Mercantilism

Mercantilism is the economic theory that a nation's prosperity 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.

Criticisms

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.

Related Topics:
Dudley North - John Locke - David Hume - Comparative advantage - David Ricardo - Trade

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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.{{ref|rich}}

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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 mineral that was valuable only because there was not much of it.

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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.{{ref|straw}}

Related Topics:
Physiocrat - The Wealth of Nations - 1776 - Classical economics

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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. {{ref|end}}

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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.{{ref|Germany}}

Related Topics:
Free trade - Laissez-faire - French Revolution - Germany - Historical school of economics

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