Notes On Mercantilism

1. Mercantilism is the act of Europeans in the 16th and late 18th century to develop national economic in aiming at achieving an economic balance and prospering their own countries. Countries protected their economy from foreign competition by exempting new industries from tax and guild rules and establishing monopolies over local and colonial markets. On the other hand, governments also put up tariffs and quotas against imports that competed with local industries and prohibited outflow of valuable labor and capital resources. Mercantilism disregards the benefits of free trade. (LaHaye) 2. Classical economics is a term suggested by Karl Marx to define the first ideas of an economic system founded by Adam Smith and developed by David Ricardo, James Mill and others. (Keynes, 1936) The invisible hand is a metaphor created by Adam Smith to describe the power a free market has to regulate itself. In Smith’s theory, when both consumers and producers have access to perfect information of product s and services on the free market, resources can be used more efficiently than if distributed by governments. (Joyce, 2001) 3. Neoclassical economics is the mainstream economics nowadays taught in every economic class. While classical economists defined the value of a good as the cost of producing it, a different approach was brought out saying that the value is determined subjectively. Later on came the idea of “demand” and “supply”, and soon so-called neo-classical economics was coined. The basic rule of this economic system is that industries/individuals produce/purchase goods and services until their marginal benefit/utility equals their marginal cost. (Weintraub) 4. The market failure school argues that only government regulations can most efficiently solved market failures. (Mbaku, 2004) A representative of the school is Arthur Cecil Pigou, who emphasized the role of taxes and subsidies play in correcting common market failures such as insufficient public goods, unemployment and the income gap. For example, taxes would discourage people from buying items that would bring negative externalities, such as tobacco, which causes second hand smoking; subsidies would encourage people to purchase goods with positive externalities, such as college education, which increases the productivity of the society. (Reine) 5. The Austrian school believes the theory of market process, in which the will of people is the vital variable. Scholars of the Austrian school claims that markets are dynamic because knowledge is imperfect and always changing, so individuals have to improve their knowledge and maximize their utilities. (Daher, 2012) Two representatives of this school are Friedrich August Hayek and Ludwig von Mises. Hayek argued that free markets give people the largest degree to make choices according to the information they aquire and in this way generates data. ("Friedrich August Hayek,”) Mises supported this point of view by stating that the difussion of information causes a impossibility for people to expect the results of events. (Lachmann, 1971) 6. Consumer sovereignty is when consumers dominate the market and consume freely at the lowest price and highest quality they can acquire. Consumers decide what and how producers produce. On the other hand, producer sovereignty is when producers have control of the market and consumers have to pay the price offered by producers to buy their products, like in monopolies. In reality,

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