Mercantilist Contra Quantity Theory example essay topic

Adam Smith's Role in Ending the Mercantilist Economy The mercantilist theory of economics existed in Britain since the 16th century when European states started regulating the manufacturing industry, including the conditions of the market and prices. During the time of mercantilism, the economic policy of the leaders sought to encourage national self-sufficiency. They valued gold and silver as an index of national power and wealth. The mercantilists also had a contra- or anti-quantity theory of money, which gave them a permanent spot in the history of monetary doctrines. Adam Smith was crucial in establishing the classical economy and driving economic thought forward. An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, explains Smith's classical thoughts.

"The Wealth of Nations is an extended polemic against mercantilism' (Schlefer). In Book IV, Chapters I and V, Adam Smith states his opinion on the mercantile system and its faults, while he dissected, clarified, and revolutionized the mercantilist economy and advocated the classical economy throughout the book. He used real world examples to prove his points. First, Smith disagreed with the "regulation of economic activity by the State in the interests of the merchant classes' (O'Brien 273).

He proposed a free, competitive market, which through an "invisible hand' would do a better job in guiding the economy than the mercantilists. In Book IV, Chapter II, he emphasized the invisible hand: Every individual generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. By preferring the support of domestic to that of foreign industry he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. (Smith 423) Here, Smith explains his idea that the government is not needed at all times to direct the market in the best direction.

The idea of the "invisible hand' included more individual freedom. Free competition and free trade promoted economic growth and helped balance the market. He favored a set of rules that "replaced destabilizing activist intervention with smoothly operating, or stabilizing, automatic adjustment mechanisms' (Humphrey) and the more popular laissez faire economics, or "rule by the people'. Although he didn't like government intervention, he favored it in times of despair when it was the only hope in getting the economy and nation back on track. Adam Smith also saw wealth in a different way than the mercantilists did.

According to the mercantilists, without gold and silver mines, a nation could only accumulate wealth– the precious metals– by selling more merchandise to foreigners than it bought from them. Thus, they thought the best way to obtain a permanent trade balance surplus was to promote exportation and restrict importation, compelling foreigners to cover their deficits by shipping gold and silver. To Smith, national wealth wasn't precious metal, but rather the stocks of productive resources and the efficiency of using them. Those resources include land, labor and capital.

For example, he saw agriculture as a major source of wealth for nations. Wealth-enhancing, efficient resource allocation required free trade in order to exploit comparative advantages stemming from specialization and the division of labor. Smith focused on the division of labor in Book I of the Wealth of Nations. While the mercantilist divided exports and imports unequally to encourage a flow of precious metals into the country, Smith believed that only caused a monopoly within the country and encouraged equal exportation and importation. Finally, the mercantilist contra-quantity theory consisted of seven main points; the classicalists differed from most of those because they favored quantity theories. Mercantilists believed that money didn't determined prices, while the classicalists realized that there were many factors that determined prices, including supply, demand and prices.

The classicalists wanted to anchor money with a fixed quantity of some real object, while the mercantilists favored the nominal dollar value. "The mercantilist plan leaves money anchorless' (Humphrey). That implies that the mercantilists were anchoring each dollar with another dollar. While the mercantilists argued that the interest rate was purely a monetary phenomenon, Smith and the classicalists differed. He believed that the natural equilibrium rate of interest was actually determined by productivity and thrift. He also believed that the natural rate couldn't be affected by money.

Bibliography

Schlefer, Jonathon. Today's Most Mischievous Misquotation: Adam Smith Did Not Mean What He Is Often Made to Say. The Atlantic Monthly. March 1998.
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O'Brien, D.P. The Classical Economists. Oxford: Clarendon Press, 1975.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. New York: Modern Library, 1937.
Humphrey, Thomas M. "Mercantilist and Classicals: Insights From Doctrinal History. ' web March 12, 2001.
Economics. ' Columbia Encyclopedia. web March 21, 2001.
Campbell, R.H., and Skinner, A.S. Adam Smith. New York: St. Martin's Press, 1982.
The Adam Smith Institute Page. ' Adam Smith Institute. web February 12, 2001.
Classical economics. ' Encyclopedia Britannica. web February 10, 2001".