Mercantilism & Free Trade

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Mercantilism and free trade are major economic theories.
Mercantilism and free trade are major economic theories. (Image: bazaar trade of various bean image by Maria Brzostowska from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Mercantilism and free trade are two conflicting major theories in economics that deal with how an economy and society should be structured as well as how international trade policies are to be conducted. Mercantilism has evolved into economic nationalism and in this form continues to rival the wisdom of free markets.

Main Principles

The theories of mercantilism and free trade contradict each other. Mercantilism is based on the premise that every nation should export as much goods as possible and that all imports should be restricted. Free trade, on the other hand, states that international trade is beneficial for both the the seller and the buyer, and that it encourages specialization and brings prosperity.

Proponents

Free trade and mercantilism have their own prophets and followers. Adam Smith is considered the main theorist of free trade, together with his close follower David Ricardo, while the case for mercantilism was best articulated by Jean-Baptiste Colbert, a French minister of finance from 1665 to 1683 at the court of King Louis XIV. Today, free trade is defended by free-market economists, and economic nationalism, the successor of mercantilism, is supported primarily in emerging markets, notably China.

Policies

Free-market theory demands that countries to open up their trade and reduce tariffs, quotas and other trade barriers. It encourages liberalization of the movement of goods, services, people, capital and ideas. Mercantilism, on the other hand, makes economic protectionism and imperialism its primary point. Mercantilists also believe countries can go to war to protect their economic interests.

Role of Government

Both mercantilism and free trade require certain government policies. Free trade argues for smaller government whose primary function is to facilitate and protect trade, while mercantilism requires the government to pursue narrow nationalistic economic policies such as "beggar-thy-neighbor" initiatives--policies aimed at isolating and weakening neighbor states.

Future

Free trade and mercantilism, or economic nationalism, are here to stay. As long as people are different and live by different values, countries will want to go different paths. However, developments show that most nations prefer to live in peace with their neighbors and embrace freer markets instead of protectionism and economic nationalism.

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