Economic Theories: Liberalism, Mercantilism, Nationalism, and Trade

Core Economic Doctrines

Liberalism

Liberalism states that the source of wealth comes from the regulation of the national trade balance. (Note: This definition is often associated with Mercantilism.)

Mercantilism (Bullionism)

The source of wealth is caused by the entry of metals.

The Three Laws of Liberalism

1. Law of Initiative: Identify a need in society and, for profit, create a product that meets that need.
2. Law of Competition: This is an initiative in which others begin to compete by making the same product as the original initiator. Competition generates money. The positive outcome is that products are leveled; the negative outcome is excess production and low quality.
3. Market Law: Comprising the law of supply and demand.

Comparative Advantage

Comparative advantage is the advantage enjoyed by one country over another in the manufacture of a product where this may occur at lower cost, in terms of another good.

Comparative Advantage: Standpoint of Production

• Each country produces two goods by using a single factor of production.
• The technology is represented by a production function of fixed coefficients, which results in marginal productivity and work measurement being equal for each factor.

Walras' Law

Everything that is produced is sold, and one cannot spend more than what is produced.

Von Hornick's Rules of Mercantilism

1. Ensure every inch of ground in the country is used for agriculture, mining, etc.
2. Transform all raw materials into home manufactures within the country.
3. Maintain a large and industrious population.
4. Prohibit all exports of gold and silver, ensuring that the domestic money remains in circulation.
5. Obstruct as much as possible all imports of foreign goods.

Criticism of Mercantilism

• Incapacity to understand concepts such as comparative advantage and the benefits derived from trade.
• Excessive import restrictions often resulted in the poorest nations.
• Failure to achieve a positive and steady trade balance.

Economic Nationalism

Economic nationalism is a term used for economic policies designed to protect domestic consumption, labor, or capital formation, thereby eliminating dependence on foreign entities.

Objectives of Economic Nationalism

1. Support economic activities and promote social cohesion.
2. Self-defense of local economic interests.

Consequences and Critiques

• Giving local producers more market power to drive prices, thus allowing for higher profit.
• Consumers who favor local products can be exploited by a policy of profit maximization.

Fundamental Plans of Nationalism

• Active industrial policy and direct subsidies for production substitutes.
• Creation of entry barriers to foreign trade.
• Monetary policy that maintains a high exchange rate.

Globalization

Globalization is the international integration of commodity markets, capital, and labor.

Onset of Globalization

1. First Episode: Began in the mid-19th century and ended with the outbreak of World War I.
2. Second Episode: Started after World War II and continues today.

Major Forces Driving Global Integration

• Technology innovations
• Political changes
• Economic policies