Protectionnism and Free Trade in Economical Doctrines
The theoretical basis of a study of international economic relations
in its modern form was formed as a result of a long and difficult process,
full of successes but, nevertheless, with important mistakes.
The early roots are to be found, perhaps, in Antic Greece in the works
of Aristotel, Platon and Xenophon. In general, the antic philosophers
opposed to the big commerce, supporting the idea of a closed domestic
economy. The closed character of the production of a self-supply type,
dominating from the antiquity up to 15th century gave no incentives for
developing any profound and constant studies on international trade. In
these conditions is in no way occasional that the theorists of antiquity
and Middle Ages (scholastics) exaggerated the role of production
(especially agricultural) and pleaded against the "art of making money",
the chrematistics (after Aristotel).
At the dawn of the Modern Age (16th century) there appeared the first
trials of more systematic analyses of the international economic relations.
Developed during the period of the downfall of feudalism and the
transition to capitalism, the mercantile theory was the first trial to
explain integrally the principles of international trade in a paradigm of
the analysis of economic reality.
Perhaps, the field of international trade was first closely studied by
men of affaires, in private or governmental employment, as no other topical
area, as a part of an effort to increase the wealth and the power of the
nation, with which these men tended to identify their own welfare. This
body of doctrines, later named by Adam Smith the "mercantile system" or
"mercantilism", insisted that the acquisition of wealth, particularly
wealth in the form of gold, was of paramount importance for national
policy. Mercantilists took the virtues of gold almost as an article of
faith; consequently, they never undertook to explain adequately why the
pursuit of gold deserved such a high priority in their economic plans.
The mercantilists held that economic policy should be nationalistic
and aim to secure the wealth and power of the state. This concept was based
on the conviction that national interests are inevitably in conflict - that
one nation can increase its trade only at the expense of other nations.
Thus the most pervasive and most emphasized doctrine was the
importance of bringing about and maintaining an excess of exports over
imports, for that was the only way for a country without gold and silver
mines to increase its stock of the precious metals. In this way the foreign
trade, after mercantilists, was reduced to the maximum exports of goods for
gold and silver and some exports of raw materials and precious metals.
The desire for a "favorable" balance of trade was never based by
mercantilist writers on a to see their countries engaged in capital export,
to make investments abroad, as the majority of them were at least confused
as to the difference between money and wealth, and very often identified
these two terms.
The idea was also that the state should provide its citizens with a
monopoly of the resources and trade outlets of its colonies. A typical
illustration of the mercantilist spirit is the famous English Navigation
Act of 1651, which reserved for the home country the right to trade with
the colonies and prohibited the import of goods of non-European origin
unless transported in ships flying the English flag. This law lingered on
until 1849. A similar policy was followed in France.
Thomas Mun, as a representative of mercantilist school, was one of the
firsts to deal extensively with the balance of international trade and the
balance of international payments. He first introduced into this balance
such components as the sale of numerous services - freight earnings, marine
insurance payments, travelers' expenses, and many more - to foreign
Among other adepts of mercantilist theory we can name also Edward
Misselden, William Petty, and others.
With the emergence of mercantilism in the 16th-17th century, an
extensive body of literature dealing with the international trade appeared,
although we must add immediately that it yielded relatively few lasting
contributions to international trade theory.
Mercantilists' ideas often were intellectually shallow, and indeed
their trade policy may have been little more than rationalization of the
interests of rising merchant class that wanted wider markets coupled with
protection against competition in the form of imported goods.
A strong reaction against mercantilist attitudes began to take shape
toward the middle of the 18th century. In France, the economists known as
Physiocrats demanded liberty of production and trade. In England, Adam
Smith demonstrated in his The Wealth of Nations (1776) the advantages of
removing trade restrictions. Economists and businessmen voiced their
opposition to excessively high and often prohibitive customs duties and
urged the negotiation of trade agreements with foreign powers.
This movement was later named liberalism and the very first economists
fighting against the mercantile ideas are regarded to as the pre-classical
18th century is often remarked through the development of the
scientific trend in studying human society. In this way through the
association with such sciences as physics, medicine, astronomy, and others,
it was proved that the society is ridden by the "natural law". Instead of
being finalistic and normative, as in the Middle Ages, the human sciences
became descriptive and explanatory. One of the first scientists which tried
to follow these concepts are the pre-classical liberalists and among them
such economists as Dudley (Douglas) North, Cantillon, Hume, Condillac, and
North undertook a vigurous attack aimed at ridding the discussion of
foreign trade matters from mercantilist "superstitions". He has fittingly
been called the first "free trader" in the Smithian sense. Viewing the
whole world rather than a single nation as an economic unit, he
demonstrated that there's no fundamental difference between foreign and
domestic trade. North also presented a concise formulation of the automatic
and self-regulating mechanism that provides a nation with that sum of money
required for carrying its trade.
Cantillon deflated mercantilist tenets by showing that if a country
continues to sell more than it buys from abroad, money will successively
will flow into it and, as a first consequence, land and labor in the export-
surplus country will become more expensive.
Hume greatly helped to piece together the theory of self-regulating
international trade, and he went beyond Cantillon in pointing out why a
country could not permanently have a "favorable" or "unfavorable" trade
balance. Specifically, he stated the theory of self-regulating mechanism
with a much greater degree of clarity and incorporated it more consistently
with the remainder of his work than was the case with any of the earlier or
contemporary writers. He included the influence of exchange-rate
fluctuations on commodity trade in the mechanism as an additional
equilibrating factor. Hume considered that the exchange rate equilibrates
the trade balance of the country; this meaning that it grows, if the trade
balance tends to the unfavorable one and in this way presses the imports,
Condillac applied his utility theory to international trade and
demonstrated that what holds true for exchange between two persons is
largely applicable also to commerce between nations. The inequality of
subjunctive valuations he saw reflected, on a larger scale, in the total
exchange transactions between nations. He decried the foolishness of
establishing trade barriers because it is in the very nature of exchange
that both parties will benefit - what is offered for sale always being
valued less highly than what is acquired in return. If each nation insisted
on selling only, they would all eventually wind up without foreign trade
and deprive themselves of its benefits. Condillac went beyond his
predecessors Hume and Cantillon in showing that even if other nations
continue putting up obstacles to international exchange, it will be
advantageous for a particular country to adhere to free-trade principles.
He concludes, somewhat optimistically, that when trading enjoys complete
and permanent liberty, wealth is bound to spread everywhere.
Classical liberalistic school gave us three models of international
> the physiocratic model
> the absolute advantage theory
> the theory of comparative advantage
The mercantile policies imposed in the 16th - 17th century, which
proclaimed the accumulation of wealth through trade, in the form of money
capital, had ridden the most of European countries (maybe except Germany
and, in some measure, Britain) into a state of a downfall of production,
especially of agricultural one.
Gradually there appeares the idea that the wealth consists of goods.
In this sense, physiocrats can be considered the pioneers. Supporting that
the wealth is the totality of agricultural goods, physiocrats leave money
the role of a means of exchange only.
In these conditions, the new conception about the international trade
appears. Once the wealth derives from agriculture, it is not created by
trade, therefore the trade must be based only on the exchange of
equivalents, while money are no more than a means of exchange.
The physiocrats oppose to the active ("favourable") balance, as it
results from the export of wealth (in the form of goods), and the import of
money (which are not wealth). They fight to realise an equilibrated balance
in international trade.
The founder of the Physiocratic School, Quesnay, in all probability
heavily indebted to Cantillon, brought out the fact that the state of the
balance of trade between nations is neither an indicator of the advantages
of foreign commerce nor that of the wealth of nations. But he was the
author of theory which contained the idea that when a country imports
luxury goods, selling the most necessary or most useful commodities, it
prospers, because it means that the people are able to produce beyond its
The Absolute Advantage Theory
The British school of "classical economics" began in no small measure
as a reaction against the inconsistencies of mercantilist thought. Adam
Smith was the 18th-century founder of this school; his famous work, "The
Wealth of Nations", is in part an anti-mercantilist tract. In "The Wealth
of Nations", Smith emphasized the importance of specialization: in a world
where the productive resources are scarce and human wants cannot be