Autarky

What is Autarky Economy?

Autarky, also known as closed economy, is an economic system which does not involve itself in international trade as it has achieved a certain level of self-sufficiency and therefore does not require the benefits of international exchange of goods and services. However, in a practical economy, there is very few total Autarkies, but more of those that allow limited international trade.

Explanation

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

Autarky Process

  1. Households provide factors of production in terms of land, labor, capital, and entrepreneurship to the factor markets.
  2. Factor markets connect businesses to the factors of production received from the households.
  3. Businesses use these to produce goods and services which they sell to the goods market.
  4. Goods market connects the households with goods and services for their consumption.
  5. Households pay for the goods and services purchased, which reaches the businesses.
  6. Businesses pay the wages, salaries, interest, and rent to the factors of production which reach the households. They also keep their profits.
  7. Both households and businesses pay the government taxes, and the Government provides them services such as law and order.
  8. Financial markets receive savings from households, which then lend to businesses that need capital and payback returns in the form of interest or dividends. Financial markets keep a portion of this return for themselves and give the rest to the households as their returns.

In a closed economy, there is no foreign sector and, therefore, no international trade, and at times, the Government owns a lot of businesses. Also, financial markets may not exist independently.

History

  • Autarky has its usage in a non-economic sense too. At times it is 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 also, 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 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, this lag in technological progress slows the economic development as well. 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 very 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 constitution of the region, and it follows the principles of people who work using the given resources on them, 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 nationalization of private enterprises. The government-controlled the banking and credit as well as businesses such as shipbuilding. This establishment was expensive and required the involvement of a large bureaucracy. Public debt increased, the trade deficit widened, import controls were put in place. However, this regime led to a fall in growth rates of the economy and also finally led to the fall of Mussolini.

Before WWI, the Russian economy was mostly dependent on imports of raw material and exports of agricultural produce. However, post-WWI, the economy was in a deplorable state, and the New Economic Policy was put in force, but for the economy to reach the pre-war levels, support from the agriculture sector was required, but it was not achieved. Following which, 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 imports of machinery and technology. After some years, imports were restricted, and import substitution came in to play.

Opponents of Autarky

  •  Adam Smith, the father of modern economics, is considered to be one of the primary opponents of Autarky. He vouched for free trade or the free flow of goods and services and also vouched for countries producing only those goods over which they had absolute advantage and trade the same for those goods which 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 in which they had a comparative advantage.
  • It implied that even though some countries might have no absolute advantage overproduction of any good, they might have a comparative advantage or a more optimal opportunity cost of producing few goods in comparison to 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 system with restricted or no international trade, and this system aims to achieve self-sufficiency. At times it leads to resource miss utilization and is grossly opposed by most economists. It has emerged several times in economic history and is, therefore, not a new phenomenon; However, this system has failed several times and is considered flawed. 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.

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