Term Paper: Mercantilist School

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¶ … Mercantilist school. To what extent can these beliefs be said to have arisen out of the political history of Mercantilist era, such as the rise of nation states in Europe and the Voyages of Discovery that led to the opening up of new trade links to South America and Asia?

Mercantilism was an economic doctrine of the 16th, 17th and 18th centuries. Its impacts were felt by the major trading nations. During this period, these countries were confronted with wars within the religious and the commercial domains. Therefore, the ideas promoted by this belief were meant to build "a wealthy and powerful state" (LaHaye, Laura Mercantilism). In order to achieve this result, the states pursued the increasing of exports and collection of precious metals such as gold and silver. Their reason was the fact that precious metals were easier to use in the exchange process and, thus, their attention shifted toward the external trade and the fabrication of goods which were on demand on the markets. Due to this change, agriculture and other extracting industries were ranked on the second place. "Under a mercantilist policy a nation sought to sell more than it bought so as to accumulate bullion. Besides bullion, raw materials for domestic manufacturers were also sought, and duties were levied on the importation of such goods in order to provide revenue for the government. The state exercised much control over economic life, chiefly through corporations and trading companies" (Mercantilism). The production activity focused on low costs and high quality.

In the process of wealth-creation, the mercantile class was highly privileged. The welfare of this industry resulted in greater taxes paid to the states, but also in some advantages for this class. Therefore, several policies were introduced and served as means of protection against foreign competition. Among these policies, we can refer to the actions of the state to "provide capital to new industries, exempt new industries from guild rules and taxes, establish monopolies over local and colonial markets, and grant titles and pensions to successful producers. In trade policy the government assisted local industry by imposing tariffs, quotas, and prohibitions on imports of goods that competed with local manufacturers" (LaHaye, Laura Mercantilism). In addition to them, the state barred the export tools and capital equipment and the emigration of the workforce.

Mercantilism was highly important for the Voyages of Discovery. By trying to find more markets on which to sell their products, the producers used ships and traveled between colonies or to previously unknown places. These ships were greatly developed due to the fact that they were accessible means of transporting both commodities and people and that they could arrive at locations unreachable by other transportation. "With the growth of colonies and the shipment of gold from the New World into Spain and Portugal, control of the oceans was considered vitally important to national power" (LaHaye, Laura Mercantilism).

The doctrine "served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state" (LaHaye, Laura Mercantilism). "Through a series of Navigation Acts England finally destroyed the commerce of Holland, its chief rival" (Mercantilism). Therefore, the mercantilism era led to the discovery of new locations, of new trade links between South America and Asia and to the rise of new states in Europe. However, as classical economists asserted "even a successful mercantilist policy was not likely to be beneficial, because it produced an oversupply of money and, with it, serious inflation" (Mercantilism).

Q2. Discuss Adam Smith's views on the proper role of the government. In Smith's view, what should the government do and what should it not do? Explain the meaning of Robert Heilbroner's comment in the Worldly Philosophers (by Robert L. Heilbroner, Simon and Schuster, New York, NY, 1999) that "the great enemy to Adam Smith's system is not so much government per se as monopoly in any form."

As an advocate of the non-intervention of the government on the market and of the concept of free market, Adam Smith was an important figure in the history of economics. His opinion, sometimes misunderstood by some persons, did not state that the government has no role in the economic life, but that it should restrict its activity to certain sectors. Among these, we can refer to the fact that the state should "enforce contracts and grant patents and copyrights to encourage inventions and new ideas. He also thought that the government should provide public works, such as roads and bridges that, he assumed, would not be worthwhile for individuals to provide. Interestingly, though, he wanted the users of such public works to pay in proportion to their use. One definite difference between Smith and most modern believers in free markets is that Smith favored retaliatory tariffs" (Biography of Adam Smith (1723-90)). Thus, Smith proposes the idea that the government should take care of the infrastructure of the state. Moreover, it should provide the best conditions for the development of the country and for the welfare of its citizens.

Smith's writings, among which we should mention "The Welfare of Nations," provide guidelines for the best economic development of a country. Thus, the government should ensure an environment of free competition, dominated by the trends on the market, by the actual state of the economy and not manipulated by some authoritarian forces. The concept introduced by Smith and acknowledged by most economists is "the invisible hand." Therefore, the competition should act as an invisible hand by establishing the prices in relation to the demand and the supply. Except for the competition, there should be no other influential factor such as the government. Moreover, the concept of "the invisible hand" can be used in other domains in order to explain several phenomena.

In regard to Robert Heilbroner's comment in the Worldly Philosophers, we can quote one of Smith's statements: "Civil government, so far as it is instituted for the security of property, is in reality instituted for the defense of the rich against the poor, or of those who have some property against those who have none at all" (the Betrayal of Adam Smith). As we can see, Smith reveals the fact that what bothers him is the privilege that certain categories of persons have against other social classes. Thus, we can approve Heilbroner's remark by adding the idea that Smith resents inequality. His opinion is that each person strives to become wealthy. Thus, in order to succeed when competing, the parties must enjoy the same resources and opportunities. It is only in a fair competition environment when the persons have the chance to employ their knowledge, skills and capabilities so as to obtain the best results, the most competitive results. In the case of a monopoly, the chances are clearly unequal and the winners will be those who place themselves on a monopoly position. Thus, Smith does not only refer to the government interference as a monopoly means, but to all cases in which several individuals or companies make use of undeserved competitive advantages.

Q3. Discuss David Ricardo's Theory of Comparative Costs, its history, and its strengths and weaknesses as a theory of international trade. What did John Stuart Mill later add to Ricardo's trade Theory?

The theory introduced by Ricardo under the name of "The Theory of Comparative Costs" has been subsequently entitled "The Theory of Competitive Advantage." Due to the fact that this theory is not easy to accept without a practical proven basis, Ricardo proposed a numerical model. His starting point consisted of two countries: England and Portugal which were producing two commodities, such as cloth and wine. In order to obtain these products, the only input taken into consideration was the labor.

The history of this theory was Adam Smith's view of advantageous trade on the basis of the absolute advantage. Therefore, Ricardo was actually developing the previous theory and proposed his as a more general one. By means of numbers, Ricardo proved "that if England specialized in producing one of the two goods and if Portugal produced the other, then total world output of both goods could rise! If an appropriate terms of trade (i.e., amount of one good traded for another) were then chosen, both countries could end up with more of both goods after specialization and free trade then they each had before trade. This means that England may nevertheless benefit from free trade even though it is assumed to be technologically inferior to Portugal in the production of everything" (the Theory of Comparative Advantage - Overview). As a result, the emerging theory stated that the specialization in a random good would not lead to the improvement of the world output. However, the specialization in the good in regard to which the country has a comparative production advantage will have the best results.

But, the factors taken into account when seeking a comparative advantage in production should not be the monetary costs or the labor used, but the opportunity costs of… [END OF PREVIEW]

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