Of all the problems we call “economic,” few have so baffled the expert and the nonexpert alike as those that involve the relations between nation-states. Indeed, one might even go so far as to say that economics, as a “science,” got its start from efforts to explain how gold and goods traveled from nation to nation, working their various effects on the countries they left and those they entered. In particular, that ill-associated group of seventeenth- and early eighteenth-century pamphleteers we call the mercantilists deserve their place in the history of economic thought if only because they annoyed people like Hume and Adam Smith (among others) sufficiently to get economic inquiry started along its present lines.
The basic theme of mercantilist doctrine had, at first glance, a certain logic. The mercantilists believed that a nation’s self-interest lay in the accumulation of a national treasure—gold. Gold was to be gained by selling goods to foreigners and was lost by buying goods from them. Therefore the pursuit of national self-interest resided in policies that would encourage exports and discourage imports, thereby increasing the stock of precious bullion by which the national wealth was to be measured.
To describe this underlying belief is enough to reveal that the philosophy of mercantilism is by no means dead. But at least in its original crude form, the mercantilist theory of international economic relations received its coup de grâce from the cool analysis of the classical economists. For the central message of Smith’s Wealth of Nations (1776) was that the proper measure of national wealth was not its stock of gold bullion but its annual flow of production. The road to maximizing wealth lay therefore in the pursuit of policies that would encourage the increase in that annual flow—in particular, policies that would augment production by encouraging the division of labor.
Smith, accordingly, envisaged the basic objective of international economic relations as one of bringing about a world-wide division of labor, a point of view that clearly required a willingness to buy abroad as well as an eagerness to sell abroad. Under his great successor, David Ricardo, this doctrine received its first keen analytical treatment, as Ricardo demonstrated that one nation, such as England, would benefit by trading with another, such as Portugal, even though England might be able to produce both cloth and wine more effectively than Portugal.
From this genuinely stunning insight of the classical economists there followed an obvious prescription regarding the economic relationships between nations. That was that the well-being, not merely of one nation but of all nations, would be achieved by a willing surrender to the international division of labor, in which each did the work for which its climate, soil, skills, etc., best suited it. As a corollary, of course, each would thereafter trade its own products for the products of other nations, with no effort to block this exchange by tariffs or other impediments (except in very special cases, such as the infant …
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Efficient Portugal April 22, 1971