Quite recently the World Bank released that by the end of this year, 2015, extreme poverty would fall below 10% for the first time in history. This has obviously been incredible progress from over 50% of the world living extreme poverty in 1985. The World Bank has stated that strong economic growth from emerging economies has been the main determinate of driving poverty rates down. Why does this happen? Ultimately it comes down to Adam Smith’s ‘invisible hand’. Directly when an entrepreneur starts a business, they create jobs and income. People can afford housing, food and water etc. Then the indirect effects occur, when people spend it creates income for others (one mans spending is another mans income) through the power of the multiplier effect higher aggregate levels of income will be achieved. When businesses make profit and workers are provided incomes, they pay tax, this enables the government to invest more into health, education and social safety nets such as welfare. All these effects from economic activity decrease poverty and increase living standards. It’s foolish to suggest that free trade and economic growth doesn't lead to lower poverty, but what about world peace? Free trade (or capitalism whatever you want to call it) leads to lower poverty, but can it solve world peace too?
Well when free trade occurs, countries are more independent on each other. They are reliant on each other for trade, investment, labour and capital. Now if a country relies on another country for their growth, jobs and income, it would make no sense to invade or to be aggressive towards that country, it is much more efficient and beneficial to trade. Just as Milton Friedman said, the power of the market makes people who hate each other cooperate and work together. There is evidence to back this, since WW2 the world’s top 40 biggest economies haven’t had a war with each other. So what does this mean? It means the more we become interconnected and integrated as a globe through trade and commerce, the more peaceful and understanding we will become of each other as global citizens.