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.

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.

Related Topics:
John Maynard Keynes - Monetarism

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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.{{ref|word}} 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.{{ref|neo}}

Related Topics:
Paper money - Money supply - Government intervention - Protectionism - Neo-mercantilism - Japan

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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.

Related Topics:
William Petty - Empirical - Deductive reasoning - Stock exchange - Banking - Insurance

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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.{{ref|nav}} Some economists thus feel that protecting infant industries, while causing short term harm, can be beneficial in the long term.

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