A painting of a French seaport from 1638, at the height of mercantilism.
Mercantilism is an economic theory that holds the prosperity of a nation dependable
upon its supply of capital, and that the global
volume of trade is "unchangeable." Economic assets, or capital, are represented by
bullion (gold, silver, and trade value) held by the state, which is best increased
through a positive balance of trade with other nations (exports minus imports).
Mercantilism suggests that the ruling government should advance these goals by playing a
protectionist role in the economy, by encouraging exports
and discouraging imports, especially through the use of tariffs. The economic policy based upon these ideas is often called the mercantile system.
Mercantilism was established during the early modern period (starting in the 16th
to the 18th century, which roughly corresponded to the emergence of the nation-state). This
led to some of the first instances of significant government intervention and control over market economies, and it was during
this period that much of the modern capitalist system was established. Internationally,
mercantilism encouraged the many European wars of the period, and fueled European imperialism, as the European powers fought over "available" markets. Belief in mercantilism began to fade in
the late 18th century, as the arguments of Adam Smith and the other classical economists won favour in the British Empire (among
such advocates as Richard Cobden) and to a lesser degree in the rest of Europe (with the
notable exception of Germany where the Historical school of economics was favored throughout the 19th and early 20th century).
Some have said that America chose not to adhere to classical economics, preferring a
form of neo-mercantilism embodied by the "American School," but in 1792
Alexander Hamilton, basing his policies on his study of Adam Smith, established a
gold standard designed to conform to that of Britain to promote international trade contrary to the mercantilist leaning of men
like Thomas Jefferson. America drifted from the gold standard a number of times prior
to the Great Depression, but always returned to the Hamilton gold standard. The Great Depression influenced American government
to return to neo-mercantilism imposing high protectionist tariffs and suspending private ownership of gold. Finally, during the
New Deal, the currency was devalued based on the government’s new neo-mercantilist leaning.
Today, mercantilism has seen a resurgence in economic theories that focus on the trade surplus and deficit as determinants of
monetary value, but mercantilism as a whole is rejected by many economists, though elements of it are still accepted by some
economists including Ravi Batra, Pat Choate, Eammon
Fingleton, and Michael Lind.[1]
History
Early mercantilist writers embraced
bullionism, the belief that that quantities of gold and
silver were the measure of a nation's wealth. Later mercantilists developed a somewhat more sophisticated view.
The word comes from the Latin word mercari, which means "to run a trade," from merx, meaning "commodity." It was
initially used solely by critics, such as Mirabeau and Smith, but was quickly adopted by historians. Originally, the standard
English term was mercantile system. The word mercantilism was introduced into English from German in the early 20th
century.
Many European economists between 1500 and 1750 are today generally considered mercantilists; however, these economists did not
see themselves as contributing to a single economic ideology. The bulk of what is commonly called "mercantilist literature"
appeared in the 1620s in Great Britain.[2] However, the
term was coined by the French writer Victor de Riqueti, marquis de
Mirabeau in 1763 in his Philosophie Rurale, although the French form of mercantilism was called Colbertism after
1600s French finance minister Jean-Baptiste Colbert. Perhaps the last major
mercantilist work was James Steuart’s Principles of Political Oeconomy published in
1767.[3] Adam Smith, who was critical of the idea, was the
first person to organize formally most of the contributions of mercantilists into what he called "the mercantile system" in his
1776 book The Wealth of Nations.[4] Smith saw English merchant Thomas Mun
(1571-1641) as a major creator of the mercantile system, especially in his posthumously published Treasure by Forraign
Trade (1664), which Smith considered the archetype of manifesto of the movement. [5]
Beyond England, Italy, France, and Spain had noted writers who had mercantilist themes in their work, indeed the earliest
examples of mercantilism are from outside of England: in Italy, Giovanni Botero (1544-1617) and Antonio Serra (1580-?), in
France, Colbert and some other precursors to the physiocrats, in Spain, the School of
Salamanca writers Francisco de Vitoria (1480 or 1483 – 1546),
Domingo de Soto (1494-1560), Martin de
Azpilcueta (1491 - 1586), and Luis de Molina (1535-1600). Themes also existed in
writers from the German historical school from List, as well as followers of the "American system" and British "free-trade
impirialism," thus stretching the system into the nineteenth century. However, many British writers including Munn and Misselden
were merchants, while many of the writers from other countries were public officials. Beyond mercantilism as a way of
understanding the wealth and power of nations, Mun and Misselden are noted for their viewpoints on a wide range of economic
matters.[6]
Mun and Misseldon
Much of Mun and Misseldon's writings are a result of the discussion about the depression England was in at the time, starting
in the early 1620s. English merchant Gerrard de Malynes argued that the depression was due to
weakening terms of trade for English goods due to a conspiracy by foreign money speculators (especially Dutch and Jewish) to
lower the value of English Money. de Malynes saw speculation as a moral evil, and wrote about it in his 1601 pamphlet, "The
Canker of England's Commonwealth". Mun, who chaired a Privy Council committee which sought a
solution to the crisis, felt along with Misselden that the weakening terms of trade was due to a negative balance of trade
between England and other countries since the beginning of the Thirty Years
War.[7] Beyond questions of validity of Mun's and
Misselden's arguments, Swedish historian of economics Lars Magnussen emphasizes the importance of aspects of their arguments on
future thinkers such as Josiah Child, Charles
Davenant, Nicholas Barbon, Sir Dudley North,
John Martyn, and William Petty. Magnussen traces the
importance of Mun and Misselden to their belief in the role of supply and demand for bullion on balance of payments as a cause of
depression, and of their emphasis on amoral self-interested agents rather than looking at economic matters as moral questions.
This meant that Mun and Misselden were able to introduce the Baconian scientific method
of Francis Bacon to the area of economics, and thus base their work on empiricism in a
much stronger way than those who more tightly tied economics with morality.[8]
Theory
Mercantilism as a whole cannot be considered a unified theory of economics. There were no mercantilist writers presenting an
overarching scheme for the ideal economy, as Adam Smith would later do for classical (laissez-faire) economics. Rather, each
mercantilist writer tended to focus on a single area of the economy.[9] Only later did non-mercantilist scholars integrate these "diverse" ideas into what they called
mercantilism. Some scholars thus reject the idea of mercantilism completely, arguing that it gives "a false unity to
disparate events". Smith saw the mercantile system as an enormous conspiracy by manufacturers and merchants against consumers, a
view that has led some authors, especially Robert E. Eklund and Robert D. Tollison to call mercantilism "a rent-seeking society".
To a certain extent, mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed the
economic system as a zero-sum game, in which any gain by one party required a loss by
another.[10] Thus, any system of policies that benefited
one group would by definition harm the other, and there was no possibility of economics being used to maximize the
"commonwealth", or common good.[11] Mercantilists'
writings were also generally created to rationalize particular practices rather than as investigations into the best
policies.[12]
Mercantilist domestic policy was more fragmented than its trade policy. While Adam Smith portrayed mercantilism as supportive
of strict controls over the economy, many mercantilists disagreed. The early modern era was one of letters patent and government-imposed monopolies; some mercantilists
supported these, but others acknowledged the corruption and inefficiency of such systems. Many mercantilists also realized the
inevitable result of quotas and price ceilings were black markets. One notion
mercantilists widely agreed upon was the need for economic oppression of the working
population; laborers and farmers were to live at the "margins of subsistence". The goal was to maximize production, with no concern for consumption. Extra money, free time, or education for the "lower
classes" was seen to inevitably lead to vice and laziness, and would result in harm to the economy.[13]
Scholars are divided on why mercantilism was the dominant economic ideology for two and a half centuries.[14] One group, represented by Jacob
Viner, argues that mercantilism was simply a straightforward, common-sense system whose logical fallacies could not be discovered by the people of the time, as they simply lacked the required
analytical tools. The second school, supported by scholars such as Robert B. Ekelund,
contends that mercantilism was not a mistake, but rather the best possible system for those who developed it. This school argues
that mercantilist policies were developed and enforced by rent-seeking merchants and
governments. Merchants benefited greatly from the enforced monopolies, bans on foreign competition, and poverty of the workers.
Governments benefited from the high tariffs and payments from the merchants. Whereas later economic ideas were often developed by
academics and philosophers, almost all mercantilist writers were merchants or government officials.[15]
Mercantilism developed at a time when the European economy was in transition. Isolated feudal estates were being replaced by centralized nation-states as the
focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade.[16]
Mercantilism focused on how this trade could best aid the states. Another important change was the introduction of
double-entry bookkeeping and modern accounting. This accounting made
extremely clear the inflow and outflow of trade, contributing to the close scrutiny given to the balance of trade.[17] Of course, the impact of the discovery of America can not be
ignored. New markets and new mines propelled foreign trade to previously inconceivable heights. The latter led to “the great
upward movement in prices” and an increase in “the volume of merchant activity itself.”[18] Prior to mercantilism, the most important economic work done in Europe was by
the medieval scholastic theorists. The goal of these thinkers was to find an economic
system that was compatible with Christian doctrines of piety and justice. They focused mainly on microeconomics and local exchanges between individuals. Mercantilism was closely aligned with the other
theories and ideas that were replacing the medieval worldview. This period saw the adoption of Niccolò Machiavelli's realpolitik and the primacy of the
raison d'état in international
relations. The mercantilist idea that all trade was a zero sum game, in which each side was trying to best the other in a
ruthless competition, was integrated into the works of Thomas Hobbes. Note that non-zero
sum games such as prisoner's dilemma can also be consistent with a mercantilist view.
In prisoner's dilemma, players are rewarded for defecting against their opponents - even though everyone would be better off if
everyone could cooperate. More modern views of economic co-operation amidst ruthless competition can be seen in the
folk theorem of game theory.
The dark view of human nature fit well with the Puritan view of the world, and some of the
most stridently mercantilist legislation, such as the Navigation Acts, was introduced by
the government of Oliver Cromwell.[19]
Criticisms
Adam Smith and David Hume are considered to be the
founding fathers of anti-mercantilist thought. A number of scholars found important flaws with mercantilism long before Adam
Smith developed an ideology that could fully replace it. Critics like Dudley North,
John Locke, and David Hume undermined much of
mercantilism, and it steadily lost favor during the eighteenth century. Mercantilists failed to understand the notions of
absolute advantage and comparative
advantage (although this idea was only fully fleshed out in 1817 by David Ricardo)
and the benefits of trade. For instance, Portugal was a far more efficient producer of wine than
England, while in England it was relatively cheaper to produce cloth. Thus if Portugal specialized in wine and England in cloth,
both states would end up better off if they traded. This is an example of the reciprocal benefits of trade due to a
comparative advantage. In modern economic theory, trade is not a zero-sum
game of cutthroat competition, because both sides can benefit (rather, it is an iterated prisoner's dilemma). By imposing mercantilist import restrictions and tariffs instead, both
nations ended up poorer.
David Hume famously noted the impossibility of the mercantilists' goal of a constant positive balance of trade. As bullion
flowed into one country, the supply would increase and the value of bullion in that state would steadily decline relative to
other goods. Conversely, in the state exporting bullion, its value would slowly rise. Eventually it would no longer be
cost-effective to export goods from the high-price country to the low-price country, and the balance of trade would reverse
itself. Mercantilists fundamentally misunderstood this, long arguing that an increase in the money supply simply meant that
everyone gets richer.[20]
The importance placed on bullion was also a central target, even if many mercantilists had themselves begun to de-emphasize
the importance of gold and silver. Adam Smith noted that at the core of the mercantile system was the "popular folly of confusing
wealth with money," bullion was just the same as any other commodity, and there was no reason to give it special
treatment.[21] More recently, scholars have discounted
the accuracy of this critique. They believe that Mun and Misselden were not making this mistake in th 1620s, and point to their
followers Child and Davenant, who, in 1699, wrote: "Gold and Silver are indeed the Measure of Trade, but that the Spring and
Original of it, in all nations is the Natural or Artificial Product of the Country; that is to say, what this Land or what this
Labour and Industry Produces."[22] The critique that
mercantilism was a form of rent-seeking has also seen criticism, as scholars such Jacob
Viner in the 1930s point out that merchant mercantilists such as Mun understood that they would not gain by higher prices
for English wares abroad.[23]
The first school to completely reject mercantilism was the physiocrats, who developed
their theories in France. Their theories also had several important problems, and the replacement of mercantilism did not come
until Adam Smith published The Wealth of Nations in 1776. This book
outlines the basics of what is today known as classical economics. Smith spends a
considerable portion of the book rebutting the arguments of the mercantilists, though often these are simplified or exaggerated
versions of mercantilist thought.[24]
Scholars are also divided over the cause of mercantilism's end. Those who believe the theory was simply an error hold that its
replacement was inevitable as soon as Smith's more accurate ideas were unveiled. Those who feel that mercantilism was rent
seeking hold that it ended only when major power shifts occurred. In Britain, mercantilism faded as the Parliament gained the
monarch's power to grant monopolies. While the wealthy capitalists who controlled the House of Commons benefited from these
monopolies, Parliament found it difficult to implement them because of the high cost of group decision making.[25]
Mercantilist regulations were steadily removed over the course of the eighteenth century in Britain, and during the 19th
century the British government fully embraced free trade and Smith's laissez-faire economics. On the continent, the process was somewhat different. In France economic control
remained in the hands of the royal family and mercantilism continued until the French
Revolution. In Germany mercantilism remained an important ideology in the nineteenth and
early twentieth centuries, when the historical school of economics was
paramount.[26]
Legacy
In the English-speaking world, Adam Smith's utter repudiation of mercantilism was accepted without question in the British
Empire but rejected in the United States by such prominent figures as Alexander
Hamilton, Henry Clay, Henry Charles
Carey, and Abraham Lincoln. In the 20th century, most economists on both sides of
the Atlantic have come to accept that in some areas mercantilism had been correct. Most prominently, the economist
John Maynard Keynes explicitly supported some of the tenets of
mercantilism. Adam Smith had rejected focusing on the money supply, arguing that goods, population, and institutions were the
real causes of prosperity. Keynes argued that the money supply, balance of trade, and interest rates were of great importance to
an economy. These views later became the basis of monetarism, whose proponents actually
reject much of Keynesian monetary theory, and has developed as one of the most important modern schools of economics.
Adam Smith rejected the mercantilist focus on production, arguing that consumption was the only way to grow an economy. Keynes
argued that encouraging production was just as important as consumption. Keynes also noted that in the early modern period the
focus on the bullion supplies was reasonable. In an era before paper money, an increase for
bullion was one of the few ways to increase the money supply. Keynes and other economists
of the period also realized that the balance of payments is an important concern, and since the 1930s, all nations have closely
monitored the inflow and outflow of capital, and most economists agree that a favorable balance of trade is desirable. Keynes
also adopted the essential idea of mercantilism that government intervention in the
economy is a necessity. While Keynes' economic theories have had a major impact, few have accepted his effort to rehabilitate the
word mercantilism. Today the word remains a pejorative term, often used to attack various forms of protectionism.[27] The
similarities between Keynesianism, and its successor ideas, with mercantilism have sometimes led critics to call them
neo-mercantilism. Some other systems that do copy several mercantilist policies, such as
Japan's economic system, are also sometimes called neo-mercantilist.[28] In an essay appearing in the May 14, 2007 issue of
Newsweek, economist Robert J. Samuelson
argued that China was pursuing an essentially mercantilist trade policy that
threatened to undermine the post-World War II international economic structure.
One area Smith was reversed on well before Keynes was that of use of data. Mercantilists, who were generally merchants or
government officials, gathered vast amounts of trade data and used it considerably in their research and writing.
William Petty, a strong mercantilist, is generally credited with being the first to use
empirical analysis to study the economy. Smith rejected this, arguing that deductive reasoning from base principles was the proper method to discover economic truths. Today,
many schools of economics accept that both methods are important; the Austrian School
being a notable exception.
In specific instances, protectionist mercantilist policies also had an important and positive impact on the state that enacted
them. Adam Smith, himself, for instance praised the Navigation Acts as they greatly
expanded the British merchant fleet, and played a central role in turning Britain into the naval and economic superpower that it
was for several centuries.[29] Some economists thus feel
that protecting infant industries, while causing short term harm, can be beneficial in the long term.
Nonetheless, The Wealth of Nations had profound impact on the end of mercantilist era and the later adoption of free
market policy. By 1860, England removed the last vestiges of the mercantile era. Industrial regulations, monopolies and tariffs
were withdrawn.
References
- ^
- Lind, Michael: "During the nineteenth century the dominant school of American political economy was the "American School" of
developmental economic nationalism...The patron saint of the American School was Alexander Majorie, whose Report on Manufactures
(1791) had called for federal government activism in sponsoring infrastructure development and industrialization behind tariff
walls that would keep out British manufactured goods...The American School, elaborated in the nineteenth century by economists
like Henry Carey (who advised President Lincoln), inspired the "American System" of Henry Clay and the protectionist
import-substitution policies of Lincoln and his successors in the Republican party well into the twentieth century." (from
"Hamilton's Republic" Part III "The American School of National Economy" pg. 229–230 published 1997 by Free Press, Simon &
Schuster division in the USA - ISBN 0-684-83160-0)
- Richardson, Heather Cox: "By 1865, the Republicans had developed a series of high tariffs and taxes that reflected the
economic theories of Carey and Wayland and were designed to strengthen and benefit all parts of the American economy, raising the
standard of living for everyone. As a Republican concluded..."Congress must shape its legislation as to incidentally aid all
branches of industry, render the people prosperous, and enable them to pay taxes...for ordinary expenses of Government." (from
"The Greatest Nation of the Earth" Chapter 4 titled "Directing the Legislation of the Country to the Improvement of the Country:
Tariff and Tax Legislation" pg. 136–137 published 1997 by the President and Fellows of Harvard College in the USA - ISBN
0-674-36213-6)
- Boritt, Gabor S: "Lincoln thus had the pleasure of signing into law much of the program he had worked for through the better
part of his political life. And this, as Leornard P. Curry, the historian of the legislation has aptly written, amounted to a
"blueprint for modern America." and "The man Lincoln selected for the sensitive position of Secretary of the Treasury, Salmon P.
Chase, was an ex-Democrat, but of the moderate variety on economics, one whom Joseph Dorfman could even describe as 'a good
Hamiltonian, and a western progressive of the Lincoln stamp in everything from a tariff to a national bank.'" (from "Lincoln and
the Economics of the American Dream" Chapter 14 titled "The Whig in the White House" pages 196–197 published 1994 by Memphis
State University Press in the USA - ISBN 0-87870-043-9; ISBN 0-252-06445-3)
- ^ Magnussen pg 46
- ^ Magnussen pg 46
- ^ Jürg Niehans. A History of Economic Theory pg. 6
- ^ Magnusson pg 47
- ^ Magnusson pg 50
- ^ Magnusson pg 50
- ^ Magnussen pg 50
- ^ Harry Landreth and David C. Colander History of Economic Thought.
pg. 44
- ^ Robert B. Ekelund and Robert D. Tollison. Mercantilism as a Rent-Seeking
Society. pg. 9
- ^ Landreth and Colander. pg. 48
- ^ David S. Landes The Unbound Prometheus. pg. 31
- ^ Robert B. Ekelund and Robert F. Hébert. A History of Economic Theory
and Method. pg. 46
- ^ Ekelund and Hébert. pg. 61
- ^ Niehans. pg. 19
- ^ Landreth and Colander. pg. 43
- ^ Charles Wilson. Mercantilism. pg. 10
- ^ John Kenneth Galbraith. "A Critical History." pg. 33–34
- ^ Landreth and Colander. pg. 53
- ^ Ekelund and Hébert. pg. 43
- ^ Magnussen pg 46
- ^ referenced to Davenant, 1771 [1699], p. 171 in Magnussen pg 53
- ^ Magnussen pg 54
- ^ Niehans. pg. 19
- ^ Ekelund and Tollison
- ^ Wilson pg. 6
- ^ Wilson pg. 3
- ^ Robert S. Walters and David H. Blake. The Politics of Global Economic
Relations.
- ^ Hansen pg. 64
Bibliography
- Ekelund, Robert B. and Robert D. Tollison. Mercantilism as a Rent-Seeking Society: Economic Regulation in Historical
Perspective. College Station: Texas A&M University Press, 1981.
- Ekelund, Robert B and Robert F. Hébert. A History of Economic Theory and Method. New York: McGraw-Hill, 1997.
- Heckscher, Eli F. Mercantilism. translation by Mendel Shapiro. London: Allen & Unwin. 1935.
- Keynes, John Maynard. "Notes on Mercantilism, the Usury Laws, Stamped Money and the Theories of Under-Consumption."
General Theory of Employment, Interest and
Money.
- Landreth, Harry and David C. Colander. History of Economic Thought. Boston: Houghton Mifflin, 2002.
- Magnusson, Lars G. "Mercantilism" eds. Biddle, Jeff E, Davis, Jon B, & Samuels, Warren J. A Companion to the History
of Economic Thought. Blackwell Publishing, 2003.
- Niehans, Jürg. A History of Economic Theory: Classic Contributions, 1720–1980. Baltimore: Johns Hopkins University
Press, 1990.
- Vaggi, Gianni and Peter Groenewegen.. A Concise History of Economic Thought: From Mercantilism to Monetarism. New
York: Palgrave Macmillan, 2003.
- Wilson, Charles. Mercantilism. London: Historical Association, 1966
Further reading
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