mercantilism

1. The theory and system of political economy prevailing in Europe after the decline of feudalism, based on national policies of accumulating bullion, establishing colonies and a merchant marine, and developing industry and mining to attain a favorable balance of trade.
2. The practice, methods, or spirit of merchants; commercialism.

[MERCANTIL(E) + -ISM.]

The main economic system used during the sixteenth to eighteenth centuries. The main goal was to increase a nation's wealth by imposing government regulation concerning all of the nation's commercial interests. It was believed that national strength could be maximized by limiting imports via tariffs and maximizing exports.

Investopedia Says:
This approach assumes the wealth of a nation depends primarily on the possession of precious metals such as gold and silver. This type of system cannot be maintained forever, because the global economy would become stagnant if every country wanted to export and no one wanted to import. After a period of time, many people began to revolt against the idea of mercantilism and stressed the need for free trade. The continued pressure resulted in the implementation of laissez faire economics in the nineteenth century.

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1. Seventeenth and eighteenth century economic policy under which trading nations generated wealth and power by exporting manufactured goods in exchange for gold.

2. In modern times, second-rate status of nations having a heavy dependence on imported manufactured goods.

n.belief in the benefits of profitable trading; commercialism.

mercantilist n. & adj. mercantilistic adj.

See the Introduction, Abbreviations and Pronunciation for further details.

The view, current in early modern Europe, that one nation's gain is only achieved by another nation's loss; that trade between states is a ‘zero sum game’. According to this view, a trading nation can only prosper if it encourages the export of manufactures and the import of raw materials, but discourages the import of manufactures and the export of domestically produced raw materials, through the erection of tariff barriers. Adam Smith (1723-90) countered this view, arguing that an increase in prosperity for all was possible by, as it were, increasing the size of the economic cake.

The system of relations between state and economy prevailing throughout Western Europe and its dependencies up to the nineteenth century under which those trades and industries were most encouraged that secured the accumulation of bullion, a national fleet and trained mariners, secure sources of strategic materials, and strong armaments production. Mercantilism was opposed by liberals like Adam Smith from the eighteenth century onwards, because of its reliance on the granting of exclusive privileges to corporations such as the British and Dutch East India Companies to the detriment of free trade and a rational division of labour at home. Subsequently used in an exclusively pejorative sense, neomercantilism became in the 1930s and 1970s a convenient synonym for economic nationalism.

— Charles Jones

For more information on mercantilism, visit Britannica.com.

This general term, coined in 1763 by Mirabeau, is usually applied to the system of economic policy which flourished between the 16th and 18th cents. Mercantilists were concerned to increase the power of the nation state by competition with hostile rival nations. Most characteristic were their ideas about trade and gold. Wealth was defined exclusively in terms of gold bullion reserves, so that a positive trade balance became a prime aim of policy to increase the currency reserves. Such notions supported the acquisition of colonies to provide necessary imports which, otherwise, would have to be bought from rivals in exchange for bullion. The Navigation Acts introduced in the 17th cent. by the English government represented a typically mercantilist attempt to manipulate the costs of trade by stipulating that goods in the colonial trade must be carried in English ships.

Modern economic thought gives little support to the basic ideas of mercantilism. Current theory regards the restriction of trade as damaging to economic growth. Similarly monopolistic control and the regulation of economic activity are perceived as sources of inefficiency.

Mercantilism is the name given to the economic doctrines and practices of major trading nations roughly from the fifteenth through the eighteenth centuries. Colonial empires such as those of England, France, and Spain were among those adhering to the mercantile system. Although specific practices regarding the doctrine varied from nation to nation, there were basic principles all mercantilists followed. Mercantilists practiced heavy state regulation of economic activity in order to boost national wealth. The wealth of the nation was based upon its stocks of gold and silver, rather than on its peoples' living conditions, for example. Thus the accumulation of national wealth was believed to be best achieved by creating as large an excess of exports over imports as possible, as the difference would be collected in gold from importing countries. Colonies in particular were seen as a valuable means of increasing exports and thereby enriching the mother country, as was the case with the British colonies.

One of the earliest navigation acts passed by the British Parliament to have a direct impact on the American colonies was in 1651. It is the modification of this law in 1660 that became known as the Navigation Act, which defined British colonial policy and its practice of mercantilism. Protecting its national interests, the law stated that trade within the British empire was to be conducted by English ships and English seamen. Those defined as English included residents of the colonies as well as England. This gave English ships a complete monopoly over trade within the British empire, greatly limited the trade of foreign vessels within England's ports, and excluded foreign vessels altogether from colonial ports.

Further revisions of the Act made British ports the hub for all trade within the empire. The revisions called for trade with foreign powers to be shipped from its point of production to England or a British colonial port before being shipped to its foreign destination. Conversely, foreign goods set for the colonies were required to stop first in England. This ensured England would be the center for all colonial trade and allowed for taxes to be levied as goods flowed through the country.

The next phase of the Navigation Acts specifically listed which products were to be shipped to ports within the British empire and which were to be shipped to foreign countries. They also regulated the manufacture and trade of colonial products. Those colonial products needed within the empire, like iron, lumber, and other raw materials, were highly supported by the British government. Direct bounties were used to promote the colonial production of hemp, tar, pitch, and other naval stores. Other colonial products benefited from bounties at various times, including raw silk, masts, lumber, and indigo. Large sums were paid for the production and trade of these items between 1705 and 1774, with payments averaging more than £15,000 a year in the decade preceding the Revolution alone. Other products, like tobacco, were given a monopoly of the market in England, as the government levied high tariffs on tobacco from Spain and other foreign markets. Sugar and molasses received similar treatment. When such products were not needed in the British market, the taxes were rolled back so that they could be exported to other markets with a minimum of British taxes.

As it actively supported some products, the British government also actively discouraged the production of colonial products that would compete with those produced at home. In 1699, prohibitive legislation was passed to restrict the transportation of raw wool from one colony to another because wool production and manufacturing would infringe upon the business practiced in England. Similar legislation restricting transportation between colonies was passed with regard to hats in 1732, as hat production was a valued craft in England. The Wrought Iron and Steel Bill of 1750 prohibited the creation within the colonies of new steel mills, slitting mills, and tilt hammers. In addition to these restrictions, taxes became the main issue of resentment of the American colonists living under the British mercantile system. With the Townshend Acts of 1767, Parliament levied duties on colonial imports of paper, glass, paint, and tea, to which one colonial response was the Boston Tea Party (1773).

It is widely asserted that among the causes of the American Revolution were these mercantilist laws. Revolutionary Americans resented the economic restrictions, finding them exploitative. They claimed the policy restricted colonial trade and industry and raised the cost of many consumer goods. In his 1774 pamphlet, "A Summary View of the Rights of British America, " Thomas Jefferson asserted the Navigation Acts had infringed upon the colonists' freedom in preventing the "exercise of free trade with all parts of the world, possessed by the American colonists, as of natural right." Yet, as O. M. Dickerson points out, it is difficult to find opposition to the mercantile system among the colonists when the measures were purely regulatory and did not levy a tax on them. The British mercantile system did after all allow for colonial monopoly over certain markets such as tobacco, and not only encouraged, but with its 1660 regulation was instrumental in, the development of colonial shipbuilding. Indeed, the mercantile system was specifically approved by the First Continental Congress in the Declaration of Rights of 14 October 1774.

Comprehensive intellectual criticism of mercantilism as an economic doctrine began to arise in the 1750s and continued through the end of the century. Many intellectuals during the Enlightenment explored new ideas in political economy; Adam Smith in his 1776 An Inquiry into the Nature and Causes of the Wealth of Nations was one of the most influential figures for the Americans. Smith admitted the mercantile system worked, yet criticized its principles. Expounding a doctrine of individualism, Smith was one of many voices stating that the economy, like the individual, should be free from detailed regulation from the state. Economic, as well as individual, self-interest and its outcome in the market should be allowed to function without state regulation. Although it was indeed approved by the First Continental Congress, the practice of mercantilism was replaced with a Smith-oriented form of liberalism in post-Revolutionary America.

Bibliography

Bruchey, Stuart Weems, ed. The Colonial Merchant: Sources and Readings. New York: Harcourt, Brace, 1966.

Crowley, John E. The Privileges of Independence: Neomercantilism and the American Revolution. Baltimore: Johns Hopkins University Press, 1993.

Dickerson, Oliver Morton. Navigation Acts and the American Revolution. Philadelphia: University of Pennsylvania Press, 1951.

Mercantilism is the doctrine that economic activity, especially foreign trade, should be directed to unifying and strengthening state power. Though some mercantilist writers emphasized the accumulation of gold and silver by artificial trade surpluses, this "bullionist" version was not dominant in Russia.

The greatest of the Russian enlightened despots, Peter the Great, was eager to borrow the best of Western practice in order to modernize his vast country and to expand its power north and south. Toward this end, the tsar emulated successful Swedish reforms by establishing a regular bureaucracy and unifying measures. Peter brought in Western artisans to help design his new capital at St. Petersburg. He granted monopolies for fiscal purposes on salt, vodka, and metals, while developing workshops for luxury products. Skeptical of private entrepreneurs, he set up state-owned shipyards, arsenals, foundries, mines, and factories. Serfs were assigned to some of these. Like the state-sponsored enterprises of Prussia, however, most of these failed within a few decades.

Tsar Peter instituted many new taxes, raising revenues some five times, not counting the servile labor impressed to build the northern capital, canals, and roads. Like Henry VIII of England, he confiscated church lands and treasure for secular purposes. He also tried to unify internal tolls, something accomplished only in 1753.

Foreign trade was a small, and rather late, concern of Peter's. That function remained mostly in the hands of foreigners. To protect the industries in his domains, he forbade the import of woolen textiles and needles. In addition, he forbade the export of gold and insisted that increased import duties be paid in specie (coin).

Bibliography

Gerschenkron, Alexander. (1970). Europe in the Russian Mirror. London: Cambridge University Press.

Spechler, Martin C. (2001). "Nationalism and Economic History." In Encyclopedia of Nationalism, vol. 1, ed. Alexander Motyl. New York: Academic Press, pp. 219-235.

Spechler, Martin C. (1990). Perspectives in Economic Thought. New York: McGraw-Hill.

—MARTIN C. SPECHLER

Mercantilism was an economic "system" that developed in Europe during the period of the new monarchies (c. 1500) and culminated with the rise of the absolutist states (c. 1600–1700). Mercantilism was not characterized by the blind adherence to a single, precisely defined economic theorem. Rather, its adherents embraced, in various degrees, parts of a set of commonly held theoretical beliefs or tendencies that were best suited to the needs of a particular time and state. The underlying principles of mercantilism included (1) the belief that the amount of wealth in the world was relatively static; (2) the belief that a country's wealth could best be judged by the amount of precious metals or bullion it possessed; (3) the need to encourage exports over imports as a means for obtaining a favorable balance of foreign trade that would yield such metals; (4) the value of a large population as a key to self-sufficiency and state power; and (5) the belief that the crown or state should exercise a dominant role in assisting and directing the national and international economies to these ends. As such, mercantilism developed logically from the changes inherent in the decline of feudalism, the rise of strong national states, and the development of a world market economy.

The shift from payments in kind, characteristic of the feudal period, to a money economy was one key development in this process. By the late fifteenth century, as regional, national, and international trade continued to blossom, European currencies expanded as well; circulation was more common, widespread, and vital. The early mercantilists recognized the seminal fact of this period. Money was wealth sui generis; it gave its holder the power to obtain other commodities and services. Precious metals, especially gold, were in universal demand as the surest means to obtain other goods and services. At the same time the rise of more powerful European states with burgeoning bureaucracies, frequent dynastic wars that required larger and more expensive armies, and more lavish court expenditures exacerbated this fundamental need for money in the form of precious metals. Foreign trade, not domestic trade, was viewed as the preferred method for obtaining bullion, while manufacturing, which provided the goods for such trade, was favored over agriculture. Finally, the discovery of the New World by Columbus in 1492 and the discovery of the sea route to India by Vasco da Gama in 1497–1499 also provided fertile ground for obtaining such wealth while creating an ever greater need for wealth to conquer and protect these colonies and their imperial trade. All of these factors ensured that the rising late medieval and early modern states embraced mercantilism as an economic theory that allowed them to adapt to and seek to exploit these shifting structures.

Since mercantilism at base postulated increased royal control over both the internal and external economic policies of the state, it found easy acceptance among the "new" monarchies of the late fifteenth century and the sixteenth century. In Portugal, Manuel I (ruled 1495–1521) and his successors embraced its tenets regarding bullion and colonies to help exploit their burgeoning Asian empire. In Spain both Charles I (ruled 1516–1556) and Philip II (ruled 1556–1598), given the boon of New World precious metals, also found comfort in bullionism as well as the tenets calling for the exploitation of colonies for the benefit of the mother country. In England, Henry VIII (ruled 1509–1547) and Elizabeth I (ruled 1558–1603) adhered to some mercantilist principles in an effort that was, at least in part, designed to combat the threat of universal Habsburg Monarchy and Iberian dominance in the developing world market economy.

Proponents of Mercantilism

During the seventeenth century, adherents of absolutism also found much to embrace in mercantilism. During the age of Stuart absolutism James I (ruled 1603–1625) and Charles I (ruled 1625–1649) found it logical to accept the premise that the monarch should not only control the political and social hierarchy but should enjoy control over the economy as well. Oliver Cromwell (1599–1658), after destroying Stuart pretensions in the Civil War, embraced both mercantilist warfare and the Navigation Acts in his commercial struggle with the Dutch. It was in France, however, that mercantilism found perhaps its greatest supporter in Jean-Baptiste Colbert (1619–1683). Colbert's career was as much a product of the sociopolitical dynamics of the absolutist state as the result of the unrivaled bureaucratic energies he displayed in the service of his early patrons and eventually the crown. His family rose through the social hierarchy based on the time-honored expedients of wealth and venality of office. Utilizing family connections, Colbert entered the service of Michel Le Tellier in 1643, soon after the latter became secretary of state in charge of military affairs. This promising foundation was solidified during Colbert's "apprenticeship" under Jules Cardinal Mazarin, a mutually advantageous relationship that began in 1651 and lasted until Mazarin's death in 1661. By the end of this decade of opportunity, Colbert had become baron de Seignelay, secretary of the orders of the queen, intendant general of the affairs of Mazarin, counselor of the king in all of his councils—not to mention a very wealthy man. Just as importantly, he had begun to create an apparatus for the implementation of his later policies by further enriching his family and arranging influential positions for a bevy of his brothers and cousins.

In this rapid ascent through the labyrinth of French political life, Colbert honed the ideas and theories that shaped his policies after 1661, the year Louis XIV (ruled 1643–1715) began his personal reign and Nicolas Fouquet was imprisoned, thus ensuring Colbert's ascent to ministerial preeminence. The basic theoretical tenets of mercantilism predated Louis XIV's reign, in some cases by half a dozen generations. Colbert was exposed to such ideas in the Paris of his youth, when the economic traditions of the first Bourbon king of France, Henry IV (ruled 1589–1610), and the theories of his able controleur général du commerce (comptroller general of finance), Barthélemy de Laffemas, were still relatively strong. Armand-Jean Du Plessis, Cardinal Richelieu (1585–1642) was still alive at that time, and Issac de Laffemas, the cardinal's creature, was in the midst of perpetuating his father's intellectual legacy. Although Colbert never referred to the writings of Antoine de Montchrestien (c. 1575–1621) and Jean Bodin (1530–1596), he was probably familiar with their works. Mercantilism reached its apogee under Colbert not because he was a theorist but rather because he was a man of action who judged its tenets to be the only natural and logical way to achieve his most cherished goal: a powerful and wealthy France united under a glorious monarch. The primary obstacle to France's economic greatness was the overweening economic power of the Dutch. If the mercantile power of the burghers of Amsterdam could be broken in both Europe and the lucrative Asian trade, France could prosper.

Colbert's anti-Dutch strategy evolved logically from his beliefs on political economy. Foremost among his particular tenets on mercantilism was the conviction that the volume of world trade was essentially static and that, to increase its share, France would have to win part of that controlled by its rivals. In one of his most quoted mémoires (Lettres VI: 260–270) Colbert wrote, "The commerce of all Europe is carried on by ships of every size to the number of 20,000, and it is perfectly clear that this number cannot be increased." Commerce caused "perpetual combat in peace and war among the nations of Europe, as to who shall win most of it." His exaggerated estimate on the maritime strength of the major European trading nations competing in this "war" was fifteen thousand to sixteen thousand Dutch ships, three thousand to four thousand English ships, and five hundred to six hundred French ships. Just as importantly neither the French nor the English could "improve their commerce save by increasing this number, save from the 20,000 . . . and consequently by making inroads on the 15,000 to 16,000 of the Dutch." (Lettres VI: 260–270). The bellicism inherent in such beliefs would in part culminate in the Dutch War of 1672, a war Colbert supported. Unfortunately, despite his most careful calculations regarding this struggle in both Europe and the Indian Ocean, Louis XIV's armies and fleets suffered increasing difficulties in the war from 1672 to 1679. These setbacks forced Colbert to undo many of his initial reforms from 1661 that had doubled the king's revenues, forged a powerful navy, and set France on a course for apparent dominance in Europe. By the time of his death in 1683, the kingdom was instead on the road to bankruptcy and revolt, and Louis XIV's penchant for continued warfare in the decades down to 1715 only exacerbated this decline.

Opponents of Mercantilism

During the eighteenth century the limits of mercantilism became increasingly obvious, and intellectual and political critics of its basic tenets gradually emerged. First, Louis XIV's spectacular failures in the kingdom viewed as the apogee of both absolutism and mercantilism certainly revealed the limitations of allowing the state to direct the economy for its own frequently selfish, if not self-destructive, purposes. At the same time, in parts of England, Holland, and northwestern France the initial adherence to mercantilist principles created the very conditions that fostered antimercantilist sentiments. These developments would ultimately cause the destruction of merchant capitalism. In short, merchant capitalism reached a level within the mercantilist system where state intervention and direction of the economy was threatening and even preventing further expansion. The critical spirit toward existing Old Regime structures embodied in the intellectual revolution of the Enlightenment found its antimercantilist champions in the Physiocrats. In part adapting "natural law" doctrines to the economy, this influential group of economic theorists, including François Quesnay (1694–1774), Jean-Claude-Marie-Vincent de Gournay (1712–1759), and Pierre-Samuel du Pont de Nemours (1739–1817), instead argued for laissez-faire. This theory argued that the economy functioned best when its own "natural laws" were allowed to function without government intervention. Complementing the work of the French économistes, the Scottish philosopher David Hume (1711–1776) sought to identify the natural advantages that various nations enjoyed in the flow of commerce and provided a new theory on international trade. In his Political Discourses (1752) and Essays and Treatises on Several Subjects (1753), Hume also sought to refute some of the principal tenets of mercantilism, including confounding money with wealth and the blind acceptance of bullionism. Yet by far the most important work criticizing mercantilist thought was Adam Smith's (1723–1790) An Inquiry into the Nature and Causes of the Wealth of Nations (1776), the first systematic economic analysis of the world market economy created during the preceding age of mercantilism. Smith's strong advocacy of free trade and his belief that world wealth was not static, as Colbert and others had held, did much to undermine mercantilism. At the same time his theories and those of other Physiocrats also encouraged colonies like British North America to reject the traditional dependence on their mother countries as defined by the mercantilist model while furnishing intellectual fuel for the industrial revolution then taking place in Great Britain. In France, however, only the French Revolution and Napoléon I (1769–1821) would facilitate the destruction of the economic remnants of both the late medieval and mercantilist periods.

Bibliography

Colbert, Jean Baptiste. Lettres, instructions, et mémoires. Edited by Pierre Clément. 7 vols. Paris, 1861–1882.

Cole, Charles Woosley. Colbert and a Century of French Mercantilism. 2 vols. New York, 1939.

——. French Mercantilist Doctrines before Colbert. New York, 1931.

Heckscher, Eli F. Mercantilism. Translated by Mendel Shapiro. Rev. ed. 2 vols. London, 1955.

—GLENN J. AMES

An economic doctrine that flourished in Europe from the sixteenth to the eighteenth centuries. Mercantilists held that a nation's wealth consisted primarily in the amount of gold and silver in its treasury. Accordingly, mercantilist governments imposed extensive restrictions on their economies to ensure a surplus of exports over imports. In the eighteenth century, mercantilism was challenged by the doctrine of laissez-faire. (See also Adam Smith.)

A painting of a French seaport from 1638, at the height of mercantilism

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Mercantilism is an economic theory that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international 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, notably through the use of tariffs and subsidies.^[1]

Contents 1 Influence 2 Theory 3 Causes 4 Policies 5 Criticisms 6 Legacy 7 Mercantilism today 8 References 9 Bibliography 10 Further reading 11 External links

Influence

Mercantilism was the dominant school of thought throughout the early modern period (from the 16th to the 18th century). In the United States, this led to some of the first instances of significant government intervention and control over the economy, 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. Academic belief in mercantilism began to fade in the late 18th century, as the arguments of Adam Smith and the other classical economists won out. Today, mercantilism (as a whole) is rejected by economists, though some elements are looked upon favorably by non-economists.

The related school of economic nationalism, which emphasizes the nation and government intervention but deemphasizes bullion in favor of productive capacity, has been and continues to be a dominant model of development economics, as practiced in the 19th century in United States in the National System, Germany in the Zollverein, and Japan, and as practiced in the late 20th and early 21st century by other Asian nations such as the Four Asian Tigers of Hong Kong, South Korea, Taiwan, and Singapore, and most significantly, China. The export-led economies of present-day Japan and Germany are also cited as latter-day variants of mercantilism.

Theory

Most of the European economists who wrote between 1500 and 1750 are today generally considered mercantilists; this term 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 19th century.

The bulk of what is commonly called "mercantilist literature" appeared in the 1620s in Great Britain.^[2] Smith saw English merchant Thomas Mun (1571-1641) as a major creator of the mercantile system, especially in his posthumously published Treasure by Foreign Trade (1664), which Smith considered the archetype of manifesto of the movement.^[3] Perhaps the last major mercantilist work was James Steuart’s Principles of Political Economy published in 1767.^[2]

Beyond England, Italy, France, and Spain produced noted writers who pursued 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 imperialism," thus stretching the system into the nineteenth century. However, many British writers, including Mun 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.^[4]

Merchants in Venice

The Austrian lawyer and scholar Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of what he deemed effective national economy, which sums up the tenets of mercantilism comprehensively:^[5]

• That every inch of a country's soil be utilized for agriculture, mining or manufacturing.
• That all raw materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials.
• That a large, working population be encouraged.
• That all export of gold and silver be prohibited and all domestic money be kept in circulation.
• That all imports of foreign goods be discouraged as much as possible.
• That where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.
• That as much as possible, imports be confined to raw materials that can be finished [in the home country].
• That opportunities be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver.
• That no importation be allowed if such goods are sufficiently and suitably supplied at home.

Other than Von Hornick, there were no mercantilist writers presenting an overarching scheme for the ideal economy, as Adam Smith would later do for classical economics. Rather, each mercantilist writer tended to focus on a single area of the economy.^[6] 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. Ekelund 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.^[7] 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.^[8] Mercantilists' writings were also generally created to rationalize particular practices rather than as investigations into the best policies.^[9]

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 that the inevitable results 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.^[10]

Causes

Scholars are divided on why mercantilism was the dominant economic ideology for two and a half centuries.^[11] 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.^[12]

A third explanation for mercantilism is monetary. European trade exported bullion to pay for goods from Asia, thus reducing the money supply and putting downward pressure on prices and economic activity. The evidence for this hypothesis is the lack of inflation in the English economy until the Revolutionary and Napoleonic wars when paper money was extensively used.

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.^[13] 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.^[14] Of course, the impact of the discovery of America cannot 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.”^[15]

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 the very Machiavellian 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. The dark view of human nature also fit well with the Puritan view of the world, and some of the most stridently mercantilist legislation, such as the Navigation Acts, were enacted by the government of Oliver Cromwell.^[16]

Policies

French finance minister and mercantilist Jean-Baptiste Colbert served for over 20 years.

Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern period, and most states embraced it to a certain degree. Mercantilism was centered in England and France, and it was in these states that mercantilist polices were most often enacted. Mercantilism arose in France in the early 16th century, soon after the monarchy had become the dominant force in French politics. In 1539, an important decree banned the importation of woolen goods from Spain and some parts of Flanders. The next year, a number of restrictions were imposed on the export of bullion.^[17] Over the rest of the sixteenth century further protectionist measures were introduced. The height of French mercantilism is closely associated with Jean-Baptiste Colbert, finance minister for 22 years in the 17th century, to the extent that French mercantilism is sometimes called "Colbertism". Under Colbert, the French government became deeply involved in the economy in order to increase exports. Protectionist policies were enacted that limited imports and favored exports. Industries were organized into guilds and monopolies, and production was regulated by the state through a series of over a thousands directives outlining how different products should be produced. To encourage industry, foreign artisans and craftsmen were imported. Colbert also worked to decrease internal barriers to trade, reducing internal tariffs and building an extensive network of roads and canals. Colbert's policies were quite successful, and France's industrial output and economy grew considerably during this period, as France became the dominant European power. He was less successful in turning France into a major trading power, and Britain and the Netherlands remained supreme in this field.^[18]

In England, mercantilism reached its peak during the Long Parliament government (1640-1660). Mercantilist policies were also embraced throughout much of the Tudor and Stuart periods, with Robert Walpole being another major proponent. In Britain, government control over the domestic economy was far less extensive than on the Continent, limited by common law and the steadily increasing power of Parliament.^[19] Government-controlled monopolies were common, especially before the English Civil War, but were often controversial.^[20] British mercantilist writers were themselves divided on whether domestic controls were necessary. British mercantilism thus mainly took the form of efforts to control trade. A wide array of regulations was put in place to encourage exports and discourage imports. Tariffs were placed on imports and bounties given for exports, and the export of some raw materials was banned completely. The Navigation Acts expelled foreign merchants from England's domestic trade. The nation aggressively sought colonies and once under British control, regulations were imposed that allowed the colony to only produce raw materials and to only trade with Britain. This led to friction with the inhabitants of these colonies, and mercantilist policies were one of the major causes of the American Revolution. Over all, however, mercantilist policies had an important effect on Britain helping turn it into the world's dominant trader, and an international superpower. One domestic policy that had a lasting impact was the conversion of "waste lands" to agricultural use. Mercantilists felt that to maximize a nation's power all land and resources had to be used to their utmost, and this era thus saw projects like the draining of The Fens.^[21]

Mercantilism helped create trade patterns such as the triangular trade in the North Atlantic, in which raw materials were imported to the metropolis and then processed and redistributed to other colonies.

The other nations of Europe also embraced mercantilism to varying degrees. The Netherlands, which had become the financial center of Europe by being its most efficient trader, had little interest in seeing trade restricted and adopted few mercantilist policies. Mercantilism became prominent in Central Europe and Scandinavia after the Thirty Years' War (1618-1648), with Christina of Sweden and Christian IV of Denmark being notable proponents. The Habsburg Holy Roman Emperors had long been interested in mercantilist policies, but the vast and decentralized nature of their empire made implementing such notions difficult. Some constituent states of the empire did embrace Mercantilism, most notably Prussia, which under Frederick the Great had perhaps the most rigidly controlled economy in Europe. During the economic collapse of the seventeenth century Spain had little coherent economic policy, but French mercantilist policies were imported by Philip V with some success. Russia under Peter I (Peter the Great) attempted to pursue mercantilism, but had little success because of Russia's lack of a large merchant class or an industrial base.

Mercantilism also fueled the intense violence of the 17th and 18th centuries in Europe. Since the level of world trade was viewed as fixed, it followed that the only way to increase a nation's trade was to take it from another. A number of wars, most notably the Anglo-Dutch Wars and the Franco-Dutch Wars, can be linked directly to mercantilist theories. The unending warfare of this period also reinforced mercantilism as it was seen as an essential component to military success. It also fueled the imperialism of this era, as each nation that was able attempted to seize colonies that would be sources of raw materials and exclusive markets. During the mercantilist period, European power spread around the globe. As with the domestic economy this expansion was often conducted under the aegis of companies with government-guaranteed monopolies in a certain part of the world, such as the Dutch East India Company or the Hudson's Bay Company (operating in present-day Canada).

Criticisms

Much of Adam Smith's The Wealth of Nations is an attack on mercantilism

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 Hume, Dudley North, and John Locke undermined much of mercantilism, and it steadily lost favor during the 18th century. In 1690, John Locke made perfectly clear that prices vary in proportion to the quantity of money, but in general, the mercantilists did not put this together^{[citation needed]}. 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^{[citation needed]}. For instance, suppose Portugal was a more efficient producer of both wine and cloth than England, yet in England it was relatively cheaper to produce cloth compared to wine. 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.

Hume famously noted the impossibility of the mercantilists' goal of a constant positive balance of trade^{[citation needed]}. 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.^[22]

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 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.^[23] More recently, scholars have discounted the accuracy of this critique. They believe Mun and Misselden were not making this mistake in the 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."^[24] 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.^[25]

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.^[26]

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.^[27]

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 19th and early 20th centuries, when the historical school of economics was paramount.^[28]

Legacy

In spite of Adam Smith's repudiation of mercantilism, it was favored in the United States by such prominent figures as Alexander Hamilton^[29], Henry Clay, Henry Charles Carey, and Abraham Lincoln and in Britain by such figures as Thomas Malthus. When Britain passed its Corn Laws in 1815, Malthus thought such restrictions were a good idea, but Ricardo disagreed. Eventually Smith's view was accepted in the English-speaking world, and in 1849 the corn laws were repealed largely on "Free Market" arguments given by Sir Robert Peel.^{[citation needed]}

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 the balance of payments is an important concern. 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.^{[citation needed]} Keynes also supported government intervention in the economy as necessity, as did mercantilism.^[30] Today the word remains a pejorative term, often used to attack various forms of protectionism.^[31] 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.^[32] In an essay appearing in the 14 May 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.^[33]

The Austrian School of economics, always an opponent of mercantilism, describes it this way:

“

Mercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held exports should be encouraged by the government and imports discouraged.[34]

”

One area Smith was reversed on well before Keynes was in the 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.^{[citation needed]}

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.^[35] 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 a profound impact on the end of the 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.^{[citation needed]}

Mercantilism today

Despite common assertions that the world system is neo liberal, some^[who?] have challenged this, arguing that the current system does not represent a 'positive sum' game in which all benefit. Some suggest disparities of wealth and power have been exacerbated rather than allieviated by current financial practices and institutions.^{[citation needed]}

In response to this situation, the term 'Structural Mercantilism' ^[36] has been developed to describe the institutional and ideational structures perceived to have been built by, and in the interests of, rich countries and corporations.

References

1. ^ LaHaye, Laura. "Mercantilism". Library Fund, Inc.. http://www.econlib.org/library/Enc/Mercantilism.html. Retrieved 2008-10-27. 
2. ^ ^{a b} Magnusson (2003), p. 46.
3. ^ Magnusson (2003), p. 47.
4. ^ Magnusson (2003), p. 50.
5. ^ Ekelund, Robert B., Jr. and Hébert, Robert F. (1997). A History of Economic Theory and Method (4th ed.). Waveland Press [Long Grove, Illinois]. p. 40-41. ISBN 1-57766-381-0. 
6. ^ Landreth & Colander (2002), p. 44.
7. ^ Ekelund & Tollison (1981), p. 9.
8. ^ Landreth & Colander (2002), p. 48.
9. ^ Landes, David S. (1997). The Unbound Prometheus: Technological Change and Industrial Development in Western Europe from 1750 to the Present. Cambridge: Cambridge University Press. pp. 31. ISBN 0521094186. 
10. ^ Ekelund & Hébert (1975), p. 46.
11. ^ Ekelund & Hébert (1975), p. 61.
12. ^ Niehans (1990), p. 19.
13. ^ Landreth & Colander (1981), p. 43.
14. ^ Wilson (1963), p. 10.
15. ^ Galbraith, John Kenneth (1987). Economics in Perspective: A Critical History. Boston: Houghton Mifflin. pp. 33–34. ISBN 0395355729. 
16. ^ Landreth & Colander (2002), p. 53.
17. ^ Hermann Kellenbenz. The Rise of the European Economy. pg. 29
18. ^ E.N. Williams. The Ancien Regime in Europe. pg. 177-83
19. ^ E. Damsgaard Hansen. European Economic History. pg. 65
20. ^ Christopher Hill. The Century of Revolution. pg. 32
21. ^ Wilson pg. 15
22. ^ Ekelund & Hébert (1975), p. 43.
23. ^ Magnussen (2003), p.46.
24. ^ Referenced to Davenant, 1771 [1699], p. 171 in Magnussen (2003), p. 53.
25. ^ Magnussen (2003), p. 54.
26. ^ Niehans (1990), p. 19.
27. ^ Ekelund & Tollison (1981).
28. ^ Wilson (1963), p. 6.
29. ^ DiLorenzo, Thomas (2008). Hamilton's Curse: How Jefferson's Arch Enemy Betrayed the American Revolution--and What It Means for Americans Today. New York, NY: Crown Forum. pp. 256. ISBN 978-0307382849. 
30. ^ See Donald Markwell (2006), John Maynard Keynes and International Relations: Economic Paths to War and Peace, Oxford & New York: Oxford University Press.
31. ^ Wilson (1963), p. 3.
32. ^ Walters, Robert S.; Blake, David H. (1976). The Politics of Global Economic Relations. Englewood Cliffs, NJ: Prentice-Hall. ISBN 0136847129. 
33. ^ Samuelson, Robert J. (17 May 2007). "China's Wrong Turn on Trade". Newsweek. http://www.newsweek.com/id/34952. Retrieved 2007-12-06. 
34. ^ Murray Rothbard, “Mercantilism: A Lesson for Our Times?” , The Logic of Action II (Cheltenham, England: Edward Elgar, 1997), p. 43.
35. ^ Hansen, p. 64.
36. ^ Gee, T, The World System is not Neo Liberal: The Emergence of Structural Mercantilism, Critique, Volume 37, Issue 2 May 2009 , pages 253 - 259

Bibliography

• Ekelund, Robert B.; Tollison, Robert D. (1981). Mercantilism as a Rent-Seeking Society: Economic Regulation in Historical Perspective. College Station, TX: Texas A&M University Press. ISBN 0890961204. 
• Ekelund, Robert B.; Hébert, Robert F. (1975). A History of Economic Theory and Method. New York: McGraw–Hill. ISBN 0070191433. 
• Heckscher, Eli F. (1935). Mercantilism. London: Allen & Unwin. 
• Keynes, John Maynard (1936). "Notes on Mercantilism, the Usury Laws, Stamped Money and the Theories of Under-Consumption". The General Theory of Employment, Interest, and Money. London: Palgrave Macmillan. 
• Landreth, Harry; Colander, David C. (2002). History of Economic Thought (4th edition ed.). Boston: Houghton Mifflin. ISBN 0618133941. 
• Letwin, William (2003) [1963]. The Origins of Scientific Economics: English Economic Thought 1660–1776. London: Routledge. ISBN 0415313295. 
• Magnusson, Lars G. (2003). "Mercantilism". in Biddle, Jeff E.; Davis, Jon B.; Samuels, Warren J.. A Companion to the History of Economic Thought. Malden, MA: Blackwell Publishing. ISBN 0631225730. 
• Niehans, Jürg (1990). A History of Economic Theory: Classic Contributions, 1720–1980. Baltimore, MD: Johns Hopkins University Press. ISBN 0801838347. 
• Vaggi, Gianni; Groenewegen, Peter (2003). A Concise History of Economic Thought: From Mercantilism to Monetarism. New York: Palgrave Macmillan. ISBN 0333999363. 
• Wilson, Charles (1963) [1958]. Mercantilism. London: Routledge and Kegan Paul. 

Further reading

• Rothbard, Murray N. Economic Thought Before Adam Smith. An Austrian Perspective on the History of Economic Thought. Volume I
• Rothbard, Murray N. Classical Economics. An Austrian Perspective on the History of Economic Thought. Volume II

External links

• Thomas Mun's Englands Treasure by Forraign Trade
• Book IV of The Wealth of Nations, Adam Smith's attack on the Mercantile System
• Mercantilism List of references

v • d • e Mercantilists Gerard de Malynes · Edward Misselden · Thomas Mun · Jean Bodin · Jean-Baptiste Colbert · Josiah Child · William Petty · John Locke · Charles Davenant · Dudley North · Ferdinando Galiani · James Denham-Steuart · Philipp Wilhelm von Hornick

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