You’re part of a global economy

Here’s something people do all the time but rarely think about: They work to make money…which they then spend on things.

If you really think about it, this is a simple exchange: a person’s work in exchange for something they need—say, a pair of headphones from an online retailer. But it’s way more complex than that. Those headphones are part of a global system of buying, selling, and trading that has become more and more complex as it has developed over the last few centuries.

Think about it: The person buying the headphones didn’t make them. They didn’t even make a product that they exchanged with a headphone maker. And the person who did make the headphones wasn’t the person who sold them. Neither the worker who made the headphones nor the seller owned the materials or equipment on which they were made or the website on which they were sold. Still other people designed the packaging, wrote ads, and taxed the sale of these headphones. The point is, there’s a whole bunch of stuff that happens when we buy things—even something small, like headphones. Stuff like money, and credit, and banks, and taxes, and corporations, and labor, and shipping. We have a name for all this stuff put together. We call it the economy.

An economy is a system by which a group of people make, distribute, exchange, profit from, and use the stuff they need, whether it’s a physical product (like headphones) or a service (like the transportation needed to move the headphones). How did our economy today get so complicated?

Humans have had economies for a long time. The economies of hunter-gatherer societies were very simple. People made what they needed and shared with their group. With the Agricultural Revolution, economies grew more complex. People started making specialized products and trading them over long distances. But most economies remained local or regional. There wasn’t a global economy until the four world zones began to come together in the sixteenth century. The tying together of many different regions over the last five centuries has gradually pulled almost everyone, everywhere, into a single global economy, one that is more complex than anything that came before.

To understand the global economy, we can start with four ideas, each of which starts with the letter C.

Currency

At the heart of the global economy is money, of course. Money (or currency) is anything that people accept in exchange for goods and services. Currencies allow us to keep track of what we own, to exchange things back and forth, and to store wealth so we can use it later.

For much of human history, currency was stuff that was immediately useful—like grain or cattle—but slowly, things became more complicated. Currency became something that represented wealth, rather than something that was useful in itself. This started with metal coins, which people began to use about 2,600 years ago. These coins were often precious metals, like gold and silver, which are still important in our economy today. Metal coins helped societies trade over long distances. They were easy to carry and durable, so they wouldn’t rot or get destroyed on a long voyage. And people in many places valued metals like silver and gold, which made it easy for merchants to buy and sell with them all over the world. Governments could also stamp metal coins with their symbols to show that the coins were real and trustworthy.

Coins were helpful, but it was paper money that really helped the global economy grow. The first government to make paper money was Song Dynasty China, about 1,200 years ago. Around 350 years ago, banks in Europe began to issue notes promising to pay the person carrying them in gold or silver. Those banknotes helped to fuel the age of exploration. Paper money was even easier to carry, store, and trade. Merchants and governments all over the world started recognizing this type of money as valuable. Soon, governments everywhere were making their own paper money. Paper money made it easier to trade in different countries, which helped fuel the connection of the four world zones.

Credit and corporations

Trade between the world zones was very expensive before the Modern Revolution. It required huge ships or vast caravans. Sailors and caravan guards had to be paid. Trade goods had to be bought. Lots of merchants wanted to participate, but few of them could afford these costs. And if a caravan was attacked by bandits or a ship sank in a storm, the merchant who funded the voyage lost all their money. So, like humans everywhere, they innovated. Credit and corporations were two big innovations that solved these problems while also making the global economy more complex.

Credit is a way for people like shipbuilders and merchants to get the resources they need by borrowing from banks or governments. Of course, people had been borrowing money for centuries all over the world, but it was pretty limited. As trade began to grow, people’s attitudes began to change. Modern banks developed, like the Medici Bank in Florence and the Bank of Amsterdam. Similar banks emerged in other areas as well, such as India. These banks loaned money to merchants in exchange for interest, which is simply a percentage of the money loaned that’s added on to the original borrowed amount. As trade expanded, these banks opened branches in new places or made arrangements with banks in other places. Merchants could then carry a letter of exchange—like an early version of a credit card—instead of cash. Thanks to widespread credit, merchants had access to much more money than ever before—and the global economy grew.

The other innovation was the development of the corporation. Corporations started as agreements between groups of merchants. Merchants pooled their money together to pay for expensive equipment or goods needed to trade with places far away. Each merchant had shares in the voyage, which represented how much money they invested. The more money they invested, the more shares they owned, and the more money they could make if the journey was successful. But since there was more than one person investing in the trading voyage, each person put in less money than if they were investing alone. So, if disaster struck, the risk was spread out instead of one person losing everything. This allowed more people in more places to take the risk of investing, which expanded the global economy even more.

Commodities

The connection of the four world zones created lots of opportunities for people to make money using new kinds of money and innovations such as credit and corporations. Many corporations formed to buy commodities in one area and take them to another. These commodities were trade goods, like cotton, silk, spices, tobacco, and metals such as iron and silver. The trick was to buy the commodities in one place (where they were cheap), and take them to another place (where they were more expensive), and sell them for more money than you bought them for. Because the world was becoming connected, this got a lot easier.

Merchants usually bought goods from local people to sell elsewhere. However, some early modern trading practices were violent. Piracy and theft were common in this period because they increased the money companies made. And some companies even forced people off their lands or enslaved people to make goods more cheaply. To gain control of profitable lands, many merchants and empires worked together to conquer places and turn them into colonies. Although many of these practices eventually ended, people are still sometimes badly treated or underpaid in today’s economy, including—sometimes—while making products like those headphones.

Conclusion

Innovations like paper money, credit, and corporations made our world much more complex. They made it easier to move more goods longer distances. In the centuries since these innovations emerged, money has grown more complex, whole governments are funded by credit, and huge corporations produce most of the stuff we use and the things we watch on TV. The global economy is so complex today because it links eight billion people together in intricate relationships. Commodities travel back and forth across the world, moving from person to person in a chain of production and trade that makes headphones and most other things. This global economy makes it possible for people to have everything from headphones to houses. It provides the world with food, clothing, and all the other things we need. But not everyone benefits equally from this economy, and many are hurt by it.

Thousands of years ago, your ancestors traded fruit and meat to people they knew their whole lives in exchange for tools or clay pots. Today, you can trade digital currency like Bitcoin, which doesn’t physically exist, for a computer that was made and moved across the world through the work of hundreds of people you’ll never meet. And our economy is likely to get even more complex in the future. What do you think will change next?