Self-Reliance versus International Trade: Pros and Cons of Autarky Detailed (Including Benefits and Drawbacks)

A DIFFERENT LOOK AT AUTARKY

Autarky, the ambition of an economy to be self-sufficient, paints a picture of a system that revels in self-reliance, independent from international trade or capital flows. In its purest form, we call this a closed economy, isolated from the world. Yet, no country truly embraces this concept today.

North Korea, often regarded as enclosed, still steps out for an occasional date with China and Russia, importing goods worth $500 million from the pair in 2020 alone.

Economists, however, dabble with the idea of autarky to explain concepts like circular flow models, aggregate demand, international trade, and balance of payments.

AUTARKY VS. CLOSED ECONOMY

A closed economy occurs when a nation refrains from engaging with other nations, eschewing trade and, consequently, the exchange of goods, capital, and labor. This self-imposed isolation is rooted in autarky, which seeks self-sufficiency. By catering to domestic consumption through domestic production, a nation strengthens its economic independence.

AUTARKY VS. FREE MARKET ECONOMY

Autarky contrasts starkly with a free market economy, a system that thrives on supply and demand without interference from governments or external authorities. Unlike autarky, a free market economy encourages open borders for products, labor, and capital, leading to economic integration like the European Union.

Two icons of free trade, Adam Smith and David Ricardo, proposed that nations could mutually benefit from international trade. While Smith argued for an absolute advantage, Ricardo introduced the comparative advantage to support their claims.

REASONS FOR AUTARKY

Autarky is associated with state power preservation, viewing external power as a threat, akin to Hegelian philosophy. Its extreme protectionism sees nations extracting and processing local resources without exporting or importing.

Nationalism with a fiery intensity can also lead to autarky, as states strive to maintain their cultural identity by shunning foreign elements. An isolated economy safeguards domestic stability by minimizing economic dependencies and potential threats.

For instance, South Korea during the 1600s and Japan in the 1800s, as well as Spain in the mid-1900s, can be seen as having dabbled in autarkic practices. In modern times, Afghanistan under the Taliban may have leaned into autarky, and, in some ways, North Korea continues to do so despite its international trade relationships.

BENEFITS OF AUTARKY

Several arguments praise autarky, with preservation of national identity being one such defense. Self-sufficiency provides a nation with economic independence, ensuring domestic policies remain unaffected by external influence. Freed from international trade woes, a nation avoids negative downstream effects, such as recessions, crises, and currency devaluations.

DISADVANTAGES OF AUTARKY

Despite its allure, autarky bears drawbacks, making international trade seem superior. Primarily, self-sufficiency is challenging, with few nations successfully succeeding in isolation. Economies, after all, rely on diversity to meet myriad human needs.

Trade offers solutions to meet unmet demands, providing consumers with a plethora of choices. Moreover, products imported from abroad are often cheaper, raising quality of life for citizens.

Secondly, productivity tends to be lower, as limited resources can impact the efficiency of production. By focusing resources on a single good at the expense of another, a nation may struggle to achieve economies of scale, resulting in higher production costs and consequently higher priced goods.

Thirdly, progress may stagnate as a nation isolated from the world may miss out on opportunities to learn from other cultures and technologies. Lastly, an isolated nation can be left vulnerable to external shocks, as it lacks the international support structures other nations have.

LEARN MORE- Division of Labor: The Efficiency Engine (Specialization, Productivity)- Economic Problems: Addressing Three Key Questions for an Economic System- Command Economy: Characteristics, Advantages, and Disadvantages- Trade Barriers Explained: Types, Motives, and Impacts on Economy, Consumers, and Business- Free Market: Definition, Characteristics, Benefits, and Drawbacks- Market Economy: Definition, Characteristics, Advantages, and Drawbacks- Terms of Trade: Understanding a Nation's Trade Power and Its Impact- Comparative Advantage Explained: Assumptions, Examples, and Criticisms- Active Exports: Proactive Strategies for Global Growth

In the realm of personal-finance and education-and-self-development, understanding economic systems like autarky can provide valuable insights into a nation's financial policies and independence from international trade.
Technology plays a crucial role in determining a nation's ability to achieve self-sufficiency in a closed economy, as advancements can either facilitate or hinder domestic production.
Investing in businesses that focus on domestic production can be a strategic move for those interested in supporting autarkic practices, particularly in sectors where a nation has a comparative advantage.