The Invisible Hand: The Transition from Mercantilism to Industrialization

Today's global economic order is unhealthy and diseased. If we try to capture a historical perspective to understand this unhealthy situation, we have to go back to the 1980s when the concept called neoliberalism emerged.

Neoliberalism is not a new ideology. It is not a new philosophical movement either. When we look at its historical development process, it appears as a tool for the dominant powers of the global economy to increase their economic power in order to strengthen their position in international politics. The concept was created by the famous Fed chairman Volcker and British Prime Minister Thatcher. Later, it became a tool that US President Reagan and Thatcher jointly presented to the world from a policy perspective.

In order to understand the point reached today from a broader perspective, let's go back a little further and start analyzing the historical process in a simple, that is, highly understandable way. Thus, let's ask whether the issue is only economy or whether it is constantly on the world's agenda within the framework of a phenomenon that includes an international power struggle under the name of economy. Let's try to understand the reasons why the decisions taken by the Fed have become powerful enough to affect almost the entire global economy from a historical perspective.

Economics was born scientifically with Adam Smith, a moral philosopher, with his book The Wealth of Nations. The date of the book is 1776. In the same year, the United States of America was founded. The USA was a former British colony and was now declaring its independence. During the same period, the first industrial revolution was taking place in England. Let us remind you that as of 2011, we are in the fourth industrial revolution as defined by the German government. In other words, four industrial revolutions were squeezed into a period of approximately 240 years. Immediately after these developments, the French Revolution, a bourgeois revolution, broke out in 1789 and its effects spread.

Photo: Arda Tunca

The invisible hand that Adam Smith described in The Wealth of Nations emphasized the concept of a free market that developed with the market returns created by the industrial revolution and therefore an environment where capital accumulation increased. The period before the industrial revolution was a period called mercantilism. Mercantilism was a system that created monopoly rents with protectionist policies created by the state. The aim was for countries to accumulate as much valuable metal as possible. Trade was conducted for this purpose. The control of trade and finance was provided under the protection of the state.

In the 1770s, the industrial revolution that England was experiencing meant that Western Europe was moving away from mercantilist trade under state protection and towards a free market-based industry. Adam Smith was describing the conditions he was living in and the invisible hand mechanism within the concept of the free market that emerged within the framework of the industrial revolution. He also devoted a section of The Wealth of Nations to anti-mercantilist views. The era in which feudal lords traded with privileges received from the king was coming to an end.

The exit from the mercantilist period and the industrial period based on the free market brought with it important problems in the distribution between classes. This new period caused the working class to live in increasingly worsening conditions. In the mid-19th century, working class uprisings began in Europe. The invisible hand was focused on capital accumulation and neglected the share of the working class in the economic distribution. With industrialization, some of the rights of the working class were taken away.

In February 1848, riots began in France. The riots spread to most of Europe, especially Germany, the Netherlands, Poland, Italy and Austria, and even to Latin America. Karl Marx and Friedrich Engels took up the subject of distribution, which Adam Smith did not address. The Communist Manifesto was printed and published in the year and even during the riots.

The uprisings of 1848 were short-lived. However, slavery was abolished in Austria and Hungary, the monarchy ended in Denmark, parliamentary democracy was introduced in the Netherlands, and the Capetian monarchy ended in France.

In addition to important developments such as the distribution issue neglected by the industrial revolution process and the 1848 uprisings, another important development emerged in terms of economic order. The transition to the gold standard began in the first quarter of the 19th century. First, England began using the gold standard in 1821. Canada in 1853, Newfoundland (a province of Canada) in 1865, and the USA and Germany in 1873.

As can be seen, the leading country influencing the world's economic balances in the process that began in the 1770s was England. The most important part of the developments I have tried to summarize above is that the industrialization process that developed hand in hand with the free market system ignored distribution, and this situation led to the 1848 rebellions. Then, the gold standard system was adopted, and this process continued until World War I.

An important stop of the process I described above was the great crisis that emerged in 1873 and the Neoclassical School came into play instead of the Classical School that started with Adam Smith and ended with John Stuart Mill. I will discuss the 1873 crisis in the next article and the Neoclassical School in the following article. Proceeding in the form of a series of articles, I will try to summarize the historical perspective I mentioned at the beginning of my article with the points I think are the most crucial.