Professor Hagai M. Segal
September 29, 2015
Why Free Trade is Superior to Mercantilism
The Industrial Revolution brought great success to the British Empire. It helped establish the Empire as one of the leaders (if not the strongest) of the European powers that would colonize lands all over the globe. By the end of the 18th century, Britain had amassed global economic power, and needed to regulate it somehow. The British government's plan of action was to enforce regulations on trade in order to keep control of what was produced, and what would benefit the motherland most. Adam Smith, arguably the most influential economic theorist in modern history, coined ...view middle of the document...
It was unclear if the standard of living was improving or not.
Adam Smith did believe that the goal of politics and government should be to improve the standard of living, but did not believe the mercantile system was achieving so. Smith lived in a time where the consumer revolution had begun: prices were dropping, and luxuries were becoming a separate category of goods themselves (Gross, 2014). Though still at war with other European powers, Britain was engaged in foreign trade that was essential to its economic prowess. Adam Smith saw opportunity in foreign trade. As Smith would agree, it makes no sense for a state, even one as big and powerful as the British Empire, to try and obtain all land and its resources. Its other fixed resources, labor and capital, would not be enough to produce a satisfactory quantity level of every product that society demands. If society were to improve its standard of living, then states would be required to allocate all of their resources efficiently among each other, exploiting their competitive advantages (Smith, 1776). If states are able to specialize, then the global economy would benefit from unrestricted free trade, since every product would be available, at the fair price. However, if this were to become a reality, the role of government should be limited.
The idea of free trade that Smith developed is founded upon key characteristics of human nature. Humans are self-interested; humans care about status (the opinion of others); humans have finite goals; humans are cooperative; humans have a natural inclination to trade (Smith, 1759). Because humans have the ability to organize among themselves, free trade is the system that will let humans pursue their individual interests. It accomplishes this by allowing people to decide how many they want of a product, and for how much–this is effectively what we now define as a market. Exchange precedes specialization and the division of labor. Once a market has been established for each product, humans can allocate resources privately (without the assistance of government) to begin production. Division of labor is a term that goes hand-in-hand with specialization. In the former, people specialize. This supports the belief that people become better over time by practicing, and innovating. It leads to higher productivity, meaning more output for the same amount of input. An increase in productivity is what we know as economic growth. This is managed by exchange, since it is information on the demand for a product, and how much should be made.
Government is not entirely wiped out in a society that exercises free trade. It is, after all, a natural tendency of humans to interact and socialize, as the likes of Rousseau and Paine would agree. It has its own responsibilities that do not...