GLOBAL FINANCE

``Without stable political foundations, markets collapse.''

Doremus et al.

The most important and long-lived controversy in macroeconomics is
the debate over free trade (see Chapter 8) how much, or little, should
governments interfere in business? In 1776 Adam Smith made the
then revolutionary claim that the market system, in which everybody
competes for selfish gain, actually results in more benefits for all people
than a directed system. His famous assertion, quoted at the beginning
of Chapter 2, that an individual working for their own gain is ``led by
an invisible hand to promote an end that was no part of his intention,''
has become one of chief tenets of market-based economies.

In the early 1800s, British landowners controlled Parliament; import

and export of grain had been controlled by the Corn Laws, a collection
of tariffs, subsidies, and restrictions intended to reduce imports, boost
exports, and keep the price of grain high. Newly wealthy factory
owners emerged wanting cheap food so that they could keep the
wages they paid low. The debate lasted for years, resulting in the
eventual repeal of the Corn Laws in 1848.

The British economist David Ricardo supported repeal and devel-

oped the argument for free trade that still remains the central point
today: that specialization and free trade will benefit all trading parties,
even when some are ``absolutely'' more efficient producers than others.

THE EVOLUTION OF MACROECONOMICS

Although the term ``macroeconomics'' was not coined until after the
Second World War, the Depression of the 1930s marks its birth as a prac-
tically applicable body of ideas. During the 1930s, international trade
slumped and there were rounds of ``competitive'' currency devalua-
tions as countries tried to make their export goods cheaper. Traditional
theorists believed that wages would drop to a level where there was
little unemployment, but for a decade unemployment across the world
remained high. John Maynard Keynes, a British academic, developed
a solution, arguing that what was needed was for governments to
intervene and stimulate overall demand.

Following the end of the Second World War, Keynes' ideas gained

wide acceptance and governments increasingly used taxation, public