Chapter 3 Why Everybody Trades: Comparative Advantage 33

Case Study Mercantilism: Older Than Smith—and Alive Today

Mercantilism was the philosophy that guided more exports and fewer imports turns social
European thinking about international trade in priorities upside down. Here are the key points
the several centuries before Adam Smith pub- that refute mercantilist thinking:
lished his Wealth of Nations in 1776. Mercantilists
• National well-being is based on the ability to
viewed international trade as a source of major
consume products (and other “goods” such as
benefits to a nation. Merchants engaged in trade,
leisure and a clean environment) now and in
especially those selling exports, were good—
the future. Imports are part of the expanding
hence the name mercantilism. But mercantilists
national consumption that a nation seeks, not
also maintained that government regulation
an evil to be suppressed.
of trade was necessary to provide the largest
national benefits. Trade merchants would serve • The importance of national production and
their own interests and not the national interest, exports is only indirect: They provide the
in the absence of government guidance. income to buy products to consume. Exports
A central belief of mercantilism was that national are not desirable on their own; rather, exports
well-being or wealth was based on national hold- are useful because they pay for imports.
ings of gold and silver (specie or bullion). Given • Trade freely transacted between countries gen-
this view of national wealth, exports were viewed erally leads to gains for all countries—trade is a
as good and imports (except for raw materials not positive-sum activity.
produced at home) were seen as bad. If a country
In addition, even the goal of acquiring gold
sells (exports) more to foreign buyers than the for-
and silver can be self-defeating if this acquisi-
eigners sell to the country (the country’s imports),
tion expands the domestic money supply and
then the foreigners have to pay for the excess of
leads to domestic inflation of product prices—an
their purchases by shipping gold and silver to the
argument first expounded by David Hume even
country. The gain in gold and silver increases the
before Smith did his writing.
country’s well-being, according to the mercantilist
Although the propositions of the mercantilists
belief. Imports are undesirable because they reduce
have been refuted, and countries no longer focus
the country’s ability to accumulate these precious
on piling up gold and silver, mercantilist thinking
metals. Imports were also feared because they
is very much alive today. It now has a sharp focus
might not be available to the country in time of war.
on employment. Neo-mercantilists believe that
In addition, gold and silver accruing to the national
exports are good because they create jobs in the
rulers could be especially valuable in helping to
country. Imports are bad because they take jobs
maintain a large military for the country. Based on
from the country and give them to foreigners. Neo-
mercantilist thinking, governments (1) imposed an
mercantilists continue to depict trade as a zero-sum
array of taxes and prohibitions designed to limit
activity. There is no recognition that trade can
imports and (2) subsidized and encouraged exports.
bring gains to all countries (including mutual gains
Because of its peculiar emphasis on gold
in employment as prosperity rises throughout the
and silver, mercantilism viewed trade as a zero-
world). Mercantilist thinking, though misguided,
sum activity—one country’s gains come at the
still pervades discussions of international trade in
expense of some other countries, since a surplus
countries all over the world.
in international trade for one country must be a
deficit for some other(s). The focus on promoting
exports and limiting imports also provided major DISCUSSION QUESTION
benefits for domestic producer interests (in both Proponents of national competitiveness focus on
exporting and import-competing industries). whether our country is winning the battle for
Adam Smith and economists after him global market share in an industry. Is this a kind
pointed out that the mercantilists’ push for of mercantilist thinking? Why or why not?