Mercantilism and Classical Trade Theories: A Comparative Analysis, Schemes and Mind Maps of International Business

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MERCANTILISM & CLASSICAL TRADE

THEORIES

Developed Countries Developing Countries Source: Cypher & Dietz (1997)

COLONIZATION OF THE THIRD WORLD

LATIN AMERICA

(End of the 14th century to 19th century)

COUNTRIES COLONIAL POWER FROM TO Argentina Spain 1536 1816 Brazil Portugal 1500 1822 Bolivia Spain 1538 1825 Colombia Spain 1525 1819 Costa Rica Spain 1509 1821 Uruguay Spain 1726 1811 Portugal 1816 1822

COLONIZATION OF THE THIRD WORLD ASIA COUNTRIES COLONIAL POWER

FROM TO

Hong Kong UK 1860 1997 India UK 1773 1947 Indonesia Netherlands 1602 1950 Korea Japan 1905 1945 Malaysia Portugal 1511 1641 UK 1795 1957 Philippines Spain 1564 USA 1898 1946 Taiwan Japan 1895 1945

Causes

• (^) Marine technology
• (^) “Discoveries” of new lands
• (^) Trade and accumulation of gold and silver. Aims
• (^) Conquering, plundering, trade and settlement Main colonisers
• (^) Spain, Portugal, France, Netherlands and Britain. Colonised regions
• (^) Americas (fist Central and South, then North America),

some Asia and Africa

• (^) Trade was the most important source of wealth.
• (^) Trade and international competition among the merchants

increased.

• (^) The risky nature of international trade required larger firms

and support from the state.

• (^) Supporting merchants became the priority of the state. Mercantilism

• (^) Trade surplus and domestic accumulation of money (gold

and silver) were the main aims of international trade.

• (^) Why? We don't know exactly, but we can guess:
  1. A growing economy needs more money.
  2. As the money supply increases, interest rates fall. Lower interest rates mean more investment and faster growth.
• (^) Protectionism was a necessary policy in order to ensure

trade surplus.

• (^) Trade was seen as a zero-sum game: A gain for a country

was a lose for another.

• (^) In this view trade could not benefit to all countries equally. Mercantilism

Causes

• (^) Industrial (and agricultural) revolution Aims
• (^) Production and trade (not settlements).
• (^) Guaranty the supply of raw materials for industrial production

and markets for industrial products.

Main colonisers

• (^) Britain, France, Germany, Italy, Japan Colonised regions
• (^) Asia (India) and Africa

• (^) The emergence of industrialists
• (^) The gradual collapse of feudalism
• (^) The strengthening of capitalism.

Ideology

Results

• (^) Liberalism:
• (^) The conflict between industrialists and feudalists increased.
• (^) Industrial sector needed:
  • (^) free workers
  • (^) cheap food to keep wages down.
• (^) Ricardo (supporter of the industrialists) argued against the “Corn

Laws” and produced his famous comparative advantage theory.

• (^) Malthus (supporter of the feudalism) argued in favour of the

“Corn Laws”

1. Impact on native population: Complete devastation.

The population declined from 70-90 million in 1540 to

3.5 million in 1690

2. Impact to the settlers: Underdevelopment

LATIN AMERICA

NORTH AMERICA

1. Impact on native population: Destruction of traditional societies
2. Impact to the settlers: Development

INDIA

• (^) Deindustrialisation

SINGAPORE AND HONG KONG

• (^) Efficient bureaucratic and legal system.
• (^) Extensive pre-existing networks of trading houses and specialised services.

KOREA AND TAIWAN

Very controversial

• (^) Land reform
• (^) Infrastructure
• (^) Industry

RICARDIAN COMPARATIVE ADVANTAGE

THEORY

David Ricardo (1771-1823)

“Principles of Political Economy and Taxation”, 1817

“Corn Laws”

Static Efficiency

 (^) “It has been my endeavour to show throughout this work, that the rate of profits can never be increased but by a fall in wages, and that there can be no permanent fall of wages but in consequence of a fall of the necessaries on which wages are expended. If, therefore, by the extension of foreign trade, or by improvements in machinery, the food and necessaries of the labourer can be brought to market at a reduced price, profits will rise.” (Ricardo

 (^) Ricardo’s real interest not efficiency, but  (^) Shift income distribution: from landlords to capitalists (workers irrelevant to Ricardo)  (^) Increase rate of investment Taken from Steve Keen (Debunking Economics)