Microeconomics: Adam Smith Vs Mercantilists Views On The Nature And Causes Of The Wealth Of Nations

Mercantilists are European economists who existed in the sixteenth and eighteenth centuries. These economists largely contributed to the development of mercantilism, an economic system that is largely focused on increasing the wealth of a country through enforcement of government regulations on commercial activities. Mercantilists’ views on the nature and causes of the wealth of nations were however refuted by new economic thinkers who became popular in late 1970s (Heilbroner, 2011). The collapse of mercantilism is believed to have began in 1776, when Adam Smith, a Scottish philosopher by trade, published a book entitled, “An Enquiry into the Nature and Causes of the Wealth of Nations”, commonly referred to as “The Wealth of Nations.” Even though “The Wealth of Nations” was written to overturn mercantilism, Adam Smith and mercantilists happen to have some similar views on the nature and causes of a nation’s wealth. This paper discusses the similarities and differences between Adam Smith’s views and those of mercantilists on the nature and origin of the wealth of nations (Rothbard, 2010).

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According to mercantilists, wealth of a nation is always fixed and unlimited, and it is measured in terms of the amount of gold that a country owns. In this regard, a nation that owned more gold than the other was considered better off. In mercantilists’ view, there are two ways through which a nation can generate wealth and they include hoarding gold, and maximization of net exports while avoiding imports. Basically, mercantilists believe that a nation can become rich by selling its goods to other countries while purchasing nothing in return. The idea behind this policy is that, when a nation chooses to export its products and fails to import, it generates a net inflow of foreign exchange and increases gold stock. In order to increase their gold stock and avoid importing goods, many nations began to create retaliatory tariffs that negatively impacted international trade and several countries suffered the problem of inflation (Buchholz, 2007).

Conversely, Adam Smith believes that the wealth of a nation is determined by per capita income and on the amount of free currency that it owns, and its ability to export its products while at the same time importing others without government’s restrictions. According to Smith, the use of solid currency instead of hard metals (gold), will prevent inflation because it will limit government’s ability to circulate more of the currency in order to take care of irrelevant expenses. Smith advocated for a free market where international trade can be carried out without government regulations because he was concerned about the negative impacts of government intervention on businesses (Campbell et al., 2013).

While mercantilists believe that a country can generate wealth by hoarding gold and by minimizing imports, Smith believes that a nation can generate wealth if it exports the goods that it produces and uses the money, in form of solid currency, to import products that it does not produce. Although Adam Smith advocates for a free market without government regulation, he points out where government restriction is necessary such as when a country is wants to do away with troublesome competition (Rothbard, 2010).

While mercantilists are completely against investment of savings, Smith feels that savings help a country to generate wealth especially if such savings are used to invest. According to Rothbard (2010), the practice of investment and a spirit of hard-work play a big role in generation of output and in accumulation of wealth in a nation. For instance, a fruit vendor does not sell fruits because he feels happy when doing so, but his intention is always to get profits. The fruit seller is always willing to sell the fruits at a price that customers are willing to pay and so that he also benefits from every transaction. The profit earned will be used either to expand the current business or open new ones in order to increase the amount of profit that can be obtained. Smith feels that a country can thrive if it utilizes its savings to invest because through investment, a nation will have enough capital that can be used for innovation. This would help to raise the overall living standards of citizens. On the other hand, mercantilists believe that a country can accumulate wealth by retaining profits that it has already generated without placing it in any form of investment (Campbell et al., 2013).

Both Smith and mercantilists believe that labor is a very important factor of production that can assist a nation to generate wealth. According to mercantilists, full employment promotes concerted labor that helps a country to produce many products for export. They feel that employment should be provided for everyone who is able to work and all those who are idle should be detained and subjected to forced labor. Similarly, Smith feels that a nation can generate substantial wealth if a large proportion of its laborers are productively employed (Rothbard, 2010).

According to Smith, labor that yields output is known as productive labor while labor that only produces a service is known as unproductive labor. Smith illustrates that specialization and division of labor enhances productivity and assists a nation to generate wealth. The only difference between mercantilist and Smith’s views as far as labor is concerned lies on the purpose of the output generated. As earlier mentioned, mercantilists feel that products that a country produces should only be export and the money obtained should be retained, while Smith believes that output that a nation produces should be exported and the money obtained be used to import other goods (Rothbard, 2010).

Mercantilists’ theories and Smith’s assumptions still play a significant role in today’s economy because both of them are views as the founders of economics. However, Smith’s views are applied more in today’s world that mercantilists’ opinions and many people even refer to Adam Smith as the father of economics. Although several countries in the contemporary world are committed to free trade, majority of economic policy debates still focus on mercantilist themes (Brue and Grant, 2013). For example, Germany and China are good examples of nations that have trade surpluses and use these as a sign of wealth.

Additionally, the American President, Barack Obama has enforced policies that will enable the country to double its exports as part of its plan to achieve a competitive advantage in future. Surprisingly, China, Germany, and the United States are grouped among the rich countries of the world but they do not focus on the theory of full employment. Ideally, these nations are known to have high rates of unemployment yet they are very rich, a factor that clearly opposes Smith’s views of a wealthy nation. The manner in which many rich nations around the world look at their economy is rooted on the mercantilist views on the nature and causes of the wealth of nations (Buchholz, 2007).

In the modern economy, many countries practice division of labor and specialization as a way of maximizing productivity. These nations greatly rely on specialized labor as a way of accumulating wealth. Countries that provide little opportunity for division of labor accumulate less capital than those that provide huge opportunities for division of labor (Campbell et al., 2013). This indicates that Smith’s views are still important in today’s economy. Furthermore, due to Smith’s views on the source of a nation’s wealth, the monetary policy was developed. The foundational debate of Smith’s views continues to be part of the modern economy, more than two centuries after it was introduced (Rothbard, 2010).

When explaining the nature and source of wealth of a nation, Smith tries to distinguish his views from those of the mercantilists. According to mercantilist, wealth of a nation is determined by the amount of gold that it owns while according to Smith, a country’s wealth is measured in terms of per capita income. Additionally, mercantilists feel that a nation can generate its wealth through exporting its products without importing any. On the contrary, Adam Smith believes that a nation’s wealth is generated by exporting their products while importing those that they do not produce. However, both mercantilists and Smith believe that labor is a very important factor of production that assists a country to generate wealth. Consequently, these contrasting views still form a very important part of modern economic debate.

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