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Mercantilism: Adam Smith’s Criticism

Mercantilism is very well known as an economic system that was widely practiced in European countries from the 15th century until the late 18th century. Mercantilism was thought of as an economic policy that would benefit the Home country as they would only be exporting the goods to the other countries and putting restrictions on importing goods from the rest of the world. Mercantilist gave utmost importance to the final goods as compared to the raw materials. Hence, they believed in importing the raw materials from different parts of the world which they found out to be cheap and converting these raw materials into final goods in the Home country and then exporting these final finished goods at a higher price. Such trade practices led to Trade Surplus. Therefore, during Mercantilism, European countries accounted for more exports and fewer imports. The medium of exchange in those times was gold and silver was termed as bullions.

Over the years, the topic of Mercantilism has been in debate and in discussions of whether or not such an economic policy was a plausible cause to ignite other countries against each other over the trade dominance and import restrictions that might have ultimately led to war-like situations in various parts of the world. It followed that there are two schools of thought. One believed that practicing such a trade policy was beneficial as it accounted for higher wealth in the economy during those times. The other was an opposing view which firmly believed that such trade practices only led European countries to better-off and the rest of the world to worse-off.

Thomas Mun was one of the economists representing the first school of thought in favor of Mercantilism as Trade surplus which accounted for more exports and fewer imports also meant that these colonies were having a favorable balance of payment with more inflow of bullions in the Home country and fewer outflow of bullions in exchange of imports. Also, Mercantilist managed to trade in such a manner that there were little or no bullions exchanged while importing the goods as they would substitute making payments in bullions with the exchange of other goods. In this manner, the colonies amounted to accumulated wealth in terms of gold and silver reserves.

Adam Smith holds a very critical viewpoint on Mercantilism. In his Inquiry into Nature and Causes of the Wealth of Nations (1776), in certain instances, he quoted Mercantilists as “vile masters of mankind” and “chief architects of public policy” to highlight the fact that Mercantilist thought as being ‘All for ourselves and none for others’. This was supported by the fact that the then Legislature only focused on making themselves better off and other colonies worse off. Such governing laws related to trade and commerce only benefitted the Producers and not the consumers. Another example of how Mercantilists ruled the then economy into their favor by passing and implementing the successive Navigation Acts 1651,1660 to become self-sufficient and restrict trade and commerce among other colonies and to also prevent other colonies from becoming new manufacturing hubs. This shows the zero-sum game in Mercantilism, in which only European countries gained in terms of bullions while the rest of the world ran down on those reserves. To widen the markets and to narrow the competition, Mercantilists provided subsidies to domestic manufacturers and producers and at the same time imposed prohibitive tariffs on imports to promote domestic markets.

Adam Smith believed in Free trade based on the Specialization in factors of productions. According to him, Comparative advantage in trade would mutually benefit both the parties in contrast to what was practiced in Mercantilism, gaining at the expense of others. Also, specialization in production allows for economies of scale, more efficiency, and growth in the economy as a whole. According to Adam Smith, the method of measuring growth in terms of bullions was considered to be inappropriate. Rather, the economy’s growth should be accounted for and based on its labor and capital productivity. Smith saw Mercantilism as Monopoly leading to inefficiency in the economy.

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