Everything about Mercantile totally explained
Mercantilism is an
economic theory that the prosperity of a nation depends upon its
capital, and that the volume of the
world economy and
international trade is unchangeable. Government
economic policy based on these ideas is also sometimes called mercantilism, but is more properly known as the
mercantile system. Some scholars conceive the mercantile system as a subset of, or synonymous with, the early stages of
capitalism, while others consider mercantilism to be a distinct
economic system.
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.
Though traces of mercantilism can be found in the
Roman Empire,
History
Some
economic historians (like
Peter Temin) argue that the economy of the Early
Roman Empire was a
market economy and one of the most advanced agricultural economies to have existed (in terms of productivity, urbanization and development of capital markets), comparable to the most advanced economies of the world before the
Industrial Revolution, namely the economies of 18th century
England and 17th century
Netherlands. There were markets for every type of good, for land, for cargo ships; there was even an
insurance market.
Early
free markets were also present in the
Caliphate, where an early
market economy and early form of the mercantile system was developed between the 8th-12th centuries, which some refer to as "
Islamic capitalism". A vigorous
monetary economy was created on the basis of the expanding levels of
circulation of a stable high-value
currency (the
dinar) and the integration of
monetary areas that were previously independent. Innovative new
business techniques and forms of
business organisation were introduced, which included
trading companies,
bills of exchange,
contracts, long-distance
trade,
big businesses,
partnerships (
mufawada in
Arabic) such as
limited partnerships (
mudaraba), and the concepts of
credit,
profit,
capital (
al-mal) and
capital accumulation (
nama al-mal). Many of these early mercantile concepts were adopted and further advanced in
medieval Europe from the 13th century onwards.
Many European economists between 1500 and 1750 are today generally considered mercantilists; however, these economists didn't 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. 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.
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. 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.
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 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.
Mun and Misselden
Much of Mun and Misselden's writings are a result of the discussion about the depression England was in at the time, starting in the early 1620s. English merchant
Gerard 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. Beyond questions of validity of Mun's and Misselden's arguments, Swedish historian of economics Lars Magnusson 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. Magnusson 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.
Theory
Mercantilism as a whole can't be considered a unified theory of economics because mercantilism has traditionally been driven more by the political and commercial interests of the State and security concerns than by abstract ideas. 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. 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. 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. Mercantilists' writings were also generally created to rationalize particular practices rather than as investigations into the best policies.
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.
Scholars are divided on why mercantilism was the dominant economic ideology for two and a half centuries. One group, represented by
Jacob Viner, argues that mercantilism was simply a straightforward, common-sense system whose
logical fallacies couldn't 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 wasn't 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.
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. 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.
Of course, the impact of the discovery of America can't 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.”
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.
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's 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.
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. More recently, scholars have discounted the accuracy of this critique. They believe that 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's to say, what this Land or what this Labour and Industry Produces." 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 wouldn't gain by higher prices for English wares abroad.
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 didn't 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.
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.
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.
Legacy
In the English-speaking world,
Adam Smith's utter repudiation of mercantilism was accepted, eventually, as public policy in the British Empire and in the United States. Initially it was rejected in the United States by such prominent figures as
Alexander Hamilton,
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
Thomas Malthus thought such restrictions were a good idea, but
David Ricardo thought them not. In 1849 they were repealed largely on "Free Market" arguments given by Sir Richard Peel, though this was hotly contested and others such as Benjamin
Disraeli felt that the real reason was to keep grain prices low and empower "Commercial Interests." 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. 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. 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 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.
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. 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.
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