- one of the first attacks on mercantilism was raised by davidhume, in 1752, with his development of the price- specie- flow doctrine.
- a favorable trade balance was possible only in the short run, for over time it would automatically be eliminated.
- accumulation of precious metals by ways of a trade surplus would lead to an increase in the money supply and to increase prices and wage – reduce the competitiveness of the country with a surplus. The loss of precious metals in the deficit country would reduce its money supply, prices, and wages – increase competitiveness of the country with a deficit.
- thus, it is not possible a nation to continue to maintain a positive balance of trade indefinitely.
- the movement of specie between countries serves as an automatic adjustment mechanism that always seeks to equalize the value of exports and imports (zero trade balance).
- the mercantilism was also attacked for their static view of the world economy. To the mercantilism, the world’s wealth (output) was fixed. This meant that one nation’s gains from trade came at the expense of its trading partners; not all nations could simultaneously enjoy benefits of international trade.
- this view was attacked by adam smith in 1776. According to adam smith, the world’s wealth is not a fixed quantity. International trade allows nations to take advantage of specialization and the division of labor, which increase the level of productivity within a country and increase the world output (wealth).
- smith’s dynamic view of trade suggested that both trading nations could simultaneously enjoy higher levels of production and consumption with trade.