What is Autarky Economy?

Explanation

Below diagram shows the circular flow of goods and services and the money in a closed economy:

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  • Households provide factors of production in terms of land, labor, capital, and entrepreneurship to the factor markets.Factor markets connect businesses to the factors of production received from the households.Businesses use these to produce goods and services they sell to the goods market.Goods market connects the households with goods and services for their consumption.Households pay for the goods and services purchased, which reaches the businesses.Businesses pay the wages, salaries, interest, and rent to the factors of productionFactors Of ProductionFactors of production define resources used to produce or create finished goods and services, the sale and purchase of which keeps the market economy afloat.read more which reach the households. They also keep their profits.Both households and businesses pay government taxes, and the Government provides them services such as law and order.Financial marketsFinancial MarketsThe term “financial market” refers to the marketplace where activities such as the creation and trading of various financial assets such as bonds, stocks, commodities, currencies, and derivatives take place. It provides a platform for sellers and buyers to interact and trade at a price determined by market forces.read morereceive savings from households, which then lend to businesses that need capital and payback returns in the form of interest or dividendsDividendsDividends refer to the portion of business earnings paid to the shareholders as gratitude for investing in the company’s equity.read more. Financial markets keep a portion of this return for themselves and give the rest to the households.

In a closed economyClosed EconomyA closed economy is one in which no goods or services are imported or exported, implying that the economy is self-sufficient and has no trading activity from outside economies with the sole purpose of meeting all domestic consumers’ needs within the country’s borders.read more, there is no foreign sector and, therefore, no international tradeInternational TradeInternational Trade refers to the trading or exchange of goods and or services across international borders. read more, and at times, the Government owns many businesses. Also, financial markets may not exist independently.

History

  • Autarky has its usage in a non-economic sense too. It is sometimes used in military reference wherein a country might take no help from any other country in its defense. It has been in force to various extents in different parts of the world in the past and in the current economic system, where protectionism is coming to the fore more and more. Generally, It is the underlying principle of the ‘left-wing political framework, which has taken many forms in the past, such as socialism in the USSR, or Communism in China. However, many ‘right-wing political frameworks have also gone for Autarky, such as the Fascist Government in Italy.Most of the time, the rise and fall are cyclical. It is preceded a war, or by extreme practices of capitalism in different forms, such as Japanese imperialism, or the Czarism in Russia, wherein there is free trade among countries, but the domestic producers suffer.Immense wealth accumulation by the ruling class follows, widening the class divide. Once the regime becomes unbearable, the rebellion of the masses leads to an Autarky form of government that promises to put forth the interests of its people first. Therefore a perfect balance between free trade and protectionism is desired.Because excessive protectionism is also not favorable as people are deprived of quality products and upgrades in technology because not all innovation can happen within one country. Its lag in technological progress slows economic development. It leads to a fall in the GDP of the country.

Example of Autarky

A more appropriate example would be Rojava in northern Syria. It doesn’t indulge in international trade to a great extent and is therefore cut off from the rest of the world. It follows the ideas of Murray Bookchin, who is one of the famous proponents of Autarky. Self-sufficiency is a part of the region’s constitution. It follows the principles of people who work using the given resources, which is an idea diametrically opposite to that of private ownership of resources.

Proponents of Autarky

Benito Mussolini, one of the known figures of Fascism in Italy, was a strong proponent of Autarky. Post World War I, when Italy’s economy was falling apart, he brought several socialist measures into force and declared the goal of Autarky. During his reign, there was rapid nationalizationNationalizationNationalization is the process of the government seizing ownership or partial ownership in an organization, although the situation is temporary in many cases.read more of private enterprises. The government-controlled the banking and credit and businesses such as shipbuilding. This establishment was expensive and required the involvement of a large bureaucracy. Public debt increased, the trade deficitTrade DeficitWhen the total sum of goods or services that a country imports from other countries is higher than the total sum of goods or services that a country exports to other countries, this is referred to as a trade deficit, which is the opposite of the balance of trade theory.read more widened, import controls were put in place. However, this regime led to a fall in the economy’s growth rates and finally led to the fall of Mussolini.

Before WWI, the Russian economy was mostly dependent on imports of raw materials and exports of agricultural produce. However, post-WWI, the economy was deplorable and put New Economic Policy in force. Still, it required support from the agriculture sector for the economy to reach the pre-war levels but did not achieve it. Following this, during 1927-34, USSR also experienced Autarky, wherein it experienced high economic isolation. It was the first two five-year plans under Stalin when it was pursued. Foreign trade was significantly reduced to the minimum possible level. At first, the economy saw high growth and a rise in machinery and technology imports. After some years, restricted imports and import substitution came into play.

Opponents of Autarky

  • Adam Smith, the father of modern economics, is considered one of the primary opponents of Autarky. He vouched for free trade or the free flow of goods and services and for countries producing only those goods over which they had absolute advantage and trade the same for those goods it doesn’t produce.He inferred that this would lead to the most optimum utilization of resources by each country, and due to better production techniques implemented, the output would be greater. He was followed by David Ricardo, who vouched for the countries to specialize in those products with a comparative advantage.It implied that even though some countries might have no absolute advantage over overproduction of any good, they might have a comparative advantage or a more optimal opportunity cost of producing few goods than others given the resources that the country possessed. Producing these and trading the other would also add to the overall advantage of all the countries.

Conclusion

Autarky is a type of economic systemType Of Economic SystemThere are four prominent types of economic systems in the world based on their characteristics. It includes traditional economy, command economy, market economy and mixed economy. read more with restricted or no international trade, and this system aims to achieve self-sufficiency. It has emerged several times in economic history and is not a new phenomenon; However, this system has failed several times and is considered flawed. At times it leads to resource miss utilization and is grossly opposed by most economists. Ultimately, each economic system aims the best for its people; however, the incorrect implementation and not recognizing the growing interdependence of countries has led to its fall time and again.

This has been a guide to the Autarky economy and its meaning. Here we discuss the process of a closed economy with their example, proponents, and opponents. you can learn more about economics from the following articles –

  • Shared EconomyDeveloped EconomyRole of Financial InstitutionsKeynesian Economics