In recent centuries, many different economic theories have emerged to address pressing economic issues facing individual societies and the global economy. Diverse economic theories such as Marxism, Mercantilism, and Keynesian economics have been applied to solve economic problems and the changing demands in societies. One such approach that influenced contemporary global economic policy is Classic Liberalism. Originally developed during the late 18th and early 19th Centuries, Classic Liberalism follows the principles of limited government intervention in the economy, free trade, and the idea that increased economic competition is beneficial for the economy. According to Classic Liberalism, these principles allow for the maximum level of economic growth and enable the individual to play the primary role in determining the proper economic decisions. Some of the major figures behind Classic Liberalism include Adam Smith, David Ricardo, Jean-Baptiste Say, and John Stuart Mill. The principles put forward byClassic Liberalism explain the structure and mechanisms that define international trade and the economic successes created by current global trade policies. Despite the success of Classical Liberalism policies in the realm of trade, current global political trends threaten to alter the existing trade structure
The concept of Classic Liberalism developed in response to the Industrial Revolution. During the 18th Century, the world was shifting at an ever-increasing rate due to industrialization in and colonialism. Additionally, political reform in North America Europe necessitated a change in economic thinking. The new opportunities for wealth accumulation in the New World resulted in individuals beginning to question the economic status quo. The dominant economic approach in place at the time was Mercantilism, which is a form of economic nationalism based on creating as much wealth as possible within one’s national borders. Under Mercantilism, the import of finished goods is undesirable because it results in a decrease in a country’s overall wealth. Countries placed tariffs on all imported goods, which reduced competition with domestically finished goods they produced to sell to other nations and preserved their overall wealth. Because of these factors, the goal of Mercantilism was the accumulation of wealth and power to strengthen the state and ensure its survival.
In contrast, Classic Liberalism presents an entirely different approach to economic. Adam Smith is considered the originator of the ideas behind this theory. In the 1776 work “The Wealth of Nations,” Smith puts forward the idea that the economy functions most efficiently and at its greatest potential when interference, either by the government or by private individuals, is limited. Additionally, Smith argues that individual pursuit of self-interests serves as the basis for all economic decisions and that persons pursuing their self-interest will ultimately be beneficial for all members of society. To illustrate his idea of a self-regulating economy, Smith employs the principle of the invisible hand. The invisible hand describes how buyers and sellers respond to market condition changes. Under an entirely free market economic system, Smith argues that the existence of the invisible hand will allow the economy to remain balanced and that any inefficiencies in the market equilibrium will correct themselves without outside intervention.
Adam Smith further promoted the idea of labor specialization and the division of labor. As opposed to one person following all the steps in the production of a good, Smith argues that it is advantageous for each person to specialize in one step of the manufacture of a product. Through specialization and labor division, Smith feels that both productivity and skill will increase and that the level of economic innovation will improve. Smith also explores the theoretical approaches behind international trade. With regards to international trade, Smith promotes the idea of absolute advantage. The main idea behind the notion of absolute advantage is that a country should improve production techniques in every industry to develop a dominant position in the global economy. By mastering the production of all goods, Smith argues that countries will have an absolute advantage in the international economy and will see their wealth and aggregate income increase.
In addition to developing several ideas regarding the structure of international trade, British economist David Ricardo explores the value theory. The value theory focuses on the overall value of goods and argues that the economic value of products is dependent on the total amount of labor required in their production, as opposed to their usage or the level of satisfaction the user receives from them. Ricardo was also a proponent of free trade and promoted the idea of comparative advantage. As opposed to absolute advantage, comparative advantage follows the notion that countries should concentrate on the production of the goods that they produce the most efficiently, and that the trading of products they manufacture efficiently for goods that they do not as effectively produce should be the basis of international trade. Through industry specialization at the national level, Ricardo felt that the global trade structure would improve and that trade would be beneficial to all the countries involved.
The main ideas promoted by Classic Liberalism explain the current structure of international trade and the ways in which the global market is set up. The concepts of labor division and specialization describe the production of goods at the international level. Different countries specialize in the each of steps in the manufacture of products and thus develop their niche in the global market. This labor specialization helps to make the production of goods more efficient and serves to lower the costs of goods and increases their availability to a wider array of consumers.
Moreover, the distribution of labor at the international level helps to encourage greater international cooperation by involving many different countries in each step of production and has allowed previously poor and under-developed countries to gain a stronger presence in the increasingly globalized economy. Labor division and specialization at the international level has only grown in importance with the rise of globalization and the increasing influence and spread of multi-national corporations.
An example of the division of labor at the international level is the steps involved in the production of different types of electronics such as smartphones. The entire supply chain and each stage in the manufacture of smartphones is an embodiment of the idea of labor division. The components used in the production of smartphones originate from under-developed countries or countries that are in the process of developing primarily in regions such as Africa, Asia, and Latin America. The assembly of electronic products such as smartphones tends to occur in developing countries such as China and the marketing and sales of such products occur in developed countries such as the United States. As such, the production of smartphones is a representation of the very type of labor division and market specialization that was discussed by Adam Smith and David Ricardo as a primary component of trade under a system based on Classic Liberalism.
The existence of niche markets in individual countries is another example of the Classic Liberal concepts of comparative advantage and labor specialization. An example of an industry that follows the ideas of comparative advantage is the oil industry In the Middle East. Several nations in the Middle East such as Iran, Saudi Arabia, and the Gulf States are rich in oil reserves. Because of their abundant oil reserves, these countries have specialized in the production of oil and based their economic systems on the development of infrastructure meant to facilitate the refinement and transportation of such products. On the other hand, many industrialized nations in North America and Europe lack the tools or resources to produce and refine oil in an efficient manner despite the high demand for oil in their economies. Due to the continuing demand for oil, countries with non-oil economies seek to trade with the oil-rich countries through products that they produce efficiently for the oil products that they do not produce as well. In turn, the oil-rich countries receive goods that their domestic economies do not specialize in manufacturing through this trade relationship. As such, the trade relationship between the Western countries and the Middle East regarding oil is an example of comparative advantage and industry specialization at the global level.
Another component of Classic Liberalism is the idea of free trade and the reduction of economic barriers between nations. The creation of free trade policies leads to numerous economic advantages according to Classical Liberal Theory. One such advantage is the reduction in prices of goods and services through the expansion of the market. As the market expands and an increasing number of people have access to goods and services, the costs of previously expensive goods ultimately decline. An expansion in the access to trade increases the global marketplace for goods produced within individual countries, which increases the overall economic growth within different countries and helped to transform the economic situation in many developing countries. With expanded access to trade, firms within countries will face more competition from abroad. The increase in competition will give businesses the incentive to reduce costs and improve their efficiency. Considering these factors, proponents of Classic Liberalism view free trade and the reduction in previously-existing trade barriers as beneficial for the global economy.
Another example of Classic Liberalism playing a role in determining international trade policy is the existence and growth of free trade agreements between nations. Some of the most significant free trade policies and proposals in recent history include NAFTA, the European Economic Area, and the Trans-Pacific Partnership. Because of the end of the Cold War and the growing importance of globalization over the last few decades, many nations have begun to shift towards policies of trade liberalization and the reduction in previously-existing trade barriers. The primary rationale behind these policies is to increase economic and political cooperation between the nations involved in the agreements. By increasing economic cooperation, participants in free trade agreements sought to reduce the chances of international conflict from occurring and present a united face in addressing emerging global challenges. Additionally, the member-nations attempted to increase their overall economic growth and competitiveness on the international stage by increasing their access to trade. Participants in free trade agreements also seek to increase the spread of new ideas and enrich their cultural experiences through the promotion of free trade. Because of these factors, many different nations have promoted free trade policies and frame the policy idea of free trade as a positive and stabilizing force that fosters increased international stability and economic growth.
The Classical Liberal idea of free trade has led to sharp increases in economic growth and wealth creation and gave rise to increasing levels of innovation through expanded economic competition between nations. An example of open trade policies encouraging growth and technological innovations is the case of the software industry of India. Between 1990 and 2000, the total revenue of the Indian software industry rapidly increased from $128 million to $4 billion due to increasing trade with much of the world. Additionally, the increase in global trade and competition from technologically advanced countries such as the US encouraged India to implement technological advances within its computing and software industry to maintain an advantage in its computing industry and to lower the costs of the products that it produced.
The increase in labor division between nations has had a positive impact by allowing previously poor and under-developed countries to enter the global marketplace and has reduced the prevalence of poverty and other long-standing inequalities within them. Makki and Somwaru determined that international trade and increased foreign investment are some of the primary sources of economic growth in developing countries. Additionally, international trade has allowed developing countries to have access to information and technology previously only available to wealthier countries. These factors have ultimately contributed to the reduction of long-standing inequalities existing between developing and developed countries. Considering these factors, one can argue that the Classic Liberal principles of free trade and labor division between countries has allowed for a stronger global economy and allowed for increased levels of stability in the international arena.
Despite the economic benefits created through the application of Classical Liberal economic concepts in international trade, current political trends and economic changes threaten to upend the current international trade policies. Events such as the 2008 Financial Crisis exposed many vulnerabilities in the global economy that were brought forward by expanded trade opportunities and higher levels of globalization. One such vulnerability exposed is that increased economic interdependence made is so that countries previously shielded from global market pressures felt the effects of economic turbulence more deeply than in previous years. Additionally, the slow recovery from the crisis and the subsequent decline in economic opportunities in many of the Western countries has created resentment towards the existing structure of international trade. In response to these developments, a growing number of individuals have begun to question the benefits of a trade policy based on the ideas of Classic Liberalism and call for a change in global trade policies.
The renewed opposition to trade liberalization and criticism of globalization has become more apparent in recent years and has resulted in events such as the Brexit referendum, increasing support for economic populism in the US and much of Europe, and the withdraw of the US from the Trans-Pacific Partnership trade agreement. The emerging populist political movements seek to roll back long-standing trade agreements, arguing that policies promoting free trade contribute to economic instability and are only beneficial to primarily developing countries. The proponents of economic populism support the idea of economic nationalism and the improvement of the domestic economic system. The effects of this rise in populism and economic nationalism will become more apparent over the next few years, and the effectiveness of these policies will ultimately determine the role that international trade will play in the economy.
In conclusion, the economic theory of Classic Liberalism has played a significant role in determining international trade policies. Classic Liberalism developed during the late 18th and early 19th centuries and is based on the ideas of minimal economic intervention by outside forces and allowing the individual to play the main role in economic decision-making. Policies put forward by Classic Liberalism such as free trade and labor division have contributed to the current global trade policies and have allowed for much economic success. Despite the successful application of Classic Liberalism in the realm of international trade, there has been a recent push-back against such policies. Only time will tell if the ideas of Classical Liberal Theory will continue to influence the structures of international trade, or if alternative economic theories will come to define the structure of international trade.
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