What’s it: Autarky is a system or philosophy in which an economy seeks to be self-sufficient. If a country adopts this system, it will try to meet its needs from within. And suppose the country is not involved in international trade or capital flows. In that case, we call it a closed economy or complete autarky. The country produces goods and services for domestic consumption and does not export them. Likewise, they also do not import goods and services from other countries.
The autarkic economy is considered an abstract concept because, currently, no country has adopted it. In fact, North Korea, which is considered closed off, still has international relations with China and Russia and imported goods from both countries for $491 million and $41 million in 2020.
Economists usually use the autarky concept to explain several related macroeconomic concepts, such as circular flow models, aggregate demand, international trade, and balance of payments.
Is an autarkic economy the same as a closed economy?
A closed economy is when a country does not interact with other countries. In other words, the country does not trade with other countries. Likewise, the capital flow, or other factors of production, such as labor, with other countries also does not exist.
And closed economies often stem from autarky, in which a country seeks to be self-sufficient. Thus, the country meets consumption through domestic production. And, to build economic independence, the country is likely to adopt a closed economy to minimize dependence on other countries.
For this reason, autarky is often identified with a closed economy. And similarly, in this article, we assume the same between closed economies and autarky.
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What is the difference between an autarkic economy and a free market economy?
Autarky is in contrast to a free market economy. The latter promotes supply and demand as determinants in economic activity without government or external authorities intervening in the market.
And in international economics, the free market – also known as a liberal economy – encourages products and labor to flow freely between countries without trade barriers. Likewise, it also applies to factors of production. To a limited extent, this philosophy then gave rise to economic integration, as adopted by the European Union and other economic unions.
Adam Smith and David Ricardo are two figures for free trade. According to both, a country can benefit by conducting international trade. Adam Smith then introduced the absolute advantage concept to support his argument. Meanwhile, David Ricardo introduced a comparative advantage.
Why did autarky appear?
First, autarky is seen as a way to maintain state power. It regards power beyond national borders as a threat, as the Hegelians put it.
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Therefore, autarky is considered extreme protectionism. Autarky states do not participate in international trade. Instead, they extract their natural resources, process them, and sell them to meet domestic needs. They do not sell products abroad or import goods from abroad. In addition, they also do not receive any capital investment or outside assistance.
Second, extreme nationalism can also lead to autarky. A state identifies with its own nation and adopts autarky to preserve the existing social order. Interacting with other countries may result in foreign culture entering, which can eliminate national identity and culture. This also applies to the economic aspect.
Autarky aims to reduce the foreign economy affecting the domestic economy. A country strives for national self-sufficiency. Therefore, it minimizes potential economic threats or problems when interacting with other countries.
For example, importing most products from other countries makes the domestic economy highly dependent on partner countries. Such dependence can lead to problems later on. For example, say a partner country goes into recession. It could soon spread to the domestic economy through international trade and capital flows. Therefore, such problems can be avoided through domestic self-sufficiency.
Which countries have adopted autarky?
Autarky has its roots in Hegelian philosophy. It called for a state to focus on the economic and political forces tied to the nation-state. Hegelian philosophy also views foreign trade as a threat to the overall health and growth of the country.
Hegelians view power should be concentrated on the great people and their intellectuals. And national borders are important to maintaining existing powers. Thus, trade outside the border is considered a betrayal and erodes state power.
Mercantilism in Western European countries from the 16th to the 18th centuries is considered autarky. This economic philosophy tries to control the state’s power by restricting trade.
While under the Nazis from 1933–1945, Germany is also considered to have adopted autarky. The Nazis tried to gain power by expanding the surrounding countries, maximizing trade within their own economic bloc, and eliminating trade with outsiders.
Other examples of an autarkic economy are Japan in the 1600s and 1850s and Spain in the 1940s and 1950s. Meanwhile, no country has adopted complete autarky in today’s modern economy. Instead, Afghanistan may have done it under the Taliban.
North Korea is also considered an example of autarky in today’s modern economy. This is because the country adopts the government ideology of “Juche” (self-reliance), which is concerned with maintaining its domestic economy in the face of isolation.
However, North Korea is not 100% autarky. The country has international trade, especially with allied countries such as China and Russia. In 2020, North Korea reported $142 million in exports and $556 million in imports. Some exports go to China, Burma, Poland, and Nigeria. Meanwhile, some imports came from China and Russia.
Autarky may survive, not as a state but as a small group. Inland tribes may still adopt it and shut themselves off from outsiders. They build a community in a small area and are self-sufficient to meet their daily needs.
What are the advantages of autarky?
Several arguments support why autarky is advantageous. First, it is important to maintain national identity. Second, self-sufficiency makes a country independent from other countries to meet its needs. So, for example, a negative supply shock in another country will not cause a shortage in the domestic market because all goods and services are produced domestically.
Third, autarky means being independent in making economic policies. Policymakers do not have to bother considering other countries when making policies. Thus, the choice taken is entirely for domestic interests.
Fourth, self-sufficiency minimizes negative effects such as recession and depression from spreading to the domestic economy. Recessions often spread to other countries through international trade and capital flows. Since neither is present, autarky can avoid such negative effects.
Likewise, the currency crisis did not spread to the domestic economy. No international trade and capital flows mean there is no need to use foreign currencies such as the dollar. Long story short, there is no exchange rate under a closed economy.
What are the disadvantages of autarky?
Autarky has several drawbacks, and therefore, international trade is considered preferable. First, it is nearly impossible; otherwise, very few countries are successful at being self-sufficient. Human needs and wants are highly diverse. Thus, it is impossible to fulfill it through domestic production.
And trading with other countries is an alternative to meet the demand for some products the domestic economy cannot produce. Moreover, it offers citizens a better choice. They can access various products abroad.
Second, the efficiency is low, so the product tends to be expensive. An autarkic economy may be able to produce various products. However, limited economic resources (or factors of production) can be a problem. For example, when labor is deployed to produce one good, less labor is available to produce the other good. As a result, economies of scale are performed for one good at the expense of another.
For this reason, it is impossible to produce all goods at the most efficient rate. Thus, production costs may be low for certain goods but not others. As a result, prices can be cheap for certain items but expensive for others.
International trade offers a solution to the problem. First, a country focuses on goods in which it has an advantage. The country can import from other countries for the rest. Long story short, the country can get some cheap goods from the domestic market and other cheap goods from abroad. Finally, if all countries do this, international trade can benefit greatly.
Third, economic progress is hampered. For example, technology facilitates the economy to encourage more productive labor and physical capital. It spread to different countries through trade and capital investment.
Likewise, international relations allow a country to build knowledge to support economic and technological development. Domestic people can study abroad easily. However, it is difficult to obtain such benefits if the country adopts a closed economy.
Fourth, autarky makes the country isolated from international relations. International relations are not only related to economic aspects. But, it is also vital for aspects like humanity.
As we see today, when a country experiences a natural disaster or social disaster, other countries come to offer assistance. Then, which country will help an autarkic country if it is closed from the outside world.