World History: Mercantilism

The Mercantilism theory states that there is a finite amount of wealth in the world and that it is in a nation’s best interest to accumulate this finite wealth. Since wealth is power, so by accumulating wealth, a nation can accumulate power. Thus, this theory stands on three premises as follows:

Features of Mercantilist Thoughts

A country achieves wealth by producing and exporting more goods than it imports. These goods must be sold at a profit for wealth to accumulate. Profits are large when a country spends a small amount of money on raw materials needed to create a product and sells the finished product for a high price. Then, Mercantilism was meant to serve the interests of the only empire, not the colony. Colonies existed for the benefit of the home country. Colonies could not sell their raw materials to anyone but the home country and they were not allowed to manufacture anything for export.

The Principles of Mercantilism were as follows:

• A nation’s wealth is measured by the amount of precious metals (Bullion) it has accumulated rather than by its productivity. Sometimes, mercantilism is also known as bullionism.
• A favorable balance of trade is required to increase the wealth of the nation. To achieve this, domestic industry should be protected. Exports should be encouraged even at the cost of rival economies and imports should be curbed.
• Overseas colonies supply the mother country with raw materials for manufacture and trade
• Essential industries should be encouraged through subsidies and tax credits

Strategies of Mercantilism

• Aggressively exploit natural resources abroad. Build colonies to extract wealth.
• Maximize the export-to-import ratios and build up trade surpluses with other countries. The strategies to do so were as follows:
  • Raise protective tariffs or quotas or both on foreign imports.
  • Erect non-tariff barriers on foreign imports.
  • Dump exports on foreign markets by pricing them below cost so as to drive foreign companies out of their own domestic markets.
• Prevent other states from obtaining wealth. This could be done by
• Create exclusive trading relationships with weaker states so as to deny more powerful states access to their resources.
• Attack and capture foreign colonies.
• Block foreign shipping, preventing wealth gathered abroad from reaching rival countries. This was basically used by the pirates between 16^th and 18^th Incidentally, this is what pirates often did during the period between the 16th and 18th centuries.

The evolution of mercantilism

Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern period. It began in France in early 16^th century when an important decree of 1539 banned the import of woollen goods from Spain and some other parts. In 1540, France banned the export of bullion. This was followed by an array of mercantilist restrictions in France.

French Mercantilism

During the tenure of Finance Minister Jean-Baptiste Colbert, the French mercantilism reached its height. Under Colbert, imports were banned and exports were favoured. The Industries were organized and regulated by the state via a series of directives. To encourage the industrial production, France imported the artisans and craftsmen. The internal barriers of trade were decreased and external barriers of trade were made stronger. Thus, the French mercantilism is also sometimes known as Colbertism, due to successful policies of Colbert.

British Mercantilism

In England, the mercantilism reached its peak in 17^th century particularly between 1640 to 1660. A major contrast between French mercantilism and British mercantilism was that in Britain, the focus remained in international trade rather than the domestic control. Wide arrays of regulations were 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.

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.

Industrial Revolution and Mercantilism

The mercantilist ideas did not decline until the coming of the Industrial Revolution. However, slowly other ideas sprang up such as the policy of laissez-faire. Till the end of the 17^th century, successive governments in England kept confirming the policies to mercantilism. However, in the 18^th century, the belief in mercantilism started fading because of the arguments of Adam Smith and other classical economists who won favour of the British Empire as well as some other parts of Europe.

The opposition to mercantilism came up as anti-mercantilist thought. The founding fathers of this thought were Adam Smith and David Hume though many scholars pointed out important flaws with mercantilism long before Adam Smith developed an ideology that could fully replace it.

The anti-mercantilist thought

The mercantilists failed to understand the notions of absolute advantage and comparative advantage fleshed out by Adam Smith and David Ricardo. Using arguments in favour of laissez-faire and absolute advantage, they proved that by imposing mercantilist import restrictions and tariffs, the countries end up becoming poorer.

Absolute Advantage Example

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 absolute advantage. In modern economic theory, trade is not a zero-sum game of cutthroat competition, as both sides can benefit, it is an iterated prisoner’s dilemma. By imposing mercantilist import restrictions and tariffs instead, both nations ended up poorer.

Similarly, David Hume pointed out the impossibility of the mercantilists’ goal of a constant positive balance of trade. He said that 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.

Laissez-faire thinkers such as Smith, Malthus, and Ricardo opposed government efforts to help poor workers. They thought that creating minimum wage laws and better working conditions would upset the free market system, lower profits, and undermine the production of wealth in society.