Over the years, many scholars have argued the favorable link between trade and peace, because of self-interest centered in the phrase coined by Scottish economist, Adam Smith, “invisible hand” in his 1776 publication of the Wealth of Nations.
Years later, another economist made a follow up argument in his native France expressed in the words of Frederic Passy in the 1840s:
“Someday all barriers will fall; someday mankind, constantly united by continuous transactions, will form just one workshop, one market, and one family. . . . And this is . . . the grandeur, the truth, the nobility, I might almost say the holiness of the free-trade doctrine; by the prosaic but effective pressure of interest it tends to make justice and harmony prevails in the world.”
The challenge today is still the same as when Ludwig von Mises quoted the passage from Passy in 1924 and when Boudin in his economy of subsistence and commercial activities joined the same ideas in 1939. We must continue to fight and hopefully prevail through reason and argument against what Adam Smith referred to in 1776 as the “prejudices of the public” or the economic ignorance of our fellow men and the opposition of the “private interests” meaning those who wish to use the power of the state to plunder others in society. Until we do, free trade will not replace economic trade, however, it still makes a significant difference. Once trade is in play, a network of exchanges is structured as nations form a web of trading alliances, which creates financial motivation not only to keep peace with trading partners, but also to protect them from losing their investments so as not to disrupt the established order. In this context of alliances and partnerships trade motives are essential to avoid wars and sustain stable commercial networks. In theory, it is believed that trade networks and military alliances, help prevent future wars. The literature on the subject indicates the incidence of interstate war has decreased nearly tenfold compared with the period from 1850 to 1949. At the same time, since 1950 international trade networks have increased nearly fourfold, becoming significantly more structured. However there are other real-world factors that have influenced war and trade trends since World War II, mainly, the proliferation of nuclear weapons and the threat of Mutually Assure Destruction (MAD doctrine).
Protectionism promotes hostility. This is why free trade, in the aggregate leads to peace. If the United States imposes a tariff on German products, that tariff hurts German businesses and consumers. It creates hostility in Germany toward the United States. As a result, Germany might even retaliate with a tariff on U.S. products, hurting U.S. manufacturers and angering our government, which would retaliate with another tariff. By the end of the day, both countries now have an excuse to leverage nationalist feelings and stir up support in both countries making it an easier sell for war to settle economic issues. In academia this is called the Richardson process of reciprocal and increasing hostilities; the United States harms Korea, which retaliates, causing the United States to retaliate again. History shows that the Richardson process can easily be applied to protectionism.
Wars have been waged despite international business interests, but the world today is far more globalized than ever before and well-connected making domestic interests more dependent on access to global markets, resources, and capital markets which become huge disincentives to start a war.
Thomas Friedman in his book The World Is Flat is an updated version of his previous “Golden Arches Theory of Conflict Prevention” and the Dell theory:
“The Dell Theory stipulates: No two countries that are both part of a major global supply chain, like Dell’s, will ever fight a war against each other as long as they are both part of the same global supply chain. This is mainly due to the economic interdependence between nations that arises from a large corporation (such as Dell) having supply chain operations in multiple global locations and the reluctance of developing nations (in which supply chain operations commonly take place) to give up their newfound wealth”
In his previous book The Lexus and the Olive Tree, Friedman argued that no two nations with a McDonald’s franchise had ever gone to war with one another: this was known as the Golden Arches theory. Later, Friedman included that people or nations don’t just want to have a better standard of living as symbolized by McDonald’s franchise, but also want to participate in labor market that is created by globalization in the global supply chain.
Friedman nevertheless indicates that the Dell Theory should not be considered a guarantee that countries won’t go to war but rather that a government-population in one of these nations will have very heavy economic costs to consider as they reflect on the option of war to settle economic differences.
Unfortunately, “The breakdown” argument was made by Walter Thomas Mills last century in his Struggle for Existence and the collapse of capitalism and global markets. His reasoning is based in the fact that the success of capitalism depends on the sale of surplus products in foreign markets which will lead to global markets “globalization”but as a consequence, it will end the foreign markets. A parallel argument Mills made is that capital markets depend on growth and expansion of markets in order to invest profits from capital gains but as the opportunities for investments collapse so do the opportunities for profit which leads to a financial meltdown of the system of value such as the financial collapse we witnessed in 2008 housing market which was not based on any tangible assets but just promissory notes that were traded for future profit that fail because of its faulty math of expectation of greater value in hollow assumptions.