Many economists and people who trade in global markets have been interested in the question of whether parties who trade with each other benefit equally. James Mill (the father of J.S. Mill) thought that by increasing the efficiency of markets both parties would benefit equally in global trade. This was proved later, by J.S. Mill to be inaccurate. J.S. Mill formulated the principle of reciprocal demand. Under this principle, the gains from trade are seen to be unequal.

If vendors/producers in a small market trade with a bigger market, the demand for goods in the smaller market will increase and the small market can raise prices and therefore benefit more from the trade. Also as a benefit, the smaller market expands. And that observation makes it seem that the little guy gets to win. But that only works out for the little guy in a sound money system like that sponsored by Great Britain under the strict gold standard. The strict gold standard was the global monetary system in play during the period from the end of the Napoleonic Wars until about the end of WWI. J. S. Mill lived from 1806-1873, during the period of the strict gold standard. And under sound money the little guy could gain from trade in terms of gaining a higher demand for their product.

But what happens under today’s fiat money with mobile capital? In this case, parties with the largest capital can influence the price and value of currencies and commodities more than the little guy can. Periodic instabilities in markets due to hot money coming into and leaving the marketplace can create conditions that favor the acquisition of the little guy’s hard-won gains by the big capital holder. So under this kind of system the big guy with more capital wins. The lesson here is that the global monetary system matters in determining who benefits more from global trade.

Reference: A History of Thought on Economic Integration, by Fritz Machlup, (Columbia Press, NY, and MacMillan Press, Ltd, printed in Great Britain, 1977, 219)

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