Ricardo Davila
Modern Europe
Professor Hagai M. Segal
September 29, 2015
Why Free Trade is Superior to Mercantilism The Industrial Revolution brought great success to the British Empire. It helped establish the Empire as one of the leaders (if not the strongest) of the European powers that would colonize lands all over the globe. By the end of the 18th century, Britain had amassed global economic power, and needed to regulate it somehow. The British government's plan of action was to enforce regulations on trade in order to keep control of what was produced, and what would benefit the motherland most. Adam Smith, arguably the most influential economic theorist in modern history, coined this system as 'Mercantilism,' and felt it was not optimal. Economic development and growth is inhibited by the mercantile system because resources are not allocated for maximum efficiency. For Smith, natural tendencies for exchange rooted in the self-interest of individuals would lead to an improved standard of living. Mercantilism was situational. As described by the Library of Economics and Liberty, it is a "system of political economy that sought to enrich the country by restraining imports and encouraging exports." Economic nationalism is another way to perceive it. The system originated in the 16th century when European powers began fighting over resources, often leading to armed conflict between each other (LaHaye, 2004). The objective of the mercantile system was to sustain a trade surplus, while maintaining high employment rate domestically. To do the latter, on a micro scale government would often protect businesses and grant subsidies with the goal of protecting it from foreign competition, but often it would lead to monopolies, and unfair prices and wages (Gross, 2014). The East India Trading Company, Britain's largest merchant monopoly is a shining example, yet it is not seen in a very positive light (LaHaye, 2004). It was unclear if the standard of living was improving or not. Adam Smith did believe that the goal of politics and government should be to improve the standard of living, but did not believe the mercantile system was achieving so. Smith lived in a time where the consumer revolution had begun: prices were dropping, and luxuries were becoming a separate category of goods themselves (Gross, 2014). Though still at war with other European powers, Britain was engaged in foreign trade that was essential to its economic prowess. Adam Smith saw opportunity in foreign trade. As Smith would agree, it makes no sense for a state, even one as big and powerful as the British Empire, to try and obtain all land and its resources. Its other fixed resources, labor and capital, would not be enough to produce a satisfactory quantity level of every product that society demands. If society were to improve its standard of living, then states would be required to allocate all of their resources efficiently among each other, exploiting their competitive advantages (Smith, 1776). If states are able to specialize, then the global economy would benefit from unrestricted free trade, since every product would be available, at the fair price. However, if this were to become a reality, the role of government should be limited. The idea of free trade that Smith developed is founded upon key characteristics of human nature. Humans are self-interested; humans care about status (the opinion of others); humans have finite goals; humans are cooperative; humans have a natural inclination to trade (Smith, 1759). Because humans have the ability to organize among themselves, free trade is the system that will let humans pursue their individual interests. It accomplishes this by allowing people to decide how many they want of a product, and for how much–this is effectively what we now define as a market. Exchange precedes specialization and the division of labor. Once a market has been established for each product, humans can allocate resources privately (without the assistance of government) to begin production. Division of labor is a term that goes hand-in-hand with specialization. In the former, people specialize. This supports the belief that people become better over time by practicing, and innovating. It leads to higher productivity, meaning more output for the same amount of input. An increase in productivity is what we know as economic growth. This is managed by exchange, since it is information on the demand for a product, and how much should be made. Government is not entirely wiped out in a society that exercises free trade. It is, after all, a natural tendency of humans to interact and socialize, as the likes of Rousseau and Paine would agree. It has its own responsibilities that do not interfere with the operations of private business. Smith's idea of government is very similar to that of John Locke, who sees government as a law giver, upmire, and executive (Gross 2014). All men should be equal before the law, without favors to private units as mercantilist Britain used to give out. The following responsibilities ultimately create a stable framework in which free trade can be enjoyed (Smith 1776). The first of which is to defend the state, being it from invasions or any form of military disruption. Government should also provide a legal system that protects the private property and, most importantly, resources of every individual–although the protection of land would further enhance inequality, Smith valued an unequal civil society over an equal uncivil society (1776). Also, government should take on public works: goods which yields no profit to individuals, yet are necessary to society (a modern example would be streetlamps, which are necessary, though not attractive from an investor's point of view). Lastly, government should help provide equal education for all [white men] (Smith, 1776). This last point is especially important to Smith, since it allows for people to have a certain set of skills that would allow them to excel once they find their role in the division of labor (Gross, 2014). Very little other powers should be granted to the government in Smith's view. With this framework in place, free trade should be able to function naturally. As we can see, free trade is a much superior approach to that of mercantilism since it allows for individuality in the market system. Such a system would then lead to lower prices: many luxuries like sugar and tobacco would become mere decencies (Gross 2014). On the other hand, mercantilism led to monopolies and unfair prices, effectively lowering the standard of living, something that is contrary to what should be government's goal. Adam Smith's idea of free trade, division of labor, and the market system promoted innovation and self-interest to increase productivity and economic growth. It is possibly the set of ideas that gave birth to what is so quixotically referred to as the "American Dream" in modern times.

Works Cited
Gross, Stephen G. "Classic Liberalism: Smith, The Invisible Hand, and the State." New York University, New York. 16 Sept. 2014. Lecture.

Gross, Stephen G. "Smith: Benefits of Foreign Trade." New York University, New York. 18 Sept. 2014. Lecture.

LaHaye, Laura. "Mercantilism." Library of Economics and LIberty. 2004. Web.

Smith, Adam, and Edwin Cannan. An Inquiry into the Nature and Causes of the Wealth of Nations. Canaan ed. New York: Modern Library, 1937. Print.

Smith, Adam, and Knud Haakonssen. The Theory of Moral Sentiments. Cambridge, U.K.: Cambridge UP, 2002. Print.