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.

Theory

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.{{ref|name}} 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.

Related Topics:
Marquis de Mirabeau - 1763 - Adam Smith - 1776 - Latin - German - 20th century

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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.{{ref|focus}} 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".{{ref|unity}} 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.{{ref|comp}} Mercantilist writings were also generally created to justify particular practices, rather than as investigations into the best policies.{{ref|landis}}

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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.

Related Topics:
Bullionism - New World - Jean Bodin - Thomas Gresham - John Hales - Wealth - National income - Mercenaries - Balance of trade - Interest rate

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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.

Related Topics:
Thomas Mun - British East India Company - Wool - Capital - Usury - Navigation Acts - 1651

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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.{{ref|vice}}

Related Topics:
Letters patent - Monopolies - Black market - Production - Consumption

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