Mercantilism System Essay
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After Smith the view of the mercantile system, or simply mercantilism, as a political economy of state dirigisme to support a special interest with the help of the positive balance of trade was carried further by classical political economy - Mercantilism System Essay introduction. For instance, Richard Jones argued that the seventeenth century had seen the emergence of a protective trade system which built on ‘the almost romantic value which our ancestors set upon the possessions of the precious metals’. 1 Consequently, mercantilism was based on the King Midas folly and could be explained as a mere fallacy. Certainly Hume and others before him had used a simple specie-flow argument to correct this mistake: a net-inflow of bullion have to certainly mean a relative rise in price, which, through the export and import mechanism, will be inclined to correct itself.
During the 19th century this point of view was contested by the German Historical School which preferred to describe mercantilism as state-making in a general sense. Therefore, the principles of mercantilism were no mere folly. In brief they were the rational expression of nation-building during the early modern period. The definition of mercantilism as a process of state-making throughout a specific historical era first appeared in a series of articles published between 1884 and 1887 by the German historical economist Gustav Schmoller, afterwards published in English under the title The Mercantile System and its Historical Significance (1896). ‘Mercantilism’ was the term he used to assign the policy of unity and centralization pursued mainly by the Prussian government during the 17th and 18th centuries. Thus, mercantilism as well articulated the economic interest of the state and viewed economic wealth as a rational means to attain political power. Rooted in the tradition of the older German Historical School with such leading figures as Wilhelm Roscher, Karl Knies and Bruno Hildebrand, Schmoller argued that the core of mercantilism consisted of dirigiste ideas propounding the vigorous role of the state in economic modernisation and growth. The much-debated balance of trade theory was conceivably misguided. Though, according to Schmoller it was logical in a more general sense in its stress concerning the essential role of protectionism and infant industry tariffs so as to create a modern industrial nation.
These two extensively different definitions of mercantilism are not easy to reconcile. But, an effort was made by the Swedish economic historian Eli Heckscher who, in his massive Mercantilism (1931), wanted to present mercantilism as a system of both economic thought and economic policy. In this broader school of economic doctrine he very much accepted Adam Smith’s description. He agreed that the balance of trade theory was at the core of the mercantilist doctrine. Furthermore, he agreed that it was based on a folly, as was subsequently exposed by modern thinking, such as Hume’s expounding of the specie-flow mechanism. Heckscher described the core of the positive balance of trade theory by pointing at what he thought was a distinct ‘fear of goods’ dominating the popular mind during the 17th century. This fear of goods and love of money was, according to him, an expression of the transition which occurred during this period from a barter economy to one based on money (gold and silver). 2
Heckscher as well regarded mercantilism as a system of economic policy. And as such its logic was-as the historical economists emphasised-nation-making. Thus, with the objective of national power the mercantilists developed a number of nationalist economic policy tools, including tariffs. The British Navigation Acts, and the establishment of national standards of weights and measurements and a national monetary system could be viewed as outcomes of the same mercantilist policies.
It is not easy to grasp in Heckscher’s synthesis how the two components of mercantilism-economic theory and policy-relate to each other. Definitely, it left scope for misunderstandings. Therefore, for instance, Jacob Viner from Chicago, unjustly and incorrectly interpreted Heckscher as being a follower of Schmoller and the Historical School. It was not merely that Heckscher was a stern liberal and as such critical of any kind of dirigiste or restrictive system. In actual fact, Heckscher frequently referred critically to the methodology of the Historical School and rather stood on the side of Karl Menger in the Methodenstreit. Viner emphasised that the main characteristic of the mercantilists was their perplexity of wealth with money. Contrary to Heckcher’s more complicated picture, he portrayed them as simple bullionists 3
In time, a public policy emerged that was to make stronger the hands of the rising national states and the emerging capitalist class. This we call at present “the mercantilist system,” even though it have to be understood that mercantilism was never deliberately formulated as an economic principle or certainly as a set of rules for the guidance of the state. The term is convenient, though, for it does hit off the climate that prevailed in Western Europe from the 16th to the end of the eighteenth centuries. Mercantilism can best be depicted in a series of contrasts, for it was the reverse of the laissez-faire liberalism which succeeded it. It was footed upon the isolation of the national state–ringed about by jealous and hostile powers–rather than the internationalism that the 19th century preached. The colonial empires it sought to build up were to be the private preserves of the countries gaining them: to be exploited by their own nationals alone; to order their economic lives as the mother country directed; to operate within narrowly restricted limits. Mercantile states were much more interested in the making of money than in the production of goods. Further, all activities at home and in the colonial possessions were minutely regulated: high tariff walls kept out competing wares from abroad on the one hand and controlled intimately the exportation of foodstuffs on the other lest prices at home be deranged; elaborate regulatory codes fixed quality and fair weight of ware in the interests of the maintenance of foreign markets; wages were kept low to keep prices down in the interests of the export trade; foreign artisans were imported; monopolies were granted in the foreign trade and in domestic production; and the state closely participated in the economic life by itself investing in enterprise and through the payment of bounties and the granting of tax remissions.
In brief, the mercantile state was a totalitarian state interested in the building up of state power. It sought to maintain the dynasty, naturally, therefore the unbroken record of dynastic wars which were characteristic of the age; and to reinforce the economic resources of the nation in order that rivals could be beaten off. If a single idea may be employed to set off the concept of mercantilism it was this view of the maintenance of state power, as contrasted with the leading drive of the laissez-faire liberal state of the nineteenth century, which was the production of wealth. Certainly this purpose, in the main, was in back of the policies of Portugal, Spain, France, and England up to the Puritan Revolution. Also even in England, while the middle class gained power after the overthrow of the absolutist Stuarts, it continued to use the methods of mercantilism to keep the American colonies in a state of subjection. 4
The program of mercantilism, thus, was associated with the following devices so as to attain state power: national unification; protectionism; bullionism; colonialism. In line with the first–national unification–the dynastic houses broke down the localism of the towns, wanted to bring the guilds under national control, and labored–though not always with success-to eradicate internal barriers to the conduct of trade, for example tolls on highways and rivers and provincial tariff systems. In line with the second–protectionism–the state wanted to support the development of a constructive balance of trade by stimulating the export industries, preventing the appearance of foreign finished ware in the domestic markets, giving the home merchant marine special advantages, and the like. Thus, hand in hand with protection went state regulation, intervention, and participation. The state imported artisans, granted bounties, staked out monopolies, invested itself in enterprise and obliged private citizens to do similarly, sometimes erected state workshops; and on top of this structure imposed elaborate codes for the supervision of the home industries thus created. As in present-day Germany and Italy, not the private initiative of capitalism was at the controls of enterprise but an enormous and top-heavy bureaucracy.
In line with the third–bullionism–the state labored to increase the money stock of the nation. The attitude of mercantilism toward commodities was poles apart from that of the feudal age. The medieval world sought to attain plenty: hence it frowned on the export of goods while it tried to encourage imports. The mercantile world spoke slurringly of what it referred to as “a dead stock called plenty”: hence it reversed the process and sought to stimulate the exports of goods and limit imports. Mercantile states, therefore, favoured an increase in population, were not opposed to child labor, kept wages down (to give home producers a competitive advantage in foreign markets), and exploited the native populations of the colonial possessions overseas. 5
The measure of the success of this program was to be found in the increase of the money stock of the nation, that is to say, the excess represented by the greater outflow of exports at the expense of imports. It was no wonder that soldiers and adventurers scoured the four corners of the world for the precious metals; that sky-high barriers were erected against the outflow of gold and silver once they were brought home; that colonists were compelled to pay their adverse trade balances in specie. Notably in the seventeenth century, the apologists for mercantilism were bullionists; and while, in the eighteenth century, the theory was beginning to be looked at askance, there can be no question that the idea never was fully abandoned.
The national monarchs knew the uses of such a money stock. With liquid funds they could hire and outfit the mercenary armies by which the wars of the period were being fought, build great naval establishments, and keep a court nobility and bureaucracy with whose support their regimes were being maintained. The extravagances of the courts of Charles V, Philip II, Charles I, and Louis XIV (and paradoxically, their stability) were the other face of the shield of a mercantilist program based upon colonial spoliation, successful war, and the inflow of the precious metals. 6
In line with the fourth tactic of mercantilism–colonial expansion–the mercantile states chartered trading companies and gave them the right to erect colonies; sent armies overseas to pacify the native populations; and erected elaborate legal codes whose purpose was, generally, to compel colonial peoples to produce raw materials the mother country required and absorb finished goods the mother country produced in surplus. The colonials were to buy more from the mother country than they sold to her: and the balances were to be paid for in bullion. But where were the colonists to get specie? The thought was never articulated in so many words. Realistically, colonists got specie from the spoliation of the natives, their enslavement for work in the mines, piracy, illegal trade, the development of the Negro slave traffic. As far as the British mainland colonies in America were concerned, mercantilism by the eighteenth century had become a repressive device. To release the colonies from this leading string, which had become a fetter, became in effect the program of the American Revolution.
The Nature of Mercantilism
These striking developments in the political sphere were paralleled in economic life by a series of tendencies and developments, of ideas and policies, which have been lumped together under the name of mercantilism. It is an inexact name, given in the eighteenth century by advocates of new policies. It tends to emphasize merely one aspect of the matter (the commercial side). However, it has been so long in use that it must be employed until a better term is coined. Mercantilism varied in every country, according to local conditions and traditions; yet it can be said in a general way that it was the economic counterpart of the political processes by which the national states were being built up.
From one point of view mercantilism was the effort to secure economic unity. The administrators of the new states were anxious to wipe out the old variations in coinage, in weights and measures, and in taxation. They wished to remove the customs barriers and city tolls that had grown up within the nations. They wished to replace local economic practices, whether those of Church or gild or town, by general national policies. They wished to bring all the territories and all the citizens of the state together into a cohesive, national economy. From a second point of view, mercantilism was economic étatisme or the search for control. The national governments sought to take over the economic functions formerly carried on by the Church, the town, the province, the feudal lord, the gild. They sought to regulate industry and commerce, to handle poor relief and taxation, to set the interest rate and make laws on economic matters, to build up a national administration of economic life. From a third point of view, mercantilism is the search for power. Each national state wanted to make itself strong and prosperous. It wished to build up its industry and agriculture and to extend its commerce. It strove to gain wealth at the expense of other states and to win colonies overseas. It sought to secure the means of supporting large armies and navies and of waging victorious wars. It wished its citizens to be patriotic in economic as well as political matters. 7
It is probably impossible to define mercantilism in a satisfactory fashion. But as a working definition the following may serve: Mercantilism is the name given to that group of ideas and practices particularly characteristic of the period 1500 to 1800 by which the national state acting in the economic sphere sought by methods of control to secure its own unity and power.
The mercantilist writers and statesmen were not conscious of many of the implications of their views. They believed that they had the correct solution to certain problems, and they acted accordingly. They did not so much seek to build up an economic philosophy as to guide the nation into proper channels. As a result, mercantilism is not a unified theory. It crops up in different forms in various countries and centuries. Moreover, it is closely linked to the rise of capitalism and to the expansion of Europe. It was the increase of capitalistic business that turned the attention of people to economic matters as the key to wealth and power. Sometimes the businessmen supported the mercantilist policies; sometimes they opposed them. In a general way, however, mercantilism helped the capitalist by putting the power of the state behind him, even though it hampered and restricted him at the same time. When the businessman had grown strong enough and wealthy enough (by the eighteenth century) he began to think about shaking off the control of the state, or rather of taking charge of the state and using it for his own purposes. The expansion of Europe made the search for national strength in part a competition for commerce, sea power, and colonies and greatly widened the field in which mercantilism could be applied. Furthermore, it brought to the fore just those areas on the Atlantic where the new states were developing national and mercantilist policies. 8
Mercantilism is to be understood as a series of national economic policies connected with the rise of the national state. Some of the policies were handed down from medieval towns. Others were developed in the sixteenth and seventeenth centuries. No country adopted and applied all the mercantilist notions at the same time. In fact, each nation had its own brand of mercantilism distinct and different from all the rest. In Portugal mercantilism centred at first on the spice trade. In Spain it was based in large part on the possession of the American colonies. In Holland the major questions were shipping, commerce, and the carrying trade. England built up at first a mercantilism that had to do with industry and internal administration, then turned (after 1660) to a type of mercantilism that was almost purely commercial and colonial. France slowly built up a well-rounded mercantilist tradition that reached full development only after 1661, when attention was paid to industry, commerce, and colonies. Nevertheless, though the content of mercantilism varied in each country, there were certain peculiarly mercantilist policies, problems, and notions that tended to appear more or less clearly in every land.
One of the basic tenets of mercantilism was bullionism, or the belief that the way for a country to get rich and powerful was to acquire and keep as much gold and silver as possible. Under the influence of rising capitalism the medieval idea that money is sterile was slowly abandoned. As early as the fourteenth century in Italy, writers began to repeat the classical saying, “Money is the sinews of war,” when it became evident that with money a city could buy arms, soldiers, and ships. The development of gunpowder and artillery only increased the value of money for military purposes. The importance of money was forcefully emphasized in the sixteenth century by the example of Spain. To the other nations it seemed that Spain achieved a pinnacle of glory and power largely through the bullion it got from overseas. The growing use of money in business, the stimulation that came with the influx of American treasure, the fact that taxes were increasingly collected in money rather than goods, all lent weight to the view that money was the chief source of political power, military strength, national prestige, and internal prosperity. Indeed it is probable that this idea was in part correct, and that an inflow of money did actually stimulate business, increase investment and employment, and make it easier to collect large sums in taxes. 9
The bullionists were not simple-minded. They knew that money itself could not be eaten or used for clothes or housing. Few of them were so naive as to think that gold and silver were the only forms of wealth. But many of them did hold that money was the most usable, the most important, the most universal form of wealth. In part they were merely carrying on medieval notions, for the towns and cities of the middle ages had often striven to build up their stocks of coin. Medieval cities had also followed a policy of supply; that is, they had adopted rules and regulations to make sure that they had adequate and constant supplies of food, munitions, and raw materials. In a sense bullionism was merely the application of this policy of supply by nations to the precious metals.
Bullionism was connected with most of the other policies advocated by mercantilists. It led them to try to develop gold and silver mines at home or overseas. Because of it they forbade repeatedly all export of money or bullion so as to retain in the country the gold and silver that came into it. For nations that had no mines at home or abroad it led to more complicated endeavours. In such lands mercantilists sought to build up exports and reduce imports, so that money might be obtained from commerce. In its more highly developed form this was the doctrine of the balance of trade, which held that only by an excess of exports over imports could a nation obtain wealth and power. Later mercantilists elaborated this notion into the idea of a balance of payments, which took account not only of the sale and purchase of goods but also of money spent for freight, or insurance, or church fees, or travellers’ expenses. To secure a favourable balance of trade or of payments, mercantilists advocated import and export duties, the encouragement of industry, agriculture, and mines, a large merchant marine, and the acquisition of colonies.
The Effects of Mercantilism
Mercantilism was an economic boon for European states. Plantation products grown with slave labor made American colonies valuable possessions. Brazil, Haiti, Barbados, Cuba, and Jamaica carried the title “world’s richest colony” during different periods of the colonial era. Mercantilism brought the plantation colonies into the world economy in a subservient position to the mother country. Great economic wealth was created for the European parent and planters in America, but economic development in the colonies was stifled.
Outside plantation America a weak colonial economy developed in Portuguese America. In mainland British America north of the plantation zone, however, mercantilist policies unintentionally encouraged the creation of a diverse and balanced economic region that grew to challenge the commercial activities of the mother country itself. The Navigation Acts stimulated American shipbuilding and colonial commerce. Britain’s navy barred other European states from the Great Fishery, creating a monopoly for British and New England fishermen in the world’s richest fishing grounds.
Mercantilism dictated that Britain protect domestic producers so imports of American fish and cereal grains were prohibited. New England fish was sold in Southern Europe and the West Indies. The Corn Laws were of great benefit to the Middle Atlantic colonies. Unable to ship their products to Britain, farmers, millers, merchants, and mariners developed a prosperous wheat and flour trade with the same markets where New Englanders sold their fish. This commerce also helped local merchants, shipbuilders, and colonial firms providing “invisibles”—maritime insurance and shipping services. Forced to find markets other than England, New England and the Middle Atlantic colonies developed lucrative trading relationships with other European states and the West Indies. 10
The policies of mercantilism did not prevail in America solely by rigorous enforcement by mother country officials. To the contrary, colonial elites, well satisfied with their positions of wealth and dominance, gave strong support to most policies. Mercantilism produced great wealth for planters and merchants in plantation America. Economic and social structures were established that remained firmly in place long after Brazil and the United States became independent.
To be judged properly, a system of thought and action must be considered in the light of the times during which it was current as well as by the standards of modern economic and political thought. The surge of nationalism following the disruption of the Middle Ages was no doubt a forward step in the march of progress. English nationalism between the fifteenth and eighteenth centuries was not a reversion from internationalism, but a growth from local to national loyalties. Nationalists have ever thought in terms of future wars. They are willing to sacrifice the greatest present good for what they consider to be the greatest future good.
On the other hand, it is one thing to admit that you wish your country to have a lower standard of living and be self-sufficient but quite another to maintain that a program for self-sufficiency is economically sound. Laws sponsored by nationalists and by merchants were, perhaps, beneficial to special groups; but economically they were not to the best interest of the entire nation.
In a number of ways, the theories of mercantilism do violence to modern economic thought. In the first place, there was an apparent confusion of gold with wealth. Gold is really of little use unless spent for goods, and laws that increase the national hoard of gold deprive the nation’s citizens of many goods and services they might otherwise have purchased. The mercantilistic concepts of goods and of trade were particularly uneconomic, for goods are of value only as they are consumed. Furthermore, a favourable or unfavourable balance of trade cannot exist for any extended period of time, for those who do not buy cannot expect to sell; trade is an exchange of goods and services. Unless a nation desires to give its products away, it must accept goods or services in exchange for its exports. Likewise unfounded was the notion that one country alone gains by trade. Goods are exchanged between citizens of various nations for the same reason that goods are exchanged between citizens of the same nation. A man engages in trade when he desires the products of another more than his own; therefore he is willing to dispose of his products in exchange for the products he desires.
Artificial interference with trade, as practiced by mercantilistic legislators, created international inefficiency. Laws often forced nations to engage in productive activity for which they were ill-adapted. In other words, the restrictive legislation interfered with the, most effective geographical specialization. In the eighteenth century Adam Smith exposed the fallacies of the doctrines of economic nationalism and urged less governmental interference in economic activities. But selfish interest and rampant nationalism have been so strong that the principles of mercantilism have not yet disappeared.
Richard Jones ‘Primitive Political Economy’, in his Literary Remains Consisting of Lectures and Tracts of Political Economy . Augustus M. Kelley: New York 1964, p. 293
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Eli F. Heckscher, Lars Magnusson, Mendel Shapiro Mercantilism. Routledge, an imprint of Taylor & Francis Books Ltd; New Ed edition (Sep 1994)
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