4.7 Invisible Hand Meets Global Economy


What are the origins of contemporary economic globalization?


Adam Smith would greatly approve of globalization. Consider his theory about the invisible hand. He believed that humans are born with the desire to better ourselves. This is called self-interest. As a result, according to Smith, humans want to make more money with less effort and buy more goods at cheaper prices.

Both Adam Smith and Karl Marx agreed that the value of a product comes from the labor or work that goes into it. Therefore, in order to make more money, people will make their products efficiently and of better quality. This has led to the trend for people, firms, and governments around the world to become increasingly dependent on and integrated with each other. This can be a source of tremendous opportunity as new markets, workers, business partners, goods and services, and jobs become available, but also a source of competitive threat that may undermine economic activities viable before globalization.

It was on the idea of making a product more valuable that Smith focused. He believed the best method for making more of something was by dividing the tasks of production into a number of small distinct parts. He called this division of labor. This meant that when a product was being manufactured, an individual laborer would concentrate solely on one task involved in making that product. For instance, if two workers were building a fence, one would cut the wood while the other would install the wood on the fence. In this way, the fence would be built faster, and the two workers would become even more efficient at their activities of cutting and hammering. Thus, because workers focus only on one part of the product, they become specialized in that area.


Smith used the example of making pins to illustrate his idea of division of labor. One person, he said, could make only a few pins a day at best, but ten people could possibly produce 4,800 pins in one day. So in order to achieve this increase in production, a person must be willing to invest capital or stock (in Smith's words) to create factories to bring together the 10 people and pay them a salary for their labor to make the pins.

Growth would happen as the factory owner looked for employees and offered wages. As more people were employed, the competition for labor would increase. This would lead to higher salaries. As a result, more people would want to work for him. However, there could be a problem created by this trend of higher salaries for workers, because it would increase the cost for manufacturing the product, and thus lower the profit.

This type of competition for labor would be offset, according to Adam Smith, if workers were paid better, so they could afford better care for their children. They would be able to feed and clothe them better, and if they became sick, they could afford to get care for their children. Consequently, infant mortality would go down and result in a greater supply of labor. As the supply of labor increased, the manufacturer would be able to keep wages lower because workers would be competing for jobs.

Like most great thinkers, Adam Smith was reacting based on his observations about how things were working in his world. He lived and wrote in the early period of the Industrial Revolution. This period was characterized by the rapid change from hand power to machine power, which resulted in the ability to create far more goods for consumers then ever before in human history.