The theoretical basis of a study of international economic relations in its 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 of more systematic analyses of the international economic relations.
Developed during the period of the downfall of feudalism and the transition to capitalism, the mercantile theory was the first trial to explain integrally the principles of international trade in a paradigm of the analysis of economic reality.
Perhaps, the field of international trade was first closely studied by men of 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 policy was followed in France.
Thomas Mun, as a representative of mercantilist school, was one of the firsts 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 competition in the form of imported goods.
A strong reaction against mercantilist attitudes began to take shape toward 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 liberalists.
18th century is often remarked through the development of the scientific 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 (Douglas) North, Cantillon, Hume, Condillac, and others.
North undertook a vigurous attack aimed at ridding the discussion of foreign 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 provides a nation with that sum of money required for carrying its trade.
Cantillon deflated mercantilist tenets by showing that if a country continues 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 will become more expensive.
Hume greatly helped to piece together the theory of self-regulating 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 this way presses the imports, and vice-versa.
Condillac applied his utility theory to international trade and demonstrated 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 permanent liberty, wealth is bound to spread everywhere.
Classical liberalistic school gave us three models of international trade:
- the physiocratic model
- the absolute advantage theory
- the theory of comparative advantage
The mercantile policies imposed in the 16th - 17th century, which proclaimed 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, physiocra