Economic Nationalism

In the wake of the World's economic downturn, leaders across the globe are succumbing to the temptations of economic nationalism. Both the "buy American" clause in the stimulus package and recent strikes in the U.K. to protest foreign workers are frightening examples. Here are the economic basics of economic nationalism or mercantilism.

Mercantilism was the popular economic theory throughout Europe during the 16Th and 18Th centuries until Adam Smith came along and published The Wealth of Nations in 1776 (The second best publication of that year). Mercantilism is the premise that countries can achieve maximum wealth by maximizing exports, and minimizing imports leading to a positive trade balance. While this theory seems attractive for a firm, i.e. selling more than you buy, it has several downfalls for a national economy. First, when a country has a positive trade balance they are requiring their trading partners to be net purchasers of their currency which leads to currency appreciation. Keep in mind you do not want to import under mercantilist theory, so currency appreciation will only make your goods more expensive for your trading partners, and consequently lead to a decline in exports. The inflated currency will also make many imports cheaper; however, citizens will be forced to buy nationally made goods leading to profit extraction. The economic conflicts created by mercantilist countries were not limited to currencies and expensive goods, they led to several wars between European countries during this time period.

The classical economist David Ricardo, also helped to dispel mercantilism through his theory of competitive advantage. His theory was that both countries would be better off if they traded freely due to competitive advantages. For example if the U.K. is better at making cloth, and France is better at making wine, both countries will be better off France gets its cloth from the U.K. and the U.K. gets its wine from France.

Buying American is great, as long as we produce the cheapest. If the same product is available cheaper elsewhere, it's because they are more efficient at producing it. Our stimulus plan should be to take a good look at what we produce most efficiently and make sure the rest of the World knows we have a "For Sale" sign on those goods and services.