How Did Adam Smith Criticize Mercantilism

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How Did Adam Smith Criticize Mercantilism
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• Mercantilist ideas about wealth were nonsensical
  and untenable.
• Mercantilists efforts of accumulating gold and
  silver by trade surplus were in vain.
• Mercantilist trade theory was self-contradictory
  and logically confused.
• Invisible hand also guided foreign trade.

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What Is Real Wealth? Mercantilism vs. Adam Smith

• The basic mistake of mercantilist ideas about
  wealth They confused the precious metals, such
  as gold and silver, with the real wealth of the
  nation.
• What is real wealth The wealth of the country
  consists, not in its gold and silver only, but in
  its lands, houses, and consumable goods of all
  different kinds.

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Function of Trade to a Country

• Why did Adam Smith reach his conclusion about
  wealth? Only because he viewed foreign trade in
  the right light.
• As Adam Smith recognized, foreign trade could
  explore the overseas market and greatly
  encouraged development of production capability
  of a country and necessarily led to increase of
  the real wealth possessed by the country.

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Some Quotations of Adam Smith

• To import the gold and silver which may be
  wanted, into the countries which have no mines,
  is, no doubt, a part of the business of foreign
  commerce. It is, however, a most insignificant
  part of it.
• The importation of gold and silver is not the
  principal, much less than the sole benefit which
  a nation derives from its foreign trade.

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Commodity Exchanges vs. Exchanges of Gold and
Silver

• The transportation of commodities, when properly
  suited to the market, is always attended with a
  considerable profits whereas that of gold and
  silver is scarce ever attended with any. When
  those metals are sent abroad in order to purchase
  foreign commodities, the merchants profit
  arises, not from the purchase, but from the sail
  of the returns. But when they are sent abroad
  merely to pay a debt, he gets no returns, and
  consequently no profit.

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Mystery of Money and a Widespread Feint

• When people exchange with each other by using
  currency as the medium of exchanges currency
  merely stands for purchasing powers with which
  whatever goods or services can be bought whenever
  they are desired.
• That fact will be easily misunderstood as a
  widespread feint that wealth is only and
  exclusively expressed in terms of currency.

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Conclusion of Adam Smith on Wealth

• On the whole, a country was wealthy only because
  it had fostered a tremendous production capacity
  thus could produce a lot of consumable goods and
  services not because it possessed some amount of
  gold and silver.
• It must be of insignificance for a country to
  merely accumulate gold and silver. Only those
  enjoying their large capacity of production,
  being active in foreign trade, and exporting more
  and more goods and services to their trade
  partners could become wealthy countries in the
  world.
• Therefore, the ideas about wealth of
  mercantilists were nonsensical and untenable.

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Specie-flow Adjustment Mechanism

• Based on Quantity Theory of Money David Hume
  initiated Specie-flow Adjustment Mechanism.
• Hume argued that general price level in a society
  in which gold or silver were used as money would
  be rigidly determined by dividing the total
  amount of specie with the total amount of
  commodities exchanged in market.

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Formula of Determining Price

• When P stands for the general price level, M
  stands for total amount of money stock and W
  stands for total amount of commodities,
  respectively, the following formula is concluded.

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Trade Surplus can Do Nothing in Accumulating Gold
and Silver

• Even if mercantilists were glad that a large
  amount of gold and silver had been imported from
  abroad because the countrys trade surplus that
  must be too bad, not good, for the country since
  enlargement of its stock of money implied the
  overall increase in the general price level
  taking the total amount of commodities constant.
• Competitiveness of its exports would be reduced
  whereas goods produced in other countries would
  be more competitive in the home market. Gold and
  silver accumulated through innumerable trials and
  hardships would gradually out-flow till the
  countrys pool of money dried up. Consequently
  the country would at last inevitably surfer trade
  deficits.
• To sum up, Adam Smith wrote When the quantity
  of gold and silver imported into any country
  exceeds the effectual demand, no vigilance of
  government can prevent their exportation.

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Self-contradiction of Mercantilist Trade Theory

• According to zero-or-sum game what a country
  gained in trade was just the losses in trade
  suffered by the other country since the total
  wealth, in terms of gold and silver, of the world
  was constant.
• It must be assumed that all countries will follow
  the same principles of national economic egoism
  and desired to earn in trade.

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Some Keen-edged Questions

• All countries want to benefit from trade who are
  willing to suffer.
• No country wants to suffer from trade then how
  can the other countries acquire the possible
  trade benefits?
• If that is true is it possible for different
  countries to trade with each other?
• From where can the world find a reasonable basis
  for trade?

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The Basic Theoretical Falsehood of Mercantilist
Trade Theory

• As a theory it entirely did not explore what is
  trade, why to trade, how to trade, and are there
  generally existing trade benefits?
• It was little more than a theoretical tool of the
  feudalist lords, rulers of the sovereignties and
  large merchants to exercise colonial exploitation
  and dilation flaunting the banner of trade.
• Trade, in the eyes of the mercantilists, was
  nothing but bald-faced spoliation.
• Mercantilist trade theory could only explain
  trade between the western European powers with
  the colonies. That must be a very special case of
  trade. The theory was not of general significance.

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Invisible Hand in Foreign Trade

• Adam Smith introduced his theory of laissez faire
  into the analysis of trade problem. He criticized
  mercantilist trade policy of intervening and
  monopolizing trade business.
• Invisible hand would also guided trade just like
  it did in domestic economic performances.

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Adam Smiths Conclusion

• What is the species of domestic industry which
  his capital can employ, and of which the produce
  is likely to be of the greatest value, every
  individual, it is evident, can, in his local
  situation, judge much better than any statesman
  or law giver can do for him.
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• Government must reduce and, at last, abandon the
  administrative control over foreign trade and
  free trade policies must be implemented.

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Questions and Problems

• Try to differ mercantilist ideas of wealth from
  that of Adam Smith
• Why we say that trade theory of mercantilism was
  self-contradictory and logically confused?
• Why Adam Smith insisted that trade surplus was of
  no helpful to accumulate gold and silver.
• Try to describe the reasons for a country to
  implement free trade policies.