The Historical Evolution of the International Economy 319ers opened up new frontiers in the Amer i cas, Asia, and the Middle East to trade and
commerce. Although Greek, Phoenician, and Mesopotamian traders had preceded
them, the British East India Com pany, the Hudson’s Bay Com pany, and the Dutch
East India Com pany facilitated trade in goods (and people as slaves), provided capital
for investments in the agricultural development of the new lands, and transported
cotton, tobacco, and sugar to Eu rope. Settlers increasingly moved to these lands; linked
to the motherland by economics, politics, and culture, they formed a nascent transna-
tional class pursuing individual economic interests.
Writing during this time was the eighteenth- century British economist Adam Smith.
As we noted in Chapter 2, Smith began with the notion that human beings act in
rational ways to maximize their self- interest. When individuals act rationally, markets
develop to produce, distribute, and consume goods. These markets enable individuals
to carry out the necessary transactions to improve their own welfare. When there are
many buyers and sellers, market competition ensures that prices will be as low as pos-
si ble. Low prices result in increased consumer welfare. Thus, in maximizing economic
welfare and stimulating individual (and therefore collective) economic growth, mar-
kets epitomize economic efficiency. Those markets need to be virtually free from gov-
ernment interference; only through a free flow of commerce will efficient allocation of
resources occur. That is the rationale underpinning the theory of economic liberalism.
Yet the policies of many Eu ro pean governments at the time reflected an alternative
view, mercantilism. The goal of a mercantilist government was to build economic
wealth as an instrument of state power. Drawing on the views of the Frenchman Jean-
Baptiste Colbert (1619–83), an adviser to Louis XIV, the mercantilist view held that
states needed to accumulate gold and silver to guarantee power. A strong central govern-
ment was needed for efficient tax collection and maximization of exports, both geared
toward guaranteeing military prowess. Such governments encouraged exports over
imports and industrialization over agriculture, protected domestic production against
competition from imports, and intervened in trade to promote employment. The United
States’ first secretary of the trea sury, Alexander Hamilton (1757–1804), advocated pol-
icies to protect the growth of the new nation’s manufacturers. In his “Report on Man-
ufactures” to Congress in 1791, he supported protectionist policies and investment in
inventions. Mercantilist policies included high tariffs and discouraged foreign invest-
ment in the name of achieving national self- sufficiency.
From the beginning of the nineteenth century through World War I, the expansion
of colonialism and the Industrial Revolution occurred as the result of major technologi-
cal improvements in transoceanic communications, transportation, and manufacturing
pro cesses. The Eu ro pean states needed the raw materials found in the colonies, so inter-
national trade expanded, as did international investment; capital moved from Eu rope to
the Amer i cas as investors searched for higher profits. Often the creation of those economic
links led to po liti cal and cultural domination. Britain, in par tic u lar, was the center of the