mercantilism: Definition and Much More from A...

mercantilism


A painting of a French seaport from 1638, at the height of mercantilism.
Mercantilism is aneconomic theory that holds that the prosperity of a nation depends upon its supply ofcapital, and that theglobal volume oftrade is "unchangeable." Capital, represented bybullion (gold or silver) held by the state, is best increased through a positivebalance of trade with other nations (exports over imports). Mercantilism suggests that the rulinggovernment should advance these goals by playing aprotectionist role in the economy, by encouragingexports and discouragingimports, especially through the use oftariffs. The economic policy based upon these ideas is often called the mercantile system.
Mercantilism was the dominant school ofeconomics throughout theearly modern period (from the 16th to the 18th century, which roughly corresponded to the emergence of thenation-state). Domestically, 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 moderncapitalist system was established. Internationally, mercantilism encouraged the many European wars of the period, and fueled Europeanimperialism, as the European powers fought over "available markets". Belief in mercantilism began to fade in the late 18th century, as the arguments ofAdam Smith, and the otherclassical economists won favour in theBritish Empire among such advocates asRichard Cobden and to a lesser degree in the rest of Europe with the notable exception of Germany where theHistorical school of economics was favored throughout the 19th and early 20th century. Interestingly, the once former British colonies, the United States of America did not adhere toclassical economics but to what is called the "American School" (a form of neo-mercantilism) in the policies ofHamilton,Clay,Lincoln and later Republican Party economic practices, that were mirrored in the policies of the Historicists in Germany by such economists asFriedrich List, until the emergence of theNew Deal and the modern era. Today, mercantilism as a whole is rejected by many economists, though some elements are looked upon favorably by some economists includingRavi Batra,Pat Choate, Eammon Fingleton, andMichael Lind.[1]
Theory

Early mercantilist writers embracedbullionism, 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.
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 term was coined by theMarquis de Mirabeau in 1763, and was popularized byAdam Smith in 1776.[2] 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.
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 economics. Rather, each mercantilist writer tended to focus on a single area of the economy.[3] 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".[4] To a certain extent, mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed the economic system as azero-sum game; where a gain by one party requires a loss by another. 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".[5] Mercantilists‘ writings were also generally created to ‘justify‘ particular practices, rather than as investigations into the best policies.[6]
Mercantilist domestic policy was more fragmented than its trade policy. While Adam Smith presented mercantilism as supporting strict controls over the economy, many mercantilists disagreed. The early modern era was one ofletters patent and government-imposedmonopolies. 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 wereblack markets. One element mercantilists agreed upon was theeconomic oppression of the working population. Laborers and farmers were to live at the "margins ofsubsistence". The goal was to maximize production, with no concern forconsumption. 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 theeconomy.[7]
Scholars are divided on why mercantilism was the dominant economic ideology for two and a half centuries.[8] One group, represented byJacob Viner, argues that mercantilism was simply a straightforward, common-sense system that the people of the time simply did not have the analytical tools to discover was actually deeply fallacious. 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 byrent-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.[9]
Mercantilism developed at a time when the European economy was in transition. Isolatedfeudal estates were being replaced by centralizednation-states as the locus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase ininternational trade.[10] Mercantilism focused on how this trade could best aid the states. Another important change was the introduction ofdouble-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.[11] 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.”[12] Prior to mercantilism, the most important economic work done in Europe was by the medievalscholastic 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 onmicroeconomics 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 ofNiccolò Machiavelli‘srealpolitik and the primacy of theraison d‘état ininternational 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 ofThomas Hobbes. This dark view of human nature also fit well with thePuritan view of the world, and some of the most stridently mercantilist legislation, such as the Navigation Acts, was introduced by the government ofOliver Cromwell.[13]
Criticisms

Much ofAdam Smith‘sThe Wealth of Nations is an attack on mercantilism
A number of scholars found important flaws with mercantilism long before Adam Smith developed an ideology that could fully replace it. Critics likeDudley North,John Locke, andDavid Hume undermined much of mercantilism, and it steadily lost favor during the eighteenth century. Mercantilists failed to understand the notions ofcomparative advantage (although this idea was only fully fleshed out in 1817 byDavid Ricardo) and the benefits oftrade. 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. In modern economic theory, trade is not a zero-sum game of cutthroat competition, as both sides could benefit. 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.[14]
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 bullion was just the same as any other commodity, and there was no reason to give it special treatment. Gold was nothing more than a yellowmetal that was valuable only because there was not much of it.
The first school to completely reject mercantilism were thePhysiocrats of France. Their theories also had several important problems, and the replacement of mercantilism did not come until Adam Smith publishedThe Wealth of Nations in 1776. This book outlines the basics of what is today known asclassical 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.[15]
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 ideas that are more accurate 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.[16]
Mercantilist regulations were steadily removed over the course of the eighteenth century in Britain, and during the 19th century the British government fully embracedfree trade and Smith‘slaissez-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 theFrench Revolution. InGermany mercantilism remained an important ideology in the nineteenth and early twentieth centuries, when thehistorical school of economics was paramount.[17]
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 asAlexander Hamilton,Henry Clay,Henry C. Carey, andAbraham 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 economistJohn 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 ofmonetarism, 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 beforepaper money, an increase for bullion was one of the few ways to increase themoney 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 thatgovernment 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 ofprotectionism.[18] The similarities between Keynesianism, and its successor ideas, with mercantilism have sometimes led critics to call themneo-mercantilism. Some other systems that do copy several mercantilist policies, such asJapan‘s economic system, are also sometimes called neo-mercantilist.[19]
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 useempirical analysis to study the economy. Smith rejected this, arguing thatdeductive reasoning from base principles was the proper method to discover economic truths. Today, many schools of economics accept that both methods are important; theAustrian 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 theNavigation 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.[20] Some economists thus feel that protecting infant industries, while causing short term harm, can be beneficial in the long term.
Notes
^ 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 cariety 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 0-87880-043-9)
^ Jürg Niehans. A History of Economic Theory pg. 6^ 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^ 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
References
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. 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
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 TradeBook IV of The Wealth of Nations, Adam Smith‘s attack on the Mercantile System
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