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Chapter 2: Problem 2

How did Smith's views on international trade differ from those of the mercantilists?

Short Answer

Expert verified
Smith's views differed from the mercantilists in that he believed wealth was not finite but could be created through productive labor, preferred free trade based on absolute advantage over self-sufficiency, supported minimal state interference in economic affairs contrary to the mercantilist pro-regulation stance, and saw competition as a driving force for economic growth.

Step by step solution

01

Understand Mercantilism

First, look at what 'mercantilism' is. It was the predominant economic philosophy of the 16th to 18th century. Key features of mercantilism include: the belief in a finite amount of wealth in the world, the importance of accumulating gold and silver as national wealth, promoting exports and discouraging imports to attain economic self-sufficiency, maintaining a favorable balance of trade, and the state's strong role in regulating and controlling the economy.
02

Understand Adam Smith's Views on International Trade

Adam Smith, often known as the 'father of modern economics', had a radically different outlook. Smith propounded the theory of absolute advantage, where countries should specialize in producing goods that they can produce more efficiently than other countries. In his book 'The Wealth of Nations', he argued that free market and free trade improve economic efficiency, enhance wealth and promote social welfare. He believed in the 'invisible hand' of the market in regulating the economy, a reduced role for government in economic matters, and the importance of competition in fostering economic growth.
03

Compare and Contrast

With this understanding, compare and contrast the two views. Smith's views diverge from mercantilism in: Perception of wealth - For mercantilists, it is finite and often represented in gold and silver, but Smith sees wealth as being able to be created through productive labor; In terms of trade - Mercantilists aimed for self-sufficiency and a positive trade balance, whereas Smith advocated for free trade based on absolute advantage; Regarding state intervention - Mercantilists advocated strong state intervention, while Smith preferred minimal state interference; On competition - Smith saw competition as a driving force of economic growth, which was not a perspective shared by mercantilists.

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