By C.W. | LONDON
This post has been updated to include a suggested reading list.
It is often said that a better understanding of economic history would have helped us to avoid the worst of the recent crisis. Over the next few weeks Free exchange will consider milestones in economic history, showing how they contributed to the development of economic thought.
MERCANTILISM is one of the great whipping boys in the history of economics. The school, which dominated European thought between the 16th and 18th centuries, is now considered no more than a historical artefact—and no self-respecting economist would describe themselves as mercantilist. The dispatching of mercantilist doctrine is one of the foundation stones of modern economics. Yet its defeat has been less total than an introductory economics course might suggest.
At the heart of mercantilism is the view that maximising net exports is the best route to national prosperity. Boiled to its essence mercantilism is “bullionism”: the idea that the only true measure of a country’s wealth and success was the amount of gold that it had. If one country had more gold than another, it was necessarily better off. This idea had important consequences for economic policy. The best way of ensuring a country’s prosperity was to make few imports and many exports, thereby generating a net inflow of foreign exchange and maximising the country’s gold stocks.
Such ideas were attractive to some governments. Accumulating gold was thought to be necessary for a strong, powerful state. Countries such as Britain implemented policies which were designed to protect its traders and maximise income. The Navigation Acts, which severely restricted the ability of other nations to trade between England and its colonies, were one such example.
And there are some amusing (and possibly apocryphal) stories of bullionism in action. During the Napoleonic Wars, the warring governments made few attempts to prevent their foes from importing food (and thereby starving them). But they did try to make it difficult for their opponent to export goods. Fewer exports would supposedly result in economic chaos as gold supplies dwindled. Ensuring an absence of gold, rather than an absence of grub, was perceived to be the most devastating way to grind down the enemy.
But there is an important distinction between mercantilist practice and mercantilist thought. The opinions of thinkers were often mangled when they were translated into policies. And a paper by William Grampp, published in 1952, offers a subtler account of mercantilism.
Mr Grampp concedes that mercantilists were keen on foreign trade. One often reads in mercantilist tomes that foreign trade would be more beneficial than would domestic trade. And some of the early mercantilists, like John Hales, were enchanted by the idea of an overflowing treasure chest.
But Mr Grampp argues that, on the whole, we should stop confusing mercantilism and bullionism. Few mercantilists were slaves to the balance of payments. In fact, they were alarmed by the idea of hoarding gold and silver. This is because many mercantilist thinkers were most concerned with maximising employment. Nicholas Barbon—who pioneered the fire insurance industry after the Great Fire of London in 1666—wanted money to be invested, not hoarded. As William Petty—arguably the first “proper” economist—argued, investment would help to improve labour productivity and increase employment. And almost all mercantilists considered ways of bringing more people into the labour force.
Mr Grampp even suggests that Keynesian economics "has an affinity to mercantilist doctrine”, given their shared concern with full employment. Keynes, in a short note to his “General Theory”, approvingly quotes mercantilists, noting that an ample supply of precious metals could be key in maintaining control over domestic interest rates, and therefore to ensuring adequate resource utilisation. In some sense the Keynesian theory of underconsumption—that is, inadequate consumer demand—as a cause of recessions was presaged by mercantilist contributions. In 1598 Barthélemy de Laffemas, a French thinker, denounced those who opposed the use of expensive silks. He argued that purchasers of luxury goods created a livelihood for the poor, whereas the miser who saved his money “caused them to die in distress”.
Mercantilism is thought to have begun its intellectual eclipse with the publication of Adam Smith’s "Wealth of Nations" in 1776. A simple interpretation of the economic history suggests that Smith’s ruthless advocacy for free markets was squarely opposed to regulation-heavy mercantilist doctrine. But according to research by Lars Magnusson of Uppsala University, Smith’s contribution did not represent such a sharp break. The father of economics was certainly concerned with the effects of some mercantilist policies. He saw the damage that overweening government intervention could do. Smith argued that the East India Company, a quasi-governmental organisation that managed parts of India at the time, was responsible for creating the huge famine in Bengal in 1770. And he hated monopolies, arguing that greedy barons could earn “wages or profit, greatly above their natural rate”. Smith also grumbled that legislators could use mercantilist logic to justify stifling regulation.
But Smith points out circumstances in which government interference is necessary. He was in favour of the Navigation Acts. And in Smith’s lesser-known "Lectures on Jurisprudence", he outlines other cases where government intervention in trade is useful. Smith was not opposed to regulation per se, but rather instances where individuals and governments could abuse their position of power for personal gain.
Nicholas Phillipson, who recently wrote a biography of Smith, argues that the notion of “free markets” was alien to the father of economics. Smith made it clear that governments would always play a part in making markets—and could not conceive of a market where the government did not play a crucial role. And in this sense, his contribution does not represent such a sharp break from mercantilist thought. The question was not whether, but how much, of a role the state would play.
Though most of the world's rich countries remain committed to free trade today, mercantilist themes are often found in economic policy debates. China and Germany are often envied for their trade surpluses or seen as economic models, and China especially has very deliberately subsidised exports. President Barack Obama has made a doubling of American exports a major policy goal, as part of his plan to help America "win the future". This zero-sum way of looking at the global economy is less rooted in the national greatness side of mercantilism than in the focus on full employment, at a time when many rich economies are suffering from insufficient demand and high rates of joblessness; it is thoroughly Keynesian, in other words. Early in the recovery some economists gave a veneer of intellectual credibility to this perspective. Paul Krugman, for instance, wrote of America's 2010 trade agreement with South Korea:
There is a case for freer trade — it may make the world economy more efficient. But it does nothing to increase demand.
And there’s even an argument to the effect that increased trade reduces US employment in the current context; if the jobs we gain are higher value-added per worker, while those we lose are lower value-added, and spending stays the same, that means the same GDP but fewer jobs.
If you want a trade policy that helps employment, it has to be a policy that induces other countries to run bigger deficits or smaller surpluses. A countervailing duty on Chinese exports would be job-creating; a deal with South Korea, not.
But importantly, the case for bullionism as a demand stimulus evaporated with a role for bullion in monetary policy. The introduction of fiat money meant that balance-of-payment goals were unnecessary to maintaining a particular monetary policy stance, since central banks no longer needed an adequate hoard of gold to pump money into the economy. The mercantilist temptation is a strong one, however, especially when growth in the economic pie slows or stops altogether. More than two centuries after Smith's landmark work, economics's foundational debate continues to resonate.
Suggested reading list:
Foucault, M., Senellart, M., & Ewald, F. (Eds.). (2009). Security, Territory, Population: Lectures at the College de France 1977--1978. Macmillan. [The chapter on scarcity demonstrates Foucault’s conventional (and, this blog would argue, incorrect) understanding of mercantilism in comparison to classical economics]
Keynes, J.M. (1936) ‘Notes on mercantilism’ in The General Theory of Employment, Interest and Money. Available here. [Readable introduction to the link between mercantilism and Keynesianism]
Magnusson, L. (2002). Mercantilism: the shaping of an economic language. Routledge. [The introduction is a very good primer for someone new to this subject]
Phillipson, N. (2010). Adam Smith: An Enlightened Life. Penguin. [Excellent examination of Smith’s life and times]
Smith, A. (1776) ‘Of Restraints upon the Importation from foreign Countries of such Goods as can be produced at Home’ An Inquiry Into the Nature and Causes of the Wealth of Nations, [Book IV, part ii, chapter II]. Available here. [Smith’s discussion of the Navigation Acts].
What is mercantilism short answer? ›
Mercantilism is an economic practice by which governments used their economies to augment state power at the expense of other countries. Governments sought to ensure that exports exceeded imports and to accumulate wealth in the form of bullion (mostly gold and silver).What is mercantilism in your own words? ›
mercantilism Add to list Share. Mercantilism, also called "commercialism,” is a system in which a country attempts to amass wealth through trade with other countries, exporting more than it imports and increasing stores of gold and precious metals. It is often considered an outdated system.What was mercantilism quizlet? ›
Mercantilism is a system based on the benefits of profitable trading. Countries made trade policies that favored money going from the colonies to the mother country. How did goods move in Mercantilism? Mercantilism moved goods which were abundant in one location to another place where the goods were scarce.What does mercantilism Class 8 mean? ›
Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It was an economic policy that gave rise to imperialism and colonialism among European nations.What is mercantilism definition kid? ›
Mercantilism was an economic system used by European empires between 1500 and 1800. Under mercantilism, the economy should be controlled by the government and based on maintaining wealth in the empire. Empires believed that for them to win, another country had to lose, creating the basis for colonial systems. Lesson.What is mercantilism history? ›
Mercantilism is a practice in which a country exports massively while limiting imports. Prominent in the sixteenth through eighteenth centuries, mercantilism was seen as a way to limit the impact of other nations' economic policies.Who defined mercantilism? ›
Mercantilism was a political movement and an economic theory, dominant in Europe between 1600 and 1800. The term "mercantilism" was not in fact coined until 1763, by Victor de Riqueti, marquis de Mirabeau, and was popularized by Adam Smith in 1776.Why is mercantilism important? ›
Mercantilism exists to increase a country's wealth through its exports. British economic growth was propelled by raw materials supplied by its colonies so the nation could export finished products. Mercantilism brought about many acts against humanity, including slavery and an imbalanced system of trade.Why is it called mercantile? ›
"of or pertaining to merchants, trade, or commerce," 1640s, from French mercantile (17c.), from Italian mercantile, from Medieval Latin mercantile, from Latin mercantem (nominative mercans) "a merchant," also "trading," present participle of mercari "to trade," from merx "wares, merchandise" (see market (n.)).What are 3 facts about mercantilism? ›
The underlying principles of mercantilism included (1) the belief that the amount of wealth in the world was relatively static; (2) the belief that a country's wealth could best be judged by the amount of precious metals or bullion it possessed; (3) the need to encourage exports over imports as a means for obtaining a ...
What is the goal of mercantilism in one word? ›
The goal of mercantilism was to run trade surpluses to benefit the government.What is mercantilism PDF? ›
The term 'Mercantilism' broadly refers to that group of ideas and practices in the economic sphere by which the nation states of Europe sought to increase its own power, wealth and prosperity in the period from 1500 to 1800 A.D. It was in a way the economic counterpart of political absolutism.Is mercantilist a word? ›
mercantilism. a political and economic policy seeking to advance a state above others by accumulating large quantities of precious metals and by exporting in large quantity while importing in small. — mercantilist, n. — mercantilistic, adj.What is a sentence for mercantilism? ›
Mercantilism sentence example
England developed many colonies under mercantilism in order to increase its trading territory. The nation is attempting to sell more goods than they purchase, following the ecomonic policy of mercantilism. Great Britain imposed a policy of mercantilism upon all of its colonies.
- Economic Factors: ...
- Political Factors: ...
- Religious Factors: ...
- Cultural Factors: ...
- Scientific Factors: ...
- Wealth: ...
- Foreign Trade: ...
- Commerce and Industry:
Mercantilist economic policies rely on government intervention to restrict imports and protect domestic industries. Modern-day mercantilist policies include tariffs, subsidizing domestic industries, devaluation of currencies, and restrictions on the migration of foreign labor.What was mercantilism Karl Marx? ›
Mercantilism differed from "modern" (classical) political economy in that it adhered to "the absolute value of precious metals and possession of them as the sole reality of wealth" (Marx, 1975, p. 213).Who ended mercantilism? ›
End of Mercantilism
Mercantilism fell out of favour as an economic theory beginning in the late 18th century. The repeal of the Corn Laws and the Navigation Acts in the mid-19th century permanently ended mercantilist practices in the British Empire.
General FAQs on Mercantilism
In turn, mercantilists use trade barriers such as tariffs, quotas, and regulations to prevent imports and ensure a positive trade balance. Why is mercantilism bad? Mercantilism reduces trade and cooperation between countries, which makes goods more expensive and difficult to procure.
Who is a mercantile? ›
1. : the agency of a factor who in the customary course of his business has authority binding on his principal to buy or to sell goods, to consign goods for sale, or to raise money by pledging goods. : an agency that collects credit information about businesses and businessmen and furnishes it to subscribers.Does the word mercantile mean? ›
of or relating to merchants or trade; commercial. engaged in trade or commerce: a mercantile nation. Economics.Which best explains mercantilism? ›
Mercantilism was a form of economic nationalism that sought to increase the prosperity and power of a nation through restrictive trade practices. Its goal was to increase the supply of a state's gold and silver with exports rather than to deplete it through imports. It also sought to support domestic employment.Who did mercantilism benefit and why? ›
Under mercantilism, colonies were important because they produced raw materials for the mother country, goods that the country would have to import otherwise (things like grain, sugar, or tobacco). The colonies also gave the mother country an outlet for exports, which increased jobs and industrial development at home.What are the five points of mercantilism? ›
- Accumulation of wealth and power.
- Belief about wealth being static. It was the core belief of mercantilism.
- Establishing monopolies on certain items of trade.
- Trade barriers.
- Positive balance of trade.
Mercantilism led to the creation of monopolistic trading companies, such as the East India Company and the French East India Company. Restrictions on where finished goods could be purchased led in many cases to burdensome high prices for those goods.Is mercantilism a capitalism? ›
Capitalism is an economic system in which private owners control the country's trade and industry, rather than by the state, while mercantilism is an economic theory and practice that advocates governmental regulation of the nation's economy to generate wealth and augment national power.What is mercantilism synonym? ›
capitalism. nouneconomic system of private ownership. commercialism. competition.What is mercantilism an example of? ›
Mercantilist policies focus on the accumulation of wealth and resources while maintaining a positive trade balance with other countries. By maximizing exports and minimizing imports, mercantilism is also viewed as a form of economic protectionism.When was mercantilism first used? ›
Mercantilism arose in France in the early 16th century soon after the monarchy had become the dominant force in French politics.
What is mercantilism main goal? ›
The mercantilist goal was to maximize a nation's export surplus—the balance of trade, which was equated with the future prosperity and power of the realm—and the means were cheap production inputs, that is, cheap raw materials (for which colonies proved useful) and cheap, and therefore poor, labor at home.Why is mercantile law? ›
Mercantile Law is a repository of all the Laws included in a company to handle or look after its commercial activities. It is a generalized term for the entire legal body. All the other acts like the company act, limitations act, Indian contract act, etc. are subsidiaries of the Mercantile Law.What type of system is mercantilism? ›
At the time, mercantilism was the operative economic system in Europe. It is the name given to the economic policy that developed in Europe that equated wealth with power. Governments attempted to export more than they imported, making their balance of trade more favorable, thus increasing their wealth.