Merkantilizam

Mercantilism is the economic theory holding that the prosperity of a nation depends upon its supply of capital and that the global volume of trade is unchangeable.

The amount of capital, represented by bullion (amount of precious metal held by the state), is best increased through a balance of trade with large exports and low imports. Mercantilism suggests that the government should advance these goals by playing an active, protectionist role in the economy by encouraging exports and discouraging imports, especially through the use of tariffs. The economic policy based on these ideas is often called the mercantile system.

Mercantilism was the dominant school of economics throughout the early modern period (from the 16th to the 18th century). 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 modern capitalist system was established. Internationally, mercantilism encouraged the many European wars of the period and fueled European imperialism. 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 all serious economists, though some elements are looked upon favourably.

Theory

Early mercantilist writers embraced bullionism, the belief that quantities of gold and silver were the measure of a nation's wealth. Later mercantilists developed a somewhat more sophisticated view.

Almost all the European economists who wrote between 1500 and 1750 are today generally considered mercantilists; however, these writers did not see themselves as contributing to a single economic ideology. The term was coined by the Marquis de Mirabeau in 1763, and was popularized by Adam Smith in 1776. 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 who presented 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. 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". To a certain extent mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed the economic system as a zero-sum game, a gain by one party was 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 common good. Mercantilist writings were also generally created to justify particular practices, rather than as investigations into the best policies.

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 also 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 favoured 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 British 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. Labourers 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.

Causes

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, commonsense 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 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 locus of power. Technological changes in shipping and the growth of urban centres 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.

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 cheat the other in a ruthless competition, was integrated into the works of Thomas Hobbes. This 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, was introduced by the government of Oliver Cromwell.

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 centred 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. 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 favoured 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.

In Britain, mercantilism reached its peak during the Long Parliament government. 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 the common law tradition and the steadily increasing power of Parliament. Government-controlled monopolies were common, especially before the English Civil War, but were often controversial. 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 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 Britain'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.

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 centre 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, with Christina of Sweden and Christian IV of Denmark being notable proponents. The Hapsburg 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 centuriesn 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.

Criticisms

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Much of Adam Smith's The 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 like Dudley North, John Locke, and David Hume undermined much of mercantilism, and it steadily lost favour 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 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 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.

Legacy

In the English-speaking world, Adam Smith's utter repudiation of mercantilism was accepted without question, but in the 20th century most economists 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, 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 in the amount of bullion was one of the only 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 favourable 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.

One area Smith was reversed on well before Keynes, was on the importance 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 economists accept that both methods are important. It was also during the mercantilist period that most of the modern economic institutions were first established, such as stock exchanges, and the modern banking and insurance industries.

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.

Notes

1. ^ Jürg Niehans. A History of Economic Theory pg. 6
2. ^ Harry Landreth and David C. Colander History of Economic Thought. pg. 44
3. ^ Robert B. Ekelund and Robert D. Tollison. Mercantilism as a Rent-Seeking Society. pg. 9
4. ^ Landreth and Colander. pg. 48
5. ^ David S. Landis The Unbound Prometheus. pg. 31
6. ^ Landreth and Colander. pg. 43
7. ^ Charles Wilson. Mercantilism. pg. 10
8. ^ Robert B. Ekelund and Robert F. Hébert. A History of Economic Theory and Method. pg. 46
9. ^ Ekelund and Hébert. pg. 61
10. ^ Niehans. pg. 19
11. ^ Landreth and Colander. pg. 53
12. ^ Hermann Kellenbenz. The Rise of the European Economy. pg. 29
13. ^ E.N. Williams. The Ancien Regime in Europe. pg. 177-83
14. ^ E. Damsgaard Hansen. European Economic History. pg. 65
15. ^ Christopher Hill. The Century of Revolution. pg. 32
16. ^ Wilson pg. 15
17. ^ Ekelund and Hébert. pg. 43
18. ^ Niehans. pg. 19
19. ^ Ekelund and Tollison
20. ^ Wilson pg. 6
21. ^ Wilson pg. 3
22. ^ Robert S. Walters and David H. Blake. The Politics of Global Economic Relations.
23. ^ 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

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