Mercantilism: What are the Causes, Effects, principles and criticisms?
Mercantilism is an economic principle which suggests that a nation derives its economic benefits from the accumulation of monetary reserves through a positive balance of trade. The theory of mercantilism was commonly used in Western Europe between 16th and 18th century. It was used as part of economic policy and discourse. Mercantilism policy in Western Europe was characterized by high tariffs of manufactured goods. Other policies included: establishing network of overseas colonies, banning export of silver and gold, creating market monopolies, preventing colonies from trading with other countries, banning trade in foreign ships, research and direct subsidies for manufacturing, settings limits for wages, and maximizing the use of domestic resources.
Mercantilism started during the empiricism renaissance which quantified large-scale trade accurately for the first time. The first large-scale integrative approach to mercantilism first started in England during the Elizabeth era between 1558 and 1603. The national balance of trade developed a system which ensures that England did not buy from other countries more than it exports to them. This was intended to increase balance of trade. The court of Queen Elizabeth established merchant fleet to challenge the strongholds of Spain on trade. The country also expanded the growth of bullion within its boundaries. Queen Elizabeth passed legislations in parliament which encouraged the protection of English shipping. She ordered her navy to carry out the deliberations of the Navigation Acts of Parliament by protecting and promoting the shipments and fleets of England in the sea. Thomas Mun said, “The treasure of England by foreign trade, or the balance of our foreign trade is the rule of our treasure” (Onnekink and Rommelse, 2001). These activities led to the effective utilization of English national resources in order to defend England against the powerful Spain Empire. It also led to the establishment of global empire in the 19th century.
British mercantilism peaked between 1640 and 1660. Domestic control in England was less prominent than the control on the continent. The power of the parliament was also increased and government controlled monopolies. In the British mercantilism, the government partnered with merchants to increase political power and private wealth of the country while excluding other empires within the continent of Europe. The government gave sufficient protection to its merchants, and excluded others by setting trade barriers, subsidies to local industries, and regulations on trade. Exports out of the country were maximized while imports into the country were minimized. The main aim of mercantilism in Britain was to encourage trade surplus in order to increase gold and silver in London. Therefore, British mercantilism was mainly in form of trade control.
French Mercantilism policy was established in 16th century after the introduction of monarchy in the country’s political system. However, the practice of mercantilism peaked in 17th century when it was highly supported by Jean-Baptiste Colbert, the French finance minister for 22 years. Due to his successful use of mercantilism, the French mercantilism is sometimes referred to as Colbertism (The Economist, 2013). French mercantilism was later liberalized under the leadership of Napoleon. French government became highly involved in the economy in order to increase the country’s exports. Protectionism also increased, and policies were enacted to limit the amount of imports in favour of exports. Industries were monopolized and the state controlled production by giving directives on how different goods should be produced.
Apart from Britain and France, mercantilism was also embraced by other European countries, but to varying degrees. Netherlands was the most efficient trader in Europe when it adopted mercantilism after the thirty years of war between 1618 and 1648. Spain also borrowed mercantilism policies from France after its economic collapse in the 17th century. Russia attempted to adopt mercantilism policies but failed because it lacked industrial base and did not have any large merchant class.
Mercantilism rejected the concept of money hoarding and encouraged the circulation of money (The Economist, 2013). It emphasized on monetary metals which can be associated with the current concept of money supply. The industrial policy of the mercantilism period encouraged heavy emphasis on money, and a shift from the heavy investment on wars to promotion of general prosperity. During mercantilism, domestic policy was more uneven than trade policy. Adam Smith suggested that mercantilism supported stringent controls over the economy, but mercantilists disagreed. Mercantilists widely disagreed with economic theories. They believed that economic system is a zero-sum game whereby one party gains and another one loses. Therefore, a set of policies which benefited one group harmed another. Smith suggested that the mercantile system was a conspiracy of merchants and manufacturers to harm consumers.
Proposers of mercantilism also suggest that economics cannot be used for a common good, or to maximize commonwealth. Mercantilists agreed that economic oppression of the working population is good for the economy. They suggest that farmers and labourers should live only by subsistence. It was necessary under mercantilism to maximize production without caring about consumption. Mercantilists did not allow for free time, education or extra money for the lower-class because they would affect the economy negatively. Mercantilists also considered a large population as a form of wealth which enhanced bigger armies and markets. The central idea of mercantilism was to protect the market and maintain agriculture for those who depend on it as a main source of livelihood.
Scholars and historians provide various perspectives on the origin and causes of mercantilism. A group led by Jacob Viner suggested that mercantilism is a clear, common-sense system that people adopted without seeing its logical fallacies because they did not have the required analytical tools. Another group of scholars viewed mercantilism as the best possible system that could be developed by those who adopted it. Therefore, according to them the system was not a mistake; it was the right and justifiable thing to do. This school suggests that mercantilism policies originated from rent-seeking governments and merchants. In other words, merchants and governments developed mercantile policies because it benefited them. Enforced monopolies, poverty of workers, and bans on imports benefited merchants. High tariffs and payments from the merchants benefited the government. Most mercantilism policies sought to outgrow relationship between governments of nation-states and their merchants. Merchants agreed to pay levies and taxes to fund the wars between nation-state in exchange for governments’ enactment of policies that protected merchants from competition.
Mercantile policies took many forms. In terms of the domestic economy, the governments of nation-states of Europe offered capital to new industries and exempted from taxes and stringent rules and regulations. Monopolies were also created over local and colonial markets, and pensions were offered to successful producers (Stern and Wennerlind, 2013). In terms of foreign trade, the government protected mercantilists by imposing quotas, tariffs and restrictions to imports of commodities that may compete with local industries. Governments also banned the export of capital equipment, and prohibited the movement of labour outside the country because that would allow foreign countries to compete with the country in terms of manufacturing and production of goods.
Shipping also accelerated mercantilism in the mercantile era. As colonies were established and gold was shipped from the New World to Portugal and Spain, national power started to concentrate its efforts in protecting the oceans. Strong merchant marines were established during the era in order to allow for shipments for merchant and military intentions. For instance, Jean Baptiste Colbert increased port duties for foreign ships and provided subsidies for French ships (Stern and Wennerlind, 2013). The 1651 Navigation Act of England prevented foreign ships from accessing the coastal regions for trade in England. Under the Act, trade involving England was carried out in either English or colonial vessels. France, England and other powerful European nations directed their navigation rules against the Dutch because the Dutch dominated marine merchant business in 16th and 17th century.
Monetarism explained that mercantilism originated from the export of bullion (gold) by the European trade in exchange for goods from Asia. This led to reduction money supply and decline of prices and economic activity in Europe. This was evidenced by the fact that there was no inflation in Europe until the revolutionary era when paper money was introduced. The last school of thought suggested that the increase of technification and professionalization of wars caused maintenance of funds to become an expensive and competitive business.
Mercantilism developed as part of transition of European economy from isolated feudal states to centralized nation-states seeking power. The growth of urban centres and technological changes in shipping also caused a drastic increase in international trade. As a result, mercantilism was used to increase the benefits of this international trade for European states. The introduction of the concept of double-entry bookkeeping and modern accounting also led to mercantilism because it exposed the inflow and outflow of trade in the European economy. As a result, European states were able to determine balance of trade. The discovery of United States also led to mercantilism. United States offered new mines and new markets which heightened foreign trade; hence increasing prices and encouraging merchant activities.
Mercantilism operated under certain sets of organizing principles. First, all mercantilists believed in the limits of growth. They believed in the economic proposition of scarcity. Property and value was strongly linked to land. In turn, land was considered as a resource which promotes competition as a significant part of human life. Mercantilists believed in finite and delimited riches. They did not view trade as bargains of mutual benefit. Instead, they viewed it as an opportunity to achieve success over foreign rivals through balance of trade. Because the store of wealth in the world is finite, it is possible for one country to expand its resources by limiting the powers of another country.
The concept of establishing colonies in the mercantile era arose due to the principle that wealth is finite. Due to this principle, European countries believed that gaining wealth will only be successful through the seizure of a larger slice of the pie. Colonies were part of the agenda of European economies when they were seeking wealth. They believed that remittances from their colonies would increase their balance of trade and in turn increase their wealth. Some people also argued that mercantilism is a way of maximizing net profit by accumulating wealth received through imports and limiting exports.
Bullionism also played a significant role in the mercantilism era and attracted attention from many mercantilists and mercantile writers. For instance, during the Napoleon Wars, the nations involved tried to prevent their enemies from accessing food in order to starve them. Countries also attempted to make it difficult for their enemies to offer their products for exportation into other countries of the world. One way that European countries managed to destroy their enemies economically was to dwindle their gold supplies.
Mercantilist practice and mercantilist thought played two different roles in enhancing the wealth and prosperity of nations in Europe during the mercantilism era. Thinkers may provide opinions which may end-up being crushed when it comes to policy implementation. As noted earlier in this paper, mercantilists put all their energies on foreign trade and balance of trade. Mercantilists suggest that foreign trade is more significant than domestic trade for the economic prosperity of their nations. They were concerned with the issue of hoarding gold and silver, and most mercantile thinkers believed maximization of employment. This is in line with the Keynesian theory that was developed later to show the idea of employment maximization. Some of mercantilists such as Nicholas Barbon agitated for the supply of money. Barbon started the fire insurance industry after the occurrence of the famous Great Fire of London in 1666. He agitated for the spending of money in order to boost labour productivity and enhance employment. Interestingly, mercantilists also thought of ways in which more people can be brought into the labour force.
Keynesian economics relates in some ways with mercantilism. Both of the two theories are concerned with full employment and encourage more people in the labour force in order to enable everyone participate in the country’s productivity. Keynes quoted mercantilists and said that if precious metals are offered in sufficient quantities, they will help any country to maintain its control over interest rates (Markwell, 2006). This enhances effective and efficient resource utilization in the economy. Keynes also suggests that inadequate consumer demand leads to recession which is based on the contributions of mercantilism.
There are also various effects and benefits of mercantilism in Europe. First, foreign trade led to importation of gold and silver. Mercantilism was considered not to result in net gains to any country because the benefit of getting gold and silver was associated with costs incurred by the country exporting such gold and silver (Onnekink and Rommelse, 2011). Mercantilism also generated rapid growth in the countries that practiced it.
The merchants and governments of countries like Spain, Portugal, France and Britain obtained generated wealth from mercantilism. They attained such wealth by exploiting foreign lands of the Caribbean, Indian Sub-continent, Asia and Latin America. They established trade relations with such countries first, and then overthrew the local rulers and set up colonies. The government allowed merchants of their countries to establish trade or business in their colonies and provided the necessary military to capture the required land in the colonies and church clergy to convert people. Merchants were also allowed by the colonial governments to establish plantations and mines in the colonies. These plantations and mines encouraged the availability of raw materials, jewelry, silver, gold and other important products which were then remitted to the home country of the colonizers. These merchant practices led to the enrichment of colonial masters, traders, and the nation-states engaged in mercantilism (LaHaye, 2013). The wealth generated was later used to develop science and technology which became the basis for the industrial revolution that followed the mercantilism era.
One of the negative effects of mercantilism is that local people of the colonies established by powerful European countries during the mercantile era were exploited badly. They were converted into bonded labour or slaves. They were forced to work hard for long hours in a day with very low subsistence wages. The people of the colonies became economically and politically weak as their independence was robbed and their economic freedom was halted. They were demoralized and felt like strangers in their own countries.
Another negative effect of mercantilism was economic warfare and imperialism. Mercantilism was suited to an era of warfare. The level of world trade during that era was considered to be fixed. Therefore, the only way that a nation’s trade could be increased was by taking it from another country. The mercantilist theories led to various wars including the Franco-Dutch Wars and Anglo-Dutch Wars (Onnekink and Rommelse, 2011). Most of European wars during the era were caused by other things, but mercantilism exacerbated them because mercantilism was defined by mercantilism. Mercantilism clearly defined the enemy during wars and justified the war. The common convictions of mercantilists led to the disharmony in the era that resulted in wars.
As nations increased their efforts to establish new colonies, imperialism was fueled (Rothbard, 1997). Mercantile European countries developed colonies that formed sources of gold such as Mexico or sugar such as West-Indies. The European countries set these colonies as exclusive markets, hence causing imperialism.
Like any economic theory, mercantilism has its own criticisms and critics. David Hume and Adam Smith became the first people to dismiss the claims of mercantilism through the establishment of an anti-mercantilist thought (LaHaye, 2013). Before Adam Smith came up with its contradicting ideology that seemed more convincing, other critiques had also attempted to criticize the theory. Mercantilism lost trust since the 18th century.
John Locke opposed mercantilism by arguing that prices changes depending on the quantity of money available in the economy. He also argues that wealth is not fixed; It requires the efforts of human labour to create. Mercantilism also ignored the ideas of comparative advantage and comparative advantage developed by David Ricardo in his international trade theory. David Ricardo also used the theories of comparative advantage and absolute advantage to discuss the benefits of international trade. This opposes the proposition of mercantilism that there is no benefit in foreign trade, and that it is just a zero-sum game. An example of how countries can benefit from international trade is; supposing France is more efficient in production of cloth while England is an efficient producer of wine compared to France. If England specializes in the production of wine while France specializes in the production of cloth, then both countries would benefit from trade. They would both be better off as opposed to the assertion of mercantilism that one country cannot be made better off without making another country worse off.
Hume suggested that it is quite impossible to achieve a constantly positive balance of trade as opposed to the mercantilism position that positive balance of trade should be sought to increase the wealth of a country. He suggested if gold is exported from one country to another, the amount of gold in the importing country will increase and may reach a point where its value declines. For the exporting country, the amount of gold decreases to a level where its value increases becomes high. As a result, it becomes costly for the importing country to import more gold, and the balance of trade reverses itself.
Adam Smith also criticized the use of gold and silver by the mercantilists as medium of exchange. He states that wealth should not be confused with wealth. Bullion (gold) was just like any other commodity and shouldn’t have been treated in a special way by the mercantilists. Other critics also suggested that the view of mercantilism as a rent-seeking process is wrong because mercantilists knew that they wouldn’t benefit from higher prices if English commodities abroad.
Smith used his book, “Wealth of Nations” to put an end to the mercantilism era and introduce a new classical theory which suggests a free-market economy. This is the exact opposite of the mercantilist regulation-based view. However, further studies show that the views of Smith did not indicate a sharp deviation from mercantilism. Instead, he just sought the effects of mercantilism. He realized that monopolies are greedy and earn profits above their natural rate; hence causing distortions in the economy. Smith also suggested that mercantilism’s use of regulation may be used by the government to oppress people.
Mercantilism came to an end during the introduction of Adam Smith’s more accurate ideas. However, those who held the view that mercantilism was rent-seeking process suggest that mercantilism ended when major shifts of power occurred (Vaggi and Groenewegen, 2003). Furthermore, mercantilism ended in Britain due to the changes in forms of power and leadership. When parliament gained the power of the monarch to establish monopolies, mercantilism came to an end. Wealthy capitalist who occupied the House Commons benefited from mercantilism. However, parliament considered the system to be difficult to implement because the cost of group decision making is high.
The regulations of mercantilism era were removed towards the end of 18th century. In early 19th century, the British government established the laissez-faire and free trade economic systems (Johnson, 1974). In France, mercantilism continued as economic control of the country still remained in the hands of the royal family. Mercantilism then ended in the French Revolution. In Germany, the historical school of economics continued the operation of mercantilism in the country until 19th and early 20th century.
In conclusion, mercantilism can be considered as one of the first ways through which economics and economic theory developed and earned a lot of concern across the world. Mercantilism is considered as a way of government regulation whereby the nation-states of Europe used balance of trade to accumulate wealth. To do this, they attempted to increase their balance of trade by increasing exports and reducing imports. They also relied on the principle of finite wealth which led countries of Europe to cause barriers to establish colonies and use barriers to other countries to prevent them from accessing their wealth. Mercantilism was criticized by many people including Adam Smith. Smith suggested that regulations suggested by Mercantilism may lead to stifling rules and market distortions by monopolies. He advocated for free markets which encouraged effective utilization of resources. When mercantilism ended in 19th century, free market and laissez-faire replaced it.
References list
Houston, A. (2008). Benjamin Franklin and the Politics of Improvement. New Haven: Yale University Press.
Johnson, H.G. (1974). Mercantilism: Past, Present and Future. The Manchester School, 42, 1–17
LaHaye, L. (2013). Mercantilism. Library of Economics and Liberty. Accessed November 25, 2013 from http://www.econlib.org/library/Enc/Mercantilism.html
Markwell, D. (2006). John Maynard Keynes and International Relations: Economic Paths to War and Peace. Oxford & New York: Oxford University Press.
Onnekink, D. and Rommelse, G. (2011). Ideology and Foreign Policy in Early Modern Europe (1650–1750). Ashgate Publishing
Rothbard, M. (1997). Mercantilism: A Lesson for Our Times? Cheltenham, England: Edward Elgar.
Stern, P. J. and Wennerlind, C., (2013). Mercantilism Reimagined: Political Economy in Early Modern Britain and Its Empire. Oxford: Oxford University Press.
The Economist (2013). What was mercantilism? Accessed November 25, 2013 from http://www.economist.com/blogs/freeexchange/2013/08/economic-history
Vaggi, P., and Groenewegen, K. (2003). A Concise History of Economic Thought: From Mercantilism to Monetarism. New York: Palgrave Macmillan.
