4.7 Invisible Hand and Problems with Global Trade


The problem that faced Smith's Free Market system was that Britain, like most other nations, was still practicing an economic system called "mercantilism", which meant that a country could attain growth and prosperity by selling more of its products while not importing goods from elsewhere. Britain could obtain raw goods from its colonies, manufacture them in Britain, and then ship them back to be sold in the colonies.


The problem was that trade growth was limited.

For Smith, however, the invisible hand was the mechanism that should be used to allow economies to grow. Manufacturers who wanted to sell more would have to hire workers to produce more. This would make more of the product available and increase demand. If more then one manufacturer made the product, competition would exist between the two, and this would ensure that better products would be made and higher salaries paid for skilled workers. A market left to operate under this principal was called a free market, and the invisible hand would drive it. If, however, the manufacturer was told how to sell his product, like in a command economy as proposed by Karl Marx, the invisible hand would not work.

Global Free Trade


In colonial times, the imperial powers had much control over how trade occurred. Trade was not "open" or "free". In fact, it was very controlled to maintain the wealth and power of the rich countries and their citizens. Although trade with the colonies did provide for an exchange of wealth among nations, the way trade was managed benefitted the already wealthy nations far more than it benefitted other nations.

For example, the inventions of the Industrial Revolution created the technology to make Britain efficient at making textiles in factories. Britain's colonies in India provided the raw material of cotton. Transportation technology allowed them to ship their textiles all over the world. Textiles were traded along with other manufactured goods in marketplaces all around the globe.


Today, the trade of raw materials for manufactured goods occurs between Canada and other countries. For example, Alberta has become rich because of abundant oil and gas resources. In effect, Alberta sells oil and gas produced by the workers in this province. With their wages and investment in extraction, manufacturing, and service industries, people buy cars, stereos, computers, and Christmas tree ornaments—all things not produced in Alberta. The difference between now and then is that the colonies did not have a choice about who they could sell their products to and who they could buy them from. In today's globalized world, our main trading partner may be the United States, but we also trade with countries all over the world.

Quotas, tariffs, and dumping are ways in which a more powerful nation can exert control over a less powerful nation. They are all elements of protectionism. That is, they protect the industries of the powerful nation and stand in the way of free trade.