Those European powers that began to build overseas empires from the 16th century on were aiming to maximize their share of a growing and profitable sphere: international trade. According to the then-established theory of mercantilism, the amount of wealth in the world was fixed. As a consequence, each of the leading European powers aimed to grab the largest possible share of international trade.
This stoked a series of wars around the globe. The Seven Years’ War of 1756–63, for example, saw fighting between European powers, especially Britain and France, not only in Europe, but as far afield as the Caribbean, North America and India. These powers also passed protectionist measures that barred all but the homeland’s citizens from participating in trade to and from the mother country. Not even their own overseas colonists were allowed to benefit from this trade. According to mercantilism, colonies were established solely for the benefit and profit of the mother country. Such policies eventually drove Britain’s colonies on the eastern seaboard of North America to declare their independence as the United States in 1776.
The same year saw the publication in Britain of The Wealth of Nations , by the Scottish philosopher and political economist Adam Smith. This book is seen as the founding text of free-market capitalism. Up to this point, international trade had been subject to such constraints as prohibitive excise duties or naval action against foreign merchant ships. In addition, commerce within a particular country was often inhibited by state control. This might operate through taxes, or even internal customs duties, but it often took the form of royal patents: in return for a sizable payment, the monarch would grant the sole right to provide a particular good or service. No other person was entitled to infringe this monopoly, and the holders could charge whatever price they wanted.
Adam Smith held that all these restrictions on the freedom of the market were inefficient. He argued that if individuals are allowed to pursue their own economic self-interest, then the laws of supply and demand, which he called ‘an invisible hand’, would augment not only the wealth of nations but also the prosperity and thus the happiness of the citizens of those nations. But the laws of supply and demand, he argued, could only work successfully in a free market. And such a market should work not only within nations, but between them.
Free-market capitalism became the norm within many industrialized countries in the 19th century. However, it became apparent that companies that outcompeted their rivals would tend to become monopolies, which would allow them to dictate the price of their products. Even in the USA, that champion of free-market capitalism, the government felt obliged, from the 1890s, to rein in the unbridled free market by passing anti-trust legislation, so as to break up large companies that threatened to monopolize certain markets. And in the 20th century many developed countries chose to further regulate their industries by imposing health and safety standards on employers.
‘Every individual necessarily labours to render the annual revenue of society as great as he can. He generally neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.’
Adam Smith, The Wealth of Nations (1776)
Following Adam Smith, in the 19th century economists increasingly advocated free trade between nations, unhindered by such things as import duties. However, agricultural producers and the industrial manufacturers often argued in favour of such duties, so that they would be protected from foreign competition. As a consequence, protectionist measures continued to restrict international trade well into the 20th century. Even the establishment of free-trade areas such as the European Common Market only benefited members.
Since the later 20th century there have been concerted international efforts to break down protectionist barriers and create a genuinely globalized market. Some argue that this creates a new imbalance of power: large multinational corporations can dominate the market to the detriment of smaller companies, workers and consumers worldwide. While free trade and free markets have helped to foster global economic growth, the problem of setting the ideal balance between free markets, protectionism, market regulation, consumers’ interests and employees’ welfare is still a fundamental political and economic debate today.