way around the world, and now the only thing notable about it is that it makes some things too cheap to think about.

Many countries have gone through a process of exporting low value-added goods, and slowly moving up different value chains while attempting to specialize in a few. Every globalization story starts the same way, with either clothes or toys, but they end with different multinationals specializing in different things. And one element of that process is that while a country is getting priced out of one category, they start importing goods from, and exporting expertise to, a country that can still make them. Part of China's rise was from Taiwanese electronics assemblers decamping to the mainland for cheap labor, but those electronics assemblers were the descendants of Japanese companies that, ten to twenty years earlier, realized that putting circuit boards in beige boxes didn't make sense at Japanese wages but was perfectly economical in Taiwan. So the broad sweep of economic history is that when two countries are economic neighbors with different levels of development, the poor one exports physical stuff and the rich one exports the institutions that make the poor country richer.

Global trade ends up being a nearly universal substitute, because it has effectively compressed the prices of so many intermediate goods. So there's always room to outsource parts of a production process and focus on what's differentiated. And this means that all those specialized producers have scaled up and found every possible cost advantage. It also means that the variety of goods can go up, since producers can outsource so many intermediate steps. That gets harder to account for in the inflation calculation: is a 3-in-1 avocado slicer a quality improvement over its constituent parts? Is it price discrimination? Is it a way to sell something new to someone who already owns a spoon and a knife? It's hard to say. But whatever it is, it's implausible to imagine it existing without global trade.

This has been a massive dividend to standards of living almost everywhere: the rich world got far cheaper and more diverse goods, and responded to these incentives by specializing in better and more abundant services. The developing world got something to sell to the rest of the world that wasn't a natural resource, and thus avoided the resource curse where oil or mineral wealth distorts institutions enough that none of the money makes its way to the average person. This dividend doesn't last forever, though; it's entirely possible that concerns about geopolitical risk, economic nationalism, and worries about brittle supply chains will slow or even reverse some of these gains. And, to some extent, that's a good thing; the value of cheap stuff is more visible than the risk of relying on a potentially hostile trading counterparty for the provision of any stuff at all. But even if the magnitude of the gains won't be repeated—Mao can only die once!—the tacit knowledge and physical capital will be with us for a long time.

Read More in The Diff

The Diff has covered the tradables sector, and the importance of understanding it:

• Turning Non-Tradables Into Tradables dives deeper into the question of when and how a product becomes available globally.

• What’s Happening in Logistics looks at a specific case where the frictional costs of transportation and storage are changing.

• In De-Globalizing Luxury ($) we looked at what happens when globalization starts to revert, at least in one category.

• And in Globalization: A Toy Story we use Hong Kong’s toy business—once among the largest in the world!—as a case study in where goods get produced and when.

1. Transistor-based devices, like the one I'm using to write this and the one you're using to read it, would likely be more expensive today if NASA hadn't deliberately over-ordered them in the 1960s for the express purpose of keeping Fairchild Semiconductor in business.

2. By the standards of someone who kept their business records by paying a scribe to laboriously add and subtract roman numerals or to use an abacus, being able to fire up Quickbooks and instantly calculate year-over-year revenue makes you richer than Croesus in terms of your ability to flagrantly waste computing resources, regardless of what that revenue growth actually is. (It's hard to make direct comparisons, but an abacus seems to take several seconds to perform simple mathematical operations, while a top-of-the-line iPhone can compute two trillion floating point operations per second. So by ancient standards, we are all trillionaires who happen to do the overwhelming majority of our consumption in the form of computation.)

3. Incidentally, textbooks have to be one case where we don't use price-based hedonic adjustments, i.e. compare the price of the new model to the price of old models on the market to see how much better it is. Otherwise, we'd probably measure persistent deflation in textbooks! Buy the version one edition older and you can't do any of your homework assignments, but the material is unchanged, and the supply of slightly out-of-date textbooks should be much bigger than the supply of older editions—plus the sellers are likely to be moving, getting rid of stuff, and thus price-insensitive. So this is a case where the abacus/iPhone comparison makes more sense: a $200 ancient history textbook is 33% more expensive than a $150 ancient history textbook covering roughly the same time period in a similar amount of detail, because ancient history doesn't change all that much. And even when there is technology-driven change in older fields, it takes a while to make it into textbooks and college courses.

Help us learn more about you!

We're building a media kit and need some anonymous aggregated subscriber data. If you work in finance and have time for a 3-question survey, that would be very helpful:

Join the discussion!