4.8 The Invisible Hand Meets Change
4.8 The Invisible Hand Meets Change
What are the origins of contemporary economic globalization?
What are the origins of contemporary economic globalization?
Planning for Modern Globalization
Leaders of most of the world's nations were very concerned that the international economic instability at the end of World War I that had led to World War II would not occur again. Another concern which leaders hoped to avoid was a repeat of the Great Depression that occurred during the decade of the 1930s.
F.A. Hayek Contributes to global economics
Mr. Hayek's idea was that the marketplace should decide what is bought and sold. Companies decide the price of their products; consumers decide whether they want to buy them. If the price is too high, and the product is not selling, then the company will drop the price. If the product disappears off the shelves too quickly, then the company knows that it can either sell more of that item or charge more for it.
The market decides what is produced, how much is produced, and for what price. People's needs will be met because someone will want to make money selling them what they need. Individuals and small groups are better at making these kinds of decisions than some central agency such as the government.
The same theory holds for spending money. People want to make their own decisions about what they want to buy. If someone else makes the decisions about what to buy for us, they can choose something we don't want, and as a result, money and products are wasted.
If the proper functioning of the
marketplace requires the rule of law, then if we are to buy and sell
with other countries, rules must apply to all the countries buying and
selling. As you can imagine, this is a problem. Citizens of a country
have difficulty deciding what rules to establish for trade. The problem
is that you might have to make rules that cause you to change your
economy in order to enter into another nation's market. This could cause a
nation to become dependent on others for certain basic needs. You would
be giving up your independence.
Keynesian Economics
The Great Depression of the 1930s led to new ways of thinking about how a nation should manage its economic affairs. The Depression resulted in high unemployment and poverty almost worldwide. At this time, a British economist who had studied the economic effects of war, John Maynard Keynes, suggested a theory that called for the government to get involved in the economy of the nation. His book, The General Theory of Employment, Interest, and Money, called for governments to borrow and spend money to limit the natural highs and lows of the business cycle. Keynes' ideas clashed with those of Hayek's, despite playing an important part in developing economic policies at Bretton Woods.
The United States adopted a policy of isolationism during the Great Depression, meaning they opposed any action that would involve the country in another war. The United States also imposed protectionism in the form of tariffs and restricted immigration. During the time most of the developed nations of the world, including Canada, were concentrating on the war effort, the United States was concentrating on developing its industry. It demonstrated great industrial potential during World War II. America could build more and better planes, ships, tanks, and guns than any other nation in the world. Its leaders realized this potential could also be used to produce consumer goods after the war was over, more consumer goods than would be needed by the citizens of the United States. But, for people to purchase these goods, they had to be able to afford them. The actions of the Bretton Woods Conference were designed so that all nations, including Germany and Japan, could build an infrastructure to become part of a larger global market. Consequentially, the United States and its allies promoted the idea of globalization even before World War II was over.
