Why david hume talked about negative effects of mercantilism

Hume's argument was essentially the monetarist quantity theory of money: prices in a country change directly with changes in the money supply. Hume explained that as net exports increased and more
gold flowed into a country to pay for them, the prices of goods in that country would rise.

Definition: Mercantilism is an economic theory where the government seeks to regulate the economy and trade in order to promote domestic industry – often at the expense of other countries.
Mercantilism is associated with policies which restrict imports, increase stocks of gold and protect domestic industries.

Mercantilism stands in contrast to the theory of free trade – which argues countries economic well-being can be best improved through the reduction of tariffs and fair free trade.

Mercantilism involves

 Restrictions on imports – tariff barriers, quotas or non-tariff barriers.

 Accumulation of foreign currency reserves, plus gold and silver reserves. (also known as bullionism) In the sixteenth/seventeenth century, it was believed that the accumulation of gold
reserves (at the expense of other countries) was the best way to increase the prosperity of a country.

 Granting of state monopolies to particular firms especially those associated with trade and shipping.

 Subsidies of export industries to give a competitive advantage in global markets.

 Government investment in research and development to maximise the efficiency and capacity of the domestic industry.

 Allowing copyright/intellectual theft from foreign companies.

 Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class.

 Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth.

Examples of mercantilism

 England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.

 All colonial exports to Europe had to pass through England first and then be re-exported to Europe.

 Under the British Empire, India was restricted in buying from domestic industries and were forced to import salt from the UK. Protests against this salt tax led to the ‘Salt tax revolt’ led by
Gandhi.

 In seventeenth-century France, the state promoted a controlled economy with strict regulations about the economy and labour markets
  Rise of protectionist policies following the great depression; countries sought to reduce imports and also reduce the value of the currency by leaving the gold standard.

 Some have accused China of mercantilism due to industrial policies which have led to an oversupply of industrial production – combined with a policy of undervaluing the currency.

 However, the extent of mercantilist policies are disputed – See – Is China Mercantilist? NBER

Modern Mercantilism

In the modern world, mercantilism is sometimes associated with policies, such as:

 Undervaluation of currency. e.g. government buying foreign currency assets to keep the exchange rate undervalued and make exports more competitive. A criticism often levelled at China.

 Government subsidy of an industry for unfair advantage. Again China has been accused of offering state-supported subsidies for industry, leading to oversupply of industries such as steel –
meaning other countries struggle to compete.

 A surge of protectionist sentiment, e.g. US tariffs on Chinese imports, and US policies to ‘Buy American.’

 Copyright theft

Criticisms of Mercantilism

 Adam Smith’s “The Wealth of Nations” (1776) – argued for benefits of free trade and criticised the inefficiency of monopoly.

 Theory of comparative advantage (David Ricardo)

 Mercantilism is a philosophy of a zero-sum game – where people benefit at the expense of others. It is not a philosophy for increasing global growth and reducing global problems. Trying to
impoverish other countries will harm our own growth and prosperity. By contrast, if we avoid zero-sum game of mercantilism increasing the wealth of other countries can lead to selfish
benefits, e.g. growth of Japan and Germany led to increased export markets for UK and US.

 Mercantilism which stresses government regulation and monopoly often lead to inefficiency and corruption.

 Mercantilism justified Empire building and the poverty of colonies to enrich the Empire country.

 Mercantilism leads to tit for tat policies – high tariffs on imports leads to retaliation.

 The growth of globalisation and free trade during the post-war period showed possibilities from opening markets and respecting other countries as equal players.

 Economies of scale from specialisation possible under free trade.

According to Mercantilism why is trade is a zero sum game

Mercantilists viewed the economic system as a zero-sum game; where a gain by one party requires a loss by another. Thus, any system of policies that benefited one group would by definition "harm the
other", and there was no possibility of economics being used to maximize the commonwealth, or "common good". Mercantilism is a philosophy of a zero-sum game – where people benefit at the
expense of others. It is not a philosophy for increasing global growth and reducing global problems. Trying to impoverish other countries will harm our own growth and prosperity. By contrast, if we
avoid zero-sum game of mercantilism increasing the wealth of other countries can lead to selfish benefits, e.g. growth of Japan and Germany led to increased export markets for UK and US.

How absolute and comparative advantage are different from each other?

The Basis Of Absolute Advantage Comparative Advantage

Comparison 

Definition The Absolute Advantage is the country’s inherent ability to produce specific goods The concept of Comparative Advantage refers to the country’s capability to produce the specific good
efficiently at a lower marginal cost compared to other countries. at lower marginal cost and opportunity cost compared to other countries.

Basic Concept It deals with the lower marginal cost of production of a specific good in comparison It deals with lower marginal and opportunity cost of production of a specific good compared to
to competitor Country. competitor Country.

Trade The concept of absolute advantage may not always be mutually beneficial for both Both the Countries in transactions are mutually benefitted because of the comparative advantage of
Benefits the countries involved in the trade transaction. each other.

Cost of Absolute advantage refers to lowering the production cost of a specific good in Comparative advantage specifically refers to the lower opportunity cost of production of specific goods
Production comparison to competitors. in comparison to competitors.

 
 Production of Countries having an absolute advantage of producing a good produces a higher Countries with comparative advantage take into account the production of multiple goods in a country
Goods volume of that good with the same available resources. while deciding the production of a specific good and resource allocation for the same.

Resource An absolute advantage may not be very effective in deciding the resource allocation Comparative advantage considers the opportunity cost of production; it is more effective in decisions
allocation by a Country for the production of a good as it doesn’t consider the opportunity cost for resource allocation, domestic production, and import of specific goods.
of production.

Benefits to Trades in the context of absolute advantage are not mutually beneficial in nature. Trades decisions based on comparative advantage are mutually beneficial in nature.
Economies

Effectiveness The concept of absolute advantage may not be very effective as it focuses on Comparative advantage is more effective in helping Countries taking decisions related to resource
for Economy maximizing production with the same available resources without considering the allocation, domestic productions and import/export of goods.
opportunity cost of production.

Conclusion

The concept of Absolute Advantage vs Comparative Advantage is related to economics and trade which helps countries make logical decisions on resource allocation for the production of specific
goods, import and export of goods while considering the marginal cost and opportunity cost of producing goods. Absolute advantage focuses on the marginal cost of producing a good, whereas
comparative advantage specifically focuses on the opportunity cost of production. Trade decisions based on comparative advantage between countries are always mutually beneficial. Comparative
advantage helps in more effective decision-making for countries for resource allocation and production hence more beneficial for economies than an absolute advantage.

Example of Absolute Advantage

Let’s take the example of two countries (Country 1 and Country 2), which are manufacturing cars. Assuming County 1 produces 3 cars per hour with 10 employees and Country 2 produces 5 cars with
10 employees.

Countries Production of Cars/Hour No of Employees

Country 1 3 10
 Country 2 5 10

So in this case, Country 2 has an absolute advantage over Country 1 as Country 2 can produce several cars per hour than County 1 with the same number of employees.

Example of Comparative Advantage

Let’s take the example of Country 1 and Country 2. Country 1 can produce either 10 cars or 20 computers whereas Country 2 can produce 22 cars or 30 computers with available resources.

Product Country 1 Country 2

Computers 20 30

Cars 10 22

Opportunity Cost of Production

Product Country 1 Country 2

1 Unit of Computer 0.5 Unit of Car 0.73 Unit of Car

1 Unit of Car 2 Unit of Computer 1.36 Unit of Computer

 The opportunity cost of producing 1 unit of the computer is higher for Country 2 than Country 1 and opportunity cost for producing 1 unit of a car is lower for country 1 than a country

 According to the comparative advantage concept, Country 1 should produce computers, and Country 2 should produce cars to optimize their cost.