modern form was formed as a result of a long and difficult process, full of

successes but, nevertheless, with important mistakes.

The early roots are to be found, perhaps, in Antic Greece in the works of

Aristotel, Platon and Xenophon. In general, the antic philosophers opposed to

the big commerce, supporting the idea of a closed domestic economy. The closed

character of the production of a self-supply type, dominating from the

antiquity up to 15th century gave no incentives for developing any profound and

constant studies on international trade. In these conditions is in no way

occasional that the theorists of antiquity and Middle Ages (scholastics)

exaggerated the role of production (especially agricultural) and pleaded

against the "art of making money", the chrematistics (after Aristotel).

At the dawn of the Modern Age (16th century) there appeared the first trials

affaires, in private or governmental employment, as no other topical area, as a

part of an effort to increase the wealth and the power of the nation, with

which these men tended to identify their own welfare. This body of doctrines,

later named by Adam Smith the "mercantile system" or "mercantilism", insisted

that the acquisition of wealth, particularly wealth in the form of gold, was of

paramount importance for national policy. Mercantilists took the virtues of

gold almost as an article of faith; consequently, they never undertook to

explain adequately why the pursuit of gold deserved such a high priority in

their economic plans.

The mercantilists held that economic policy should be nationalistic and aim

to secure the wealth and power of the state. This concept was based on the

conviction that national interests are inevitably in conflict - that one nation

can increase its trade only at the expense of other nations.

Thus the most pervasive and most emphasized doctrine was the importance of

bringing about and maintaining an excess of exports over imports, for that was

the only way for a country without gold and silver mines to increase its stock

of the precious metals. In this way the foreign trade, after mercantilists, was

reduced to the maximum exports of goods for gold and silver and some exports of

raw materials and precious metals.

The desire for a "favorable" balance of trade was never based by mercantilist

writers on a to see their countries engaged in capital export, to make

investments abroad, as the majority of them were at least confused as to the

difference between money and wealth, and very often identified these two terms.

The idea was also that the state should provide its citizens with a monopoly

of the resources and trade outlets of its colonies. A typical illustration of

the mercantilist spirit is the famous English Navigation Act of 1651, which

reserved for the home country the right to trade with the colonies and

prohibited the import of goods of non-European origin unless transported in

ships flying the English flag. This law lingered on until 1849. A similar

to deal extensively with the balance of international trade and the balance of

international payments. He first introduced into this balance such components

as the sale of numerous services - freight earnings, marine insurance payments,

travelers' expenses, and many more - to foreign countries.

Among other adepts of mercantilist theory we can name also Edward Misselden,

William Petty, and others.

With the emergence of mercantilism in the 16th-17th century, an extensive

body of literature dealing with the international trade appeared, although we

must add immediately that it yielded relatively few lasting contributions to

international trade theory.

Mercantilists' ideas often were intellectually shallow, and indeed their

trade policy may have been little more than rationalization of the interests of

rising merchant class that wanted wider markets coupled with protection against

the middle of the 18th century. In France, the economists known as Physiocrats

demanded liberty of production and trade. In England, Adam Smith demonstrated

in his The Wealth of Nations (1776) the advantages of removing trade

restrictions. Economists and businessmen voiced their opposition to excessively

high and often prohibitive customs duties and urged the negotiation of trade

agreements with foreign powers.

This movement was later named liberalism and the very first economists

fighting against the mercantile ideas are regarded to as the pre-classical

trend in studying human society. In this way through the association with such

sciences as physics, medicine, astronomy, and others, it was proved that the

society is ridden by the "natural law". Instead of being finalistic and

normative, as in the Middle Ages, the human sciences became descriptive and

explanatory. One of the first scientists which tried to follow these concepts

are the pre-classical liberalists and among them such economists as Dudley

trade matters from mercantilist "superstitions". He has fittingly been called

the first "free trader" in the Smithian sense. Viewing the whole world rather

than a single nation as an economic unit, he demonstrated that there's no

fundamental difference between foreign and domestic trade. North also presented

a concise formulation of the automatic and self-regulating mechanism that

to sell more than it buys from abroad, money will successively will flow into

it and, as a first consequence, land and labor in the export-surplus country

international trade, and he went beyond Cantillon in pointing out why a country

could not permanently have a "favorable" or "unfavorable" trade balance.

Specifically, he stated the theory of self-regulating mechanism with a much

greater degree of clarity and incorporated it more consistently with the

remainder of his work than was the case with any of the earlier or contemporary

writers. He included the influence of exchange-rate fluctuations on commodity

trade in the mechanism as an additional equilibrating factor. Hume considered

that the exchange rate equilibrates the trade balance of the country; this

meaning that it grows, if the trade balance tends to the unfavorable one and in

that what holds true for exchange between two persons is largely applicable

also to commerce between nations. The inequality of subjunctive valuations he

saw reflected, on a larger scale, in the total exchange transactions between

nations. He decried the foolishness of establishing trade barriers because it

is in the very nature of exchange that both parties will benefit - what is

offered for sale always being valued less highly than what is acquired in

return. If each nation insisted on selling only, they would all eventually wind

up without foreign trade and deprive themselves of its benefits. Condillac went

beyond his predecessors Hume and Cantillon in showing that even if other

nations continue putting up obstacles to international exchange, it will be

advantageous for a particular country to adhere to free-trade principles. He

concludes, somewhat optimistically, that when trading enjoys complete and

the accumulation of wealth through trade, in the form of money capital, had

ridden the most of European countries (maybe except Germany and, in some

measure, Britain) into a state of a downfall of production, especially of

agricultural one.

Gradually there appeares the idea that the wealth consists of goods. In this

sense, physiocrats can be considered the pioneers. Supporting that the wealth

is the totality of agricultural goods, physiocrats leave money the role of a

means of exchange only.

In these conditions, the new conception about the international trade

appears. Once the wealth derives from agriculture, it is not created by trade,

therefore the trade must be based only on the exchange of equivalents, while

money are no more than a means of exchange.

The physiocrats oppose to the active ("favourable") balance, as it results

from the export of wealth (in the form of goods), and the import of money

(which are not wealth). They fight to realise an equilibrated balance in

indebted to Cantillon, brought out the fact that the state of the balance of

trade between nations is neither an indicator of the advantages of foreign

commerce nor that of the wealth of nations. But he was the author of theory

which contained the idea that when a country imports luxury goods, selling the

most necessary or most useful commodities, it prospers, because it means that

reaction against the inconsistencies of mercantilist thought. Adam Smith was

the 18th-century founder of this school; his famous work, "The Wealth of

Nations", is in part an anti-mercantilist tract. In "The Wealth of Nations",

Smith emphasized the importance of specialization: in a world where the

productive resources are scarce and human wants cannot be completely satisfied,

each nation should specialize in the production of goods it is particularly

well equipped to produce; it should export part of this production, taking in

which was already tottering both because economic changes had given some of

these doctrines an antiquarian flavor and because the piecemeal invalidations

of these doctrines by the many forerunners of economic liberalism hardly left

it a "leg to stand on". All the same, without Smith's vigurous, forceful, and

systematic statement of its weaknesses, it might have lingered much longer than

it did.

On the other hand, Smith was unfortunately not capable of precisely

formulating a general theory of international trade. Apart from his building up

an imposing structure of arguments in favor of freedom from restrictions on

foreign trade activities, his contributions to this theory are relatively

minor, as Smith considered mistaken that a producer needs an absolute advantage

to export its products.

The basic concepts of Smith's teory of international trade may be considered

the following:

1. The international commerce is close related with the social division of

labor.

2. The international trade after Smith is based apon the freedom of action

and the incentives of economic agents.

3. In international trade the competition is free and perfect (without

monopolies and any governmental restrictions in the form of protectionist

policies).

From these concepts the following indications on international economic

relations result:

1. In the result of labor division it is not necessary and even possible that

every country produce inside all the products it needs. It is because different

states are provided with the factors of production of different types and

quality in different proportions. As the result every country must specialize

in production of that goods, for which the costs of production are the lowest.

2. Every country imports the goods for which it pays a lower price than it

would cost him in case it produced this product domestically.

3. The difference between the domestic cost of production and the import

price is the absolute advantage obtained through the international trade, this

rule being general for all countries.

4. At the domestic range the state must not interfere in economy, as it

always disturbs economic agents from seeking the most efficient mode to invest

factors of production it posesses.

5. In the international trade must be promoted the policy of free competition

(without monopolies) and a policy of free exchange (non-discriminating).

Much as Smith was aware of the benifits of free trade and was able to

influence the British economic thought, he was not an unqualified free trader.

He singled out two primary cases which in his view justified the imposition of

barriers on imports for the purpose of encouraging domestic industry.

First, some particular industries may be necessary for the defense of a

country. From this point of view, the British Navigation Acts, inasmuch as they

promoted the building up of a merchant marine to be used in peace and war

alike, were perfectly sensible.

The second case is an application of the principle that normally competitive

conditions should not be distorted by government intervention. Consequently, it

will be proper to place a burden on foreign industry if this merely neutralizes

the disadvantage under which domestic industry operates because it is burned

with some taxes from which the foreign producers are exempt. After the

imposition of a "matching" tariff duty, a form of equalizing adjustment no

larger portion of domestic labor and capital would be devoted to the particular

domestic industry of a country than what would naturally go to it. "It would

only hinder any part of what would naturally go to it from being turned away by

the tax, into a less natural direction..." Smith does not underrate the

difficulty arising from the fact that imported commodities are seldom perfect

equivalents of the domestic produced variety.

Adam Smith took up two secondary cases in which he held it to be a "matter of

deliberation" whether or not to follow a laissez-faire policy.

The first deals with the advisability, pro and con, of imposing a retaliatory

duty designed to bring about the repeal of a duty imposed by a foreign country.

The success of taking such a step, Smith holds, will always be open to guess;

and unless the odds are distinstly in its favor, the "...transitory

inconviniency of paying dearer during a short time for some sorts of goods"

would not be justified.

The second possibility, where the issue is not the imposition of a new tax

but rather the return to free trade from the evils of protection, centers

around the need of preventing a sudden painful shock to a domestic industry.

This will be largely a question of size: only when a "great multitude of hands"

would all at once be deprived of their ordinary employment and livelihood by

the removal of high duties and prohibitions in some special regard to their

welfare in order. Indeed, Smith feels, it becomes a matter of equity in this

case that the return to exposure to competition from foreigners be undertaken

"...slowly, gradually, and after a very long warning".

Bounties on exports, that is, government payments to exporters of goods who

could not otherwise effectively compete with their foreign rivals, were, as we

might expect, another device of the "mercantile system" scorned by Smith. They

can only warp the natural allocation of resources. Since a country cannot force

the buying of its exports on other countries, the next best expedient may be

found in one country paying another for the buying of exports. But doing so,

through bounties, will force a country's trade in less advantageous channels

than that in which it would go if left alone. Domestic consumers will be the

losers: under conditions of full employment they would pay a higher price for a

smaller portion of the total supply, and in addition they would have to foot

the bill for government payments to exporters.

Such are the highlights of the attack on the absurdities of mercantilist

country can produce best, in comparing not with other countries, but with the

producing of other kinds of goods. In this case the country doesn't necessarily

need an absolute advantage to specialize in producing and exporting it.

The major purpose of the theory of comparative advantage is to illustrate the

gains from the international trade. Each country can gain by specializing in

those occupations in which it is relatively efficient; it should export part of

that production and take in exchange those goods in whose production it is, for

whatever reason, at a comparative disadvantage. The theory of comparative

advantage thus provides a strong argument for free trade - and indeed - for a

laissez-faire attitude with respect to trade.

The supporting argument is simple; specialization and free exchange among

nations yield higher real income for the participants.

The act that a country will enjoy higher real income as a consequence of the

opening up of trade barriers does not mean, of course, that every family or

individual within a country must share in that benifit. Producer groups

affected by import competition obviously will suffer to at least some degree.

Comparative-advantage theorists concede that free trade would affect the

relative income position of such groups, and perhaps even their absolute income

level. But they insist that the special interests of these groups clashes with

the total national interest, and the most that they are usually willing to

concede is the possible need for a temporary protection against import

competition, in order that the persons affected may have sufficient time to

researches but mainly engaged in abstract reasoning. In working out his

international trade theory, he also founded his conclusions apon a set of

postulates which he considered as first approximations of the real world. The

conclusions he drew, being valid within the framework of his assumptions only,

had of course to be modified before they could be applied to actual

circumstances.

The same is also true for Jean-Stuart Mill, whose studies in international

trade theory completed the framework built by Ricardo. In spite of many attacks

and emandations, the main structure of the Ricardo-Mill theory of international

trade remained basically unimpared untill well into the 20th century.

He left however, much unfinished business for his successors, since his

statements did not explain how the actual ratios of international exchange

at which goods exchange are determined. It was Jean Stuart Mill who explained

the determination of the terms of trade and did so with great skill. He found

that they are dependent on reciprocal demand and that the equilibrum exchange

ratio is the ratio that equalizes the values of exports and imports for each

country in a two-country two-commodity situation. With the "Equation of

International Demand" as a tool, he proceeded to envisage more complicated

situations and explain what modifications in assumptions their analysis

necessitated. His work helped greatly in clarifying the intricate problems

connected with the theory of international values and strengthened the

foundations on which others could build.

Among the other representatives of classical school we can pick up such

economists as Nassau William, Senior, John Elliot Cairness, the Irish one

Charles Francis Bastable, whose apport in developing theory of international

trade was, perhaps, the boldest, as they tried to modify the Ricardo-Mill

theory in more realistic way.

This change of attitudes led to the signing of a number of agreements

embodying the new ideas, among them the Anglo-French Treaty of 1786, which

ended what had been an economic war between the two countries.

After Adam Smith, the basic tenets of mercantilism were no longer considered

defensible. This did not, however, mean that nations abandoned all mercantilist

policies. Restrictive economic policies were now justified by the claim that,

up to a certain point, the government should keep foreign merchandise off the

domestic market in order to shelter national production from outside

competition. To this end, customs levies were introduced in increasing number,

which provided that French protective duties were to be reduced to a maximum of

25 percent within five years, with free entry of all French products except

wine into Britain. This agreement was followed by other European trade pacts.

Resurgence of Protectionism

In the period of a whole triumph of the doctrine of classical economic

liberalism, in the first part of 19th century, there appears in Germany a

diametrically contraire (at least apparently) doctrine of economic

protectionism. The brightest representative of this new theory is, no doubt,

Friedrich List (1789-1846), son of a German leatherworker. Not studying at any

university, he made an academic career to become active in German politics. In

1819, he became leader of the General Association of Manufacturers &

Merchants and the very soul of the movement to confederate the German states.

Being controversed and pressed in course of his life, list was in no smaller

measure appreciated and valued posthumously. Rare economists had such a great

influence upon the course of economic events as List had, there are few systems

of economic thought which were to such extend using in practice as the Listien

one was.

The economic and political unity that characterized much of Europe in the

first half of 19th century was totally absent from Germany. The peace treaty

that ended Germany's participation in Napoleonic wars left that country divided

into 39 different states, most of which were individual monarchies economically

and politically isolated from one another. Such isolation was primarily the

result of a complex system of interstate tariffs that impaired the free and

easy exchange of goods. At the same time, however, no import duties existed.

Thus British surplus products (and those of other countries) found their way

into German markets, where they were offered at extremely low prices.

Under these circumstances the very existence of German manufacturing and

mercantile interests was threatened, and by the 1830, there arose among the

German states a general clamor for economic unity and uniform tariffs. It was

this movement that consumed List's interests and energy.

In his analysis of national systems of political economy, List applied a

method of inquiry originated by Saint-Simon: the idea that an economy must pass

through successive stages before it reaches a "mature" state. The historical

stages of development detailed by List were:

1. Barbaric

2. Pastoral

3. Agricultural

4. Agricultural-Manufacturing

5. Agricultural-Manufacturing-Commercial

Like Sismondi and Saint-Simon, List was as much interested in transition

between stages of economic development as in the end result. He felt that

passage through the first three stages will be brought about most speedily by

free trade between states and nations, but that economies in transition between

the last two stages required economic protection until the final stage was

reached.

Free trade justified once again, however, when the final stage of development

was attained, "in order to guard against retrogression and indolence by the

nation's manufacturers and merchants".

By List's classification and testimony, only Great Britain had attained the

final stage of economic development. While the Continental and American nations

struggled to reach this apogee, however, cheap British imports were thwarting

the development of domestic manufacturing. List felt that until all nations

reached the final stage of development, international competition could not

exist on an equal footing. Thus he favored protective tariffs for Germany

until its greatest national economic power was attained.

It is important to note that List was not an outright protectionist; rather,

he felt that protection was warranted only at critical stages in history. His

writings are replete with examples borrowed from history and experience showing

that economic protection is the only way for an emerging nation to establish

itself. List felt that the American experience offered vindication of his

views, and he of course found ready support among United States protectionists,

particularly Alexander Hamilton and Henry Carey.

List's Criticism of Classical Economics

List strongly opposed the absolutist, cosmopolitian tendencies of the

classical economists. They derived principles, he maintained, which were then

assumed to hold for all nations and all times. By contrast, List's theory and

methodology were strongly nationalistic and historical. His theory of stages in

economic development, for example, was calculated to demonstrate the

insufficiency of classical economics to recognize and reflect the variety of

conditions existing in different countries and, most especially, in Germany.

Like Sismondi, List subordinated economics to politics in general. In his

view, it was not enough for the statesmen to know that the free interchange

will increase wealth (as demonstrated by the classical economists); he must

also know the ramifications of such action for his own country. Thus List

argued that free trade that displace either population or domestic industry is

undesirable. Moreover, List would not sacrifice the future for the present. He

maintained that the crucial economic magnitude in economic development is not

wealth (as measured by exchange values) but productive power. In his own words,

" The power of producing wealth is...infinitely more important than the wealth

itself". Thus economic resources must be safeguarded so that their future

existence and development are assured. This view constitutes further

justification for List's protectionist arguments; it also lies at the root of

the popular "infant-industry" argument in support of protective tariffs.

For List, the ultimate goal of economic activity should be national

development and the accretion of economic power. In this, he (as Marx was to do

later) perceived industry as more than the mere result of labor and capital.

Rather, he conceived industry as a social force that itself creates and

improves capital and labor. In addition to effecting present production,

industry gives an impetus and a direction to future production. Therefore, List

recommended the introduction of industry into underdeveloped countries even at

the expense of temporary loss.

List's originality in economic theory and method consisted in his systematic

use of historical comparison as a means of demonstrating the validity of

economic propositions and in his introduction of new and useful points of view

in contradistinction to the economic orthodoxy of classical liberalism. In

stretching the dynamic fabric of classical economic growth by representing

economic development as a succession of historical stages, he provided a

methodological rallying point for the economists of the German historical

school. Thus List may appropriately be considered the forerunner of that

school.

This reaction in favor of protection spread throughout the Western World in

the latter part of the 19th century. Germany adopted a systematically

protectionist policy and was soon followed by most other nations. Shortly after

1860, during the Civil War, the United States raised its duties sharply; the

McKinley Tariff Act of 1890 was ultra-protectionist. England was the only

country to remain faithful to the principles of free trade.

But the protectionism of the last quarter of the 19th century was mild by

comparison with the mercantilist policies that had been common in the 17th

century and were to be revived between the two World wars. Extensive economic

liberty prevailed by 1913. Quantitative restrictions were unheard of, and

customs duties were low and stable. Currencies were freely convertible into

gold, which in effect was common international money. Balance-of-payments

problems were few. People who wished to settle and work in a country could go

where they wished with few restrictions; they could open businesses, enter

trade, or export capital freely. Equal opportunity to compete was the general

rule, the sole exception being the existence of limited customs preferences

between certain countries, most usually between a home country and its

colonies. Trade was freer throughout the Western World in 1913 than it was in