Mercantilism and free trade: opposing economic theories and perspectives

International Trade

Mercantilism is the economic theory that a nation's prosperity depended upon its supply of gold and silver, that the total volume of trade is unchangeable. According to the theory, the government should play an active role in the economy by encouraging exports and discouraging imports, especially through the use of tariffs. Underlying mercantilism was the notion that a country needs a positive balance of trade to gain more precious resources. This belief fueled colonialism to acquire natural resources and to build a large empire in order to become wealthy. England often banned exports of raw or unfinished good and passed the Navigation Acts requiring ships entering English ports either be English or be carriers of goods from their country of origin.

David Hume was opposed to mercantilism. He argued that prices in a country change directly with changes in the money supply. As net exports increased and more gold flowed into a country to pay for them, the prices of goods in that country would rise. Thus, an increased flow of gold into England would not necessarily increase England's wealth substantially.