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All about Mercantilism

Even more stuff to know!

Even more stuff to know!


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 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. 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, prices would slowly drop. 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 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 yellow metal that was valuable only because there was not much of it.

The first school to completely reject mercantilism were the physiocrats of 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.

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 due to 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.

The growth of Mercantilism as a system:

Early mercantilism, which was developed beginning around 1500, was most marked by its bullionism. This period saw a vast inflow of gold and silver from the Spanish colonies in the New World, and an overriding concern was how the other states of Europe could be able to compete. The bullionists, such as Jean Bodin, Thomas Gresham and John Hales, felt that the wealth and power of a state was measured by the amount of bullion it possessed, and that to grow in power meant increasing the amount of bullion at the expense of the other powers. The prosperity of a state was measured by the accumulated wealth of its government, with no concept of national income. In part this focus on reserves of gold and silver was because of their importance in times of war. Armies, which often included mercenaries, were paid in bullion, and navies were funded by gold and silver. The complicated system of international alliances of the period also often required large payments from one state to another. Only a few European states controlled gold or silver mines; for the others the primary method of increasing bullion supplies was through the balance of trade. If a state exported more than it imported, then this imbalance would have to be made up by inflows of money. Thus, mercantilists firmly believed that each nation should seek to export more goods and services than it imported. This led to strict bans on the export of bullion. Bullionists also favored high interest rates to encourage investors to move their money to the nation.

In the 17th century, a more complex version of mercantilism developed, which rejected simple bullionism. These writers, such as Thomas Mun, felt that overall national wealth was the primary goal, and saw bullion as the most important sign of wealth but not its totality, as goods and resources were also essential. The support for the balance of trade was preserved, but in a less rigid form. Mun, who worked for the British East India Company, argued that the exports of bullion to Asia were good for Britain, as the goods imported would then be resold to the rest of Europe at a substantial profit. This new view rejected the export of raw materials, as it acknowledged that the transformation of these materials into finished goods was an important generator of wealth. Thus while the bullionists had supported the mass export of wool from Britain, the later mercantilists supported total bans on the export of raw materials and supported the development of domestic manufacturing industries. Since creating domestic industries required an available supply of capital, the seventeenth century also saw governments dramatically tighten usury limits. This artificially lowered prevailing interest rates and encouraged the wealthy to invest their money in manufacturing instead. Later mercantilists also placed a greater focus on service industries. One result of this was the Navigation Acts of 1651 that expelled the Dutch from English shipping.

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 of letters patent and government imposed monopolies. Some mercantilists supported these, but others acknowledged the corruption and inefficiency of such systems. Many mercantilists also realized the inevitable result of quotas and price ceilings were black markets. One element mercantilists agreed on was the 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 harm to the economy.

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