What is free trade?
– FREE TRADE –
In the nineteenth century, economists believed that there were limits to human wealth. In their opinion, when one man became richer, another grew poorer. If a country wished to improve its standard of living, it had to export more than it imported. So, in Britain, the main argument in those days was about free trade and protectionism.
The owners of the Lancashire textile factories naturally supported free trade because they wanted to export as many products as possible. In their view, it would be better for the country if they sold more goods to other countries.
The landowners and farmers, on the other hand, were afraid of foreign competition. Free trade won because Britain at that time was able to buy as many cheap raw materials as it needed from its colonies and sell them again as finished goods. Import controls would have damaged its position as the strongest manufacturing nation in the world.
In America, a similar belief in free trade eventually led to a crisis in economy – the Wall Street crash, in 1929.
People in the USA were benefiting from the expansion of the American economy in the First World War.
They became convinced that money automatically makes more money and speculative investments are always profitable. When they lost confidence in the stock market, the effects of the ‘crash’ were felt all over the world.
Following the Wall Street crash, the economist John Maynard Keynes introduced a new theory. In simple terms, his solution to the problem was that there is no fixed limit to human wealth. Factories can always produce more if people can afford to buy the goods. Therefore, governments must help factories and create jobs, and the factories must pay good wages. In this way, every worker becomes a consumer.
For a time, especially after the Second World War, Keynes’s theory was successful. It kept the factories working and maintained full employment. In the 1970s, however, several unpleasant facts emerged. For one thing, we began to realise that the world’s resources are limited.
We cannot go on producing more and more because we are using up our resources too fast.
Secondly, more efficient production is often achieved with fewer workers and bigger machines, not the other way round. Above all, the industrialised nations of the world consume more of the world’s resources than they produce. But it is difficult to make people economise when they think that they create more unemployment by spending less money.
A. Mark the statements as True (T) or False (F).
1. Britain sold raw materials to its colonies.
2. The U.S.A. was in a good economic situation during the First World War.
3. According to Keynes, a worker becomes a consumer when he gets a good wage.
4. Just after the Second World War, people realised that the world’s resources are limited.
5. It is usually necessary to employ a large number of workers to achieve more efficient production.
1. According to 19th century economists, what was necessary for a country to achieve a better standard of living?
2. Why didn’t landowners and farmers support free trade?
3. Which country was the strongest manufacturing nation in the 19th century?
4. What was the result o? free trade in the U.S.A. in 1929?
5. What was the success of Keynes’s theory?
6. Why is it difficult to make people spend less money?