Free trade vs Mercantilism - Term Paper Example

6 March Mercantilism Theory: Mercantilism is one of the numerous theories of economy that emphasize upon the dependence of a state’s prosperity on the flow of capital. In 1763, the term “Mercantilism” was coined by marquis de Mirabeau and Victor de Riqueti, and Adam Smith played a primary role in spreading it by discussing the contributions of various mercantilists in the book he wrote in 1776, titled The Wealth of Nations (Niehaus cited in “New World Encyclopedia”). West European policies of economy between 16th and 18th centuries were largely dominated by the Mercantilism theory.

Thus, it can be said that Mercantilism was ingrained in the European economic policies from the Renaissance period to the early years of industrialization. Mercantilism theory asserts that the volume of global trade that occurs internationally is “unchangeable”. Therefore, whenever one party takes benefit of any sort, there is another party that has to suffer from an equivalent loss. Mercantilism encourages the representation of economic assets as bullion including gold and silver that are of huge trade value.

The Mercantilism approach holds the belief that every nation’s wealth is primarily dependent upon its richness in such precious metals as gold, platinum and silver. According to the Mercantilism theory, there is no difference between monetary assets and wealth. Mercantilism believes in the fact that the government in rule should play the role of a protectionist in economy. This can be achieved by declining imports with the use of tariffs and improving exports by making use of subsidies. The primary theme of policies of economy in the years of Mercantilism was to reinforce the strength of both a state’s internal and external position (Hansen 61).

Mercantilism believes in achieving this by promoting a nation’s exports and reducing its imports (Reinert et al. 758). Such a system is hard to maintain forever due to the fact that if all countries only export and no country is willing to import, then it would result into the stagnation of global economy. The trade value increases as more and more trade is carried out between states. Mercantilism has ignited enough tensions in Europe to cause many wars. Also, it has played an important role in the expansion of Europe and has spread imperialism not only in Europe, but also all over the world.

With the passage of time, a lot of economists started to criticize the theory of Mercantilism and emphasized upon the requirement of free trade. Although Mercantilism may cause a decline in the global output, a country may ultimately derive a bigger share than others because of the enlightened self-interest (Friedman 67). The long exerted pressure of the critics ultimately led to enforcement of the laissez faire economics. One example of country where Mercantilist system of economy prevails is Japan.

Free Trade Theory: Free trade theory is a system that facilitates trading by enabling the traders to carry out their job across boundaries without having to bear interference of the respective governments. This trade policy allows the trading permits to mutually benefit one another through exchange of products and services. Therefore, under the implementation of a free trade policy, products are sold at prices that reflect the actual supply and demand scenario. Prices determine the allocation of resources.

The fundamental difference between the free trade policy and the conventional policies of trade is that the resource allocation in the former occurs with respect to actual prices unlike the latter, in which the artificial prices do not reveal the correct picture of supply and demand. The protectionist policies of trade are controlled by the governments that restrict supply and adjust prices so as to make the prices artificial. When governments intervene in the trade, they may either increase or decrease the price of products for both suppliers and the consumers.

Interventions from government happen in the form of taxes, subsidies, barriers of tariff or non-tariff sort like quotas and legislations. Mercantilism policy had prevailed throughout Europe for many centuries before the introduction of doctrine of Free Trade. Many economists raised their consents in favor of the free trade policy because they believed that flow of trade was the main reason of civilization of many nations. Economists who have analyzed the impacts of free trade have conventionally based their opinions on the “concepts of trade creation and trade diversion” (Miller 9).

“Free trade in corn enabled the creation of a virtuous circle or reproduction, where high profits produced high investments, yielding increasing returns, reduced unit production costs, and led to potential increases in rents and profits, even with lower retail prices” (Vaggi and Groenewegen 68). Thus, the free trade policy has conventionally met with success in terms of maximized profits and increased trade wherever it has been implemented. One example of a country with free trade system is USA.

Works cited: Friedman, Kenneth S. Myths of the free market. US: Algora Publishing, 2003. Print. Hansen, E. Damsgaard. European economic history: from mercantilism to Maastricht and beyond. Denmark: Copenhagen Business School Press, 2001. Print. Miller, Arnold S. Free trade: current issues and prospects. NY: Novinka Books, 2004. Print. “New World Encyclopedia: Mercantilism.” 3 Apr. 2009. Web. 8 Mar. 2011. . Reinert, Kenneth A., Rajan, Ramkishen S., Glass, Amy J., and Davis, Lewis S. The Princeton Encyclopedia of the World Economy: I-W.

UK: Princeton University Press, 2009. Print. Vaggi, Gianni, and Groenewegen, Peter D. A concise history of economic thought: from mercantilism to monetarism. NY: Palgrave Macmillan, 2003. Print.