Question

Since the time of Adam Smith, economists have usually advocated free trade measures. The Mercantilists, however, supported a strong protectionist policy during the 17 th and 18th centuries. Brieflv explain their position.

Short answer

In conclusion, during the 17th and 18th centuries, Mercantilists advocated for a strong protectionist policy that restricted imports and promoted domestic production to achieve a favorable balance of trade and accumulate wealth. This involved using measures such as tariffs, quotas, subsidies, and non-tariff barriers to protect domestic industries from foreign competition. This contrasted with the free trade measures supported by economists like Adam Smith, which promote global cooperation and unrestricted trade.

Step-by-step solution

Define Mercantilism

Mercantilism is an economic theory that prevailed during the 17th and 18th centuries, which emphasizes the importance of maintaining a favorable balance of trade by maximizing exports and minimizing imports. Unlike free trade, which promotes global cooperation and is based on comparative advantage, Mercantilism encourages self-sufficiency and protectionism to achieve economic growth and prosperity.

Identify the key principles of Mercantilism

The key principles of Mercantilist theory include: 1. Maximizing exports: Mercantilists argue that countries should produce goods and services that are in high demand and can be exported, which increases their wealth. 2. Minimizing imports: In order to decrease foreign dependence and consolidate domestic resources, Mercantilists support the use of domestic goods and services. 3. Accumulating wealth: Mercantilists believe that countries can achieve prosperity by accumulating wealth, mainly in the form of gold and silver. 4. Protectionist measures: To achieve these goals, Mercantilists support the introduction of protectionist policies, such as tariffs and trade barriers, to protect the domestic industries.

Explain Mercantilist protectionist policy

Mercantilists supported a strong protectionist policy, aimed at restricting imports and promoting domestic production. This was achieved through various protectionist measures, including: 1. Tariffs: Imposing high taxes on imported goods made them more expensive and less attractive to consumers, encouraging the purchase of domestically produced goods. 2. Quotas: Limiting the quantity of certain goods that could be imported, also promoting domestic production as a substitute for the restricted imports. 3. Subsidies: Providing financial support to domestic producers to encourage growth and development of specific industries. 4. Non-tariff barriers: Using various regulations and restrictions, such as licensing or technical standards, to make it difficult for foreign goods to enter the domestic market. These measures were put in place to protect domestic industries from foreign competition, improve the balance of trade, and accumulate wealth within the nation.

Contrast with free trade measures

Unlike Mercantilist protectionist policies, free trade measures advocate for the removal of trade barriers and promote the exchange of goods and services between countries without restrictions. Free trade supporters, such as Adam Smith, argue that unrestricted trade leads to greater economic efficiency, improved allocation of resources, and a higher quality of products and services. In conclusion, Mercantilists advocated a strong protectionist policy during the 17th and 18th centuries, aimed at restricting imports and promoting domestic production in order to achieve a favorable balance of trade and accumulate wealth. This contrasted with the free trade measures supported by economists such as Adam Smith, which argue for global cooperation and trade without restrictions.

Key concepts

Protectionist Policy

A protectionist policy can be envisioned as an economic defense mechanism employed by nations to safeguard their domestic industries from global competition. It is a strategic practice designed to bolster economic self-reliance and minimize vulnerability to foreign markets. Protectionist policies often manifest through tariffs, which are taxes levied on imported goods, making them less competitive against local products. Quotas are another tool used to directly limit the amount of goods that can be imported into a country.

Subsidies serve as financial support systems for domestic industries, enhancing their development and enabling them to stand against international rivals. Additionally, non-tariff barriers such as regulatory standards or licensing requirements add layers of complexity for foreign entities attempting to penetrate local markets. The ultimate goal is to cultivate a robust domestic economic environment, nurturing industries until they can compete on a global stage, thereby maintaining or improving the nation's balance of trade.

Real World Application

In practice, these policies have been applied by various countries to protect nascent industries that are deemed vital for national interests or to respond to trade imbalances believed to affect domestic employment adversely.

Balance of Trade

Balance of trade is a fundamental concept in international economics, referring to the difference in value between a country's exports and imports. A favorable or positive balance of trade occurs when a country's exports exceed its imports, indicating a net inflow of domestic currency from foreign markets.

On the contrary, a negative balance, often called a trade deficit, may signify that a nation is spending more on importing goods than it earns from sales abroad. The balance of trade is a critical component of a country's current account and is an indicator of its economic health. Mercantilism, as an economic policy, fixated on achieving a surplus in the balance of trade as a direct route to national prosperity. Accumulating wealth, particularly precious metals like gold and silver, was envisaged as a sign of economic strength.

Importance of Balance

Today, economists debate the true significance of the balance of trade, as the complexities of global economies can make a trade deficit sustainable and not necessarily indicative of economic weakness, especially for countries with strong service sectors.

Economic Theories

Economic theories are the frameworks that help explain and predict various economic phenomena within the marketplace. These theories are integral in assisting policymakers in crafting economic policies and strategies.

Mercantilism, for instance, is one such theory that emerged in the early modern period, which advocated for governmental intervention to achieve a favorable balance of trade. It is one of the earliest economic theories to emphasize the nation-state's role in managing international commerce and wealth accumulation. As economic thinking evolved, new theories emerged, such as the classical economics of Adam Smith, which championed free trade and limited government intervention, and Keynesian economics, which supports government intervention to stabilize economies.

Evolving Perspectives

Each economic theory provides unique insights into how wealth is created and distributed, offering varied prescriptions for policy, from laissez-faire approaches to active government engagement. Understanding these theories helps students and policymakers grasp the motivations behind historical and contemporary economic policies.