Question

Why is mercantilism or even protectionism is generally viewed as a flawed theory today

Answer 1

Capitalism and capitalist trade theory is generally considered both more accurate and more stable than mercantilism. Mercantilism has two core problems that have made it an unreliable form of economic theory.

First, as noted above, mercantilism relies on inherently unfair trade balances and trade practices. Mercantile nations depend on being able to erect barriers in their own economies without their trading partners doing the same. In the long run this is an unstable situation, because peer nations rarely willingly concede to economic subservience. For this reason mercantilism has historically been intertwined with trade wars and military adventurism.

Second, also as noted above, mercantilism relies on an archaic and inaccurate view of wealth. This is a school of thought wedded to gold standard philosophy, one in which wealth is measured by currency and is a zero-sum quantity.

Modern economics considers currency a measure of wealth rather than a form of it. It is how nations interact with and trade their productivity, but the real wealth of nations is measured by the goods and services that currency gives access to. This is a fluid sum. As an economy grows through population and technology, it can produce more for all of its participants. This positive-sum reality of wealth undermines the core tenet of mercantilism.