Criticism of the mertilist theory, Essays (univeristy) for International Trade Union Law
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Criticism of the mertilist theory, Essays (univeristy) for International Trade Union Law

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Evaluate Adam Smith’s main criticisms of mercantilism.

Introduction

In his Theory of Moral Sentiments (1959), Adam Smith (1723–1790) took his

moral concerns into the study of the new discipline of political economy.

Smith’s economic literature made a series of criticisms of the mercantile system.

He discussed the fact that free international commerce would enlarge the

economic benefits of the market. Likewise trade between nations would have

the political benefit of reducing wars. In his magnum opus, An Inquiry into the

Nature and Causes of the Wealth of the Nations (1776) Smith arranged a

systematic model that tried to explain how self-interest guided free market

competition into social benefits. With the division of labour, market production

would increase making commodities available to the wider part of the

population for cheaper prices. This idea of a self-regulated market is

exemplified by the well-known metaphor the “invisible hand”. Hence in an

effort to examine Smith’s laissez–faire ideas against mercantilist notions, this

essay will firstly provide a description of who the great thinker Adam Smith

was. Secondly the concept of mercantilism, along with some examples

(bullionism, the English East India Company, and the Navigation Acts of 1651)

will be discussed. To conclude Smith’s Wealth of the Nation’s maincriticisms of

the mercantile system will be evaluated.

Adam Smith (1723–1790)

Adam Smith was born in Kirkcaldy, Fifeshire, Scotland in 1723, and was the

son of a typical non noble family from the higher class. His father, also Adam

Smith, was a civil servant who came to occupy positions of certain importance

in the Scottish administration. His mother, Margaret Douglas Smith, was a

descendant of landowners of the Fife County (Cannan, 1996, p.5). Smith’s

academic formation took place at the University of Glasgow in 1737. After three

years, in 1740 he received a Master of Arts degree from that university.

Consequently, after a period in Oxford, he returned to Glasgow and began his

career as a Professor of Moral Philosophy from 1752 to 1763 (Putterman &

Kroszner, 1996, p.35). An important detail to mention was the great influence

that the then Professor of Moral Philosophy at Glasgow University, and one of

the founding fathers of the Scottish Enlightenment, Francis Hutcheson

(1694-1746) had on Smith. It was during his lectures that the young Smith

initiated his studies of political economy (Cannan, 1996, p.5). Furthermore, in

his first book, The Theory of Moral Sentiments (1959), he elaborated a

philosophy of stimulus which attempted to unite human self-interest with

unrestricted social order (Heywood, 2007, p.50). Later in the TheWealth of

Nations (1776), Smith argued that the main objective of the market economy

was to create continued growth in the standard of living for the majority of

people. From 1778 until his death in 1790 Adam Smith worked as a

commissioner of customs for Scotland. On the basis of both his books together

with other essays and notes, for instance Lectures on Jurisprudence, Adam

Smith was more than just a philosopher/economist, he was also a sociologist,

psychologist and a historian. TheWealth of Nations is not only a masterpiece of

political economy but it recognises him as its founding character (Heilbroner,

1991, p.73).

Mercantilism

There is no common definition of mercantilism and its fundamental feature.

Some argue that it is its strong sense of nationalism, whilst others discuss the

role of state intervention in the economy. Additionally there is the argument

relating to the paramount importance of bullionism1. For instance, Spain hit the

jackpot on the extraction of precious metals after conquering colonies in

America, especially in the region of Potosí, now Bolivia (A History of the World

in 100Objects, 2010). Moreover mercantilism is erroneously regarded as anti-

trade, and as a program of zero-sum game2. Due to the fact that empires bought

guns and funded armies to keep their restrictive trade routes, wealth was seen as

connected with power, creating as argued by Balaam & Veseth, (2008, p.22), a

vicious cycle of absolute benefits and losses. As a protectionist policy,

mercantilism needed military assistance but also required trade to endure.

Therefore mercantilism can be considered to be a set of theories and practices of

economic intervention that developed in modern Europe. This materialised due

to the technological progress of shipbuilding which formed new trade routes

between the commercial classes. A prime example of this development was the

creation of the English East India Company in December 1600. This chartered

monopoly was established to exploit commerce with the East Indies colonies,

but traded as far as the Indian subcontinent. In order to keep this monopoly, the

Navigation Act of 1651 was created. This Parliamentary Act prohibited

European goods to be transported to Britain by foreign vessels; the only

exception was the transport by English ships or a ship listed in the country of

origin of the imports (Deyon, 2001, p.28). In addition, through the East India

Company, in the mid-1690s vast amounts of cotton calicoes were imported from

India to Britain. Eventually this had an effect on the domestic cotton market. It

also generated a debate and written work analysing the real benefits of free

trade, however not the monopolistic discussion of free trade , but the one related

to an unrestricted, self-promoted market (Irwin, 1996, p.53). From all of the 1 The belief that the accumulation of precious metals, such as gold and silver is the main form of wealth for the State (Encyclopedia Britannica, 2014)

2 The situation in which for one part to win, the other one has to loose

Western European nations that produced texts about mercantilism, the most

influential works were made by the French and the British (Landreth &

Colander, 1976, p.44). Adam Smith’s literature criticising mercantilism (a term

not yet identified) facilitated the understanding of it and coined the term

“mercantile system” (Library Economics Liberty, 2008). He basically described

this system as a political economic organisation that made efforts to promote

exports and restrain imports. Entrenched in this definition is probably Smith’s

main criticism of mercantilism and that shall be evaluated next.

The Wealth of Nations critique

Many of the analytical models of The Wealth of Nations were dedicated to

attacking the mercantile system. They arose out of the considerations made by

Smith towards the real accomplishments of the consumer revolution in Britain3.

At the expense of the common interest, merchant groups tried to evade the

competitive market and stimulate their own self-interest as stressed by Smith,

(2012, p.134) “People of the same trade seldom meet together, even for

merriment and diversion, but the conversation ends in a conspiracy against the

public or in some contrivance to raise prices”. The role of intellectuals such as

Adam Smith was to contest these forces and impulse the legislators to

encourage and regulate free market competition that would work for the overall

population, rich and poor,with the purpose of achieving “universal opulence.”

Smith argued that the mercantilist framework encouraged the monopoly of a

few classes and delivered to this minority, high rates of profit in favour of the

general interest. To challenge this, the market, supported by the division of

3 The period around 1600 to 1750, when market consumption improved and a variety of products could be purchased by individuals of different social and economic background (Fairchilds, 1993, p.850)

labour, should be defined and guided under certain conditions by a self-

controlled formula known as the "invisible hand”. Thus institutional

adjustments could channel individual interest to achieve socially desirable

outcomes.

Nevertheless, the creation of wealth and growth as argued by Adam Smith was

never related to altruism, but instead to the forces of self-interest, as everyone

was working for their own benefit which is exemplified in this sentence. “It is

not from the benevolence of the butcher, the brewer, or the baker that we expect

our dinner, but from their regard to their own interest” (Smith, 2012, p.19). This

self-interest combined with free market competiton, in opposition to

mercantilists’ policies, would help to catalyse more wealth for the vast majority

of the population. For this to materialise, profit and affluence would only be

possible through specialisation and the division of labour. As stated by Smith,

“A workman not educated to this business … could scarce, perhaps, with his

utmost industry, make one pin in a day, and certainly could not make twenty.

But in the way in which this business is now carried on, … it is divided into a

number of branches … One man draws out the wire, another straightens it, a

third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head;

… the business of making a pin is, in this manner, divided into about eighteen

distinct operations” (King, 2006). The division of labour would increase

productivity, thus generating wealth. Although often understood as a free-

market thinker, Smith was nevertheless conscious of the restrictions of the

laissez- faire system. The benefits of specialisation and the division of labour

which would allow free competition, and consequently growth and wealth,

could only work under certain conditions provided by the public authorities.

These conditions for instance, defence, property rights, and infrastructure

(roads, bridges, and lighting) called “public goods” were essential to prevent the

formation of monopolies. By providing for protection, the rule of law, and

“public goods”, the authorities produced the prerequisites for a market

economy.

In Smith’s revolutionary view, the mercantile system would limit the advantages

of the market. International trade was to be the possible solution, since new

opportunities would arise with the commerce of its surplus and bullionism could

be seen as not the only form of wealth. The rules and principles that applied to

the domestic market should also be applied at the international level (Smith,

1983, p.59). Self-interest, free competiton, and the division of labour were key

elements against mercantilist monopoly. Hence mercantilists companies such as

the East India Company, and protectionists’ laws, for instance the Navigation

Acts should be finished. As an alternative countries should seek wealth through

open competition as defined by his theory of absolute advantage “If a foreign

country can supply us with a commodity cheaper than we ourselves can make it,

better buy it from them with some part of the produce of our own industry,

employed in a way in which we have some advantage” (Smith, 2012, p.446).

And it is that pro-globalisation insight, written in Adam Smith’s The Wealth of

Nations (1776) that encouraged the end of mercantilism (Brown speech, 2006).

Conclusion

To conclude, the great philosopher/economist Adam Smith (1723-1790), began

his career as a lecturer of Moral Philosophy at the University of Glasgow.

Influenced by his professor and the founding figure of Scottish Enlightenment,

Francis Hutcheson (1694-1746), Smith took his moral concerns in The Theory

of Moral Sentiments (1959) into a study of the new discipline of political

economy. With the development of this new commercial society in Britain,

Smith's economic and political writings were often used to criticise the

mercantile system, a term coined by him. Opposing the protectionist principles

of mercantilism, he argued that free market competition would bring peace and

wealth for all nations. In his main work, The Wealth of the Nations (1776) he

made a systematic critique of mercantilism. There he argued that, with certain

restrictions, the self-regulated market (invisible hand), would lead to self-

interest, and when supported by the division of labour would bring “universal

opulence”. Mercantilism is often mistakenly defined as a policy of zero sum

game and in fact as necessary for trade to survive. However it is highly

protective of the market as the examples of bullionsim, Chartered Monopolies

and the Navigation Acts showed. Adam Smith's revolutionary ideas of self-

interest, free market competition, the division of labour and absolute advantage

helped to end mercantilism.

References

.A History of the World in 100 Objects, 2010, radio program, BBC Radio 4, London, 24 September

.Balaam, D.N. & Veseth, M. (2008), Introduction to international political economy; 4th ed. (Upper Saddle River, NJ: Pearson Education International).

.Brown, G. (2006), Mansion House speech, [online], Available at <http:// www.guardian.co.uk/business/2006/jun/22/politics.economicpolicy> [Accessed

31 August 2014]

.Cannan, E. (1996) ‘Apresentação’ em Smith, A., A Riqueza das Nações: Investigação sobre sua natureza e suas causas, (São Paulo: Abril Cultural).

.Deyon, P. (2001), O Mercantilismo, 4th ed. (São Paulo: Editora Perpectiva S.A.)

.Encyclopedia Britannica, 2014, Bullionism, [online], Available at <http:// www.britannica.com/EBchecked/topic/84477/bullionism> [Accessed 31 August

2014]

.Fairchilds, C. (1993), Consumption in Early Modern Europe. A Review Article”. Comparative Studies in Society and History, Volume 35, Number. 4

.Heilbroner, R. (1991), The Wordly Philosophers; the lives, times and ideas of the great economic thinkers, (London: Penguin).

.Heywood, A. (2007) Political Ideologies: An Introduction, 4th Edition (Basingstoke: Palgrave Macmillan).

.Irwin, D. A. (1996), Against the Tide: an intellectual history of free trade, (Princeton, N.J: Princeton University Press).

.King, M. (2006), Adam Smith lecture, speech 288, [online], Available at < w.bankofengland.co.uk/archive/Documents/historicpubs/speeches/2006/

speech288.pdf> [Accessed 1 September 2014]

.Landreth, H. & Colander, D.A. (2002), History of Economic Thought, 4th ed., (Boston: Houghton Mifflin).

.Library Economics Liberty, 2008, Mercantilism, [online], Available at <http:// www.econlib.org/library/Enc/Mercantilism.html> [Accessed 31 August 2014]

.Putterman, L. & Kroszner, R.S. (1996), The Economic nature of the firm - a reader, 2nd ed., (Cambridge University Press)

.Smith, A. (1983) A riqueza das nações: Investigação sobre sua natureza e suas causas, (São Paulo: Abril Cultural).

.Smith, A. (2012), An Inquiry into the Nature and Cause of the Wealth of Nations, (Ware: Wordsworth Edition Limited)

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