Mercantilism

1. Introduction to Mercantilism

2. Historical Background of Mercantilism

3. Main Points of Mercantilism

4. Early Writers

5. Mercantilist Thinkers

6. Conclusion

1. Introduction to Mercantilism

the theory that a country’s power depended mainly on its wealth to build strong navies and purchase vital trade goods.

What is Mercantilism?

What is Mercantilism?

Mercantilism had no systematic, comprehensive, consistent treatise, no leader, common method, or theory.

Each “mercantilist" sought advantage for a specific, trade, merchant, joint-stock company or social group.

"Protectionism" is often seen as a primary characteristic of Mercantilism.

What is Mercantilism? The primary objective of Mercantilism was

to increase the power of the nation state. One of the important aspects of national

power or strength was wealth that was equated with specie.

The states that followed a policy of mercantilism tended to see trade, colonialism and conquest as the primary ways of increasing wealth.

Mercantilism

When?

16th – 18th C

In Poland: 17th C

Where?

Western Europe, particularly England and France

Generally, Mercantilism is associated with the rise of the “Nation state.”

Feudal institutions were weakened by the increasing use of money and a greater reliance on exchange within the economy.

The Protestant Reformation weakened the role of the church and consequently the civil role of the state was expanded

There was a rise of Humanism (the concern for well-being of humans in the short term).

2. Historical Background of Mercantilism

“enclosure movement” and the commercialization of agriculture Increasing use of money in the economy reduced the role of

barter and reciprocity, people wanted to sell or work for money nailed horse shoe, harness, stirrup, horse collar, heavy plough three-field system [1 field winter crop, 1 field spring crop, third

lying fallow] extended area peasant could farm by 1/8, 50% increase in output

rise of mechanical power [water, wind] used in textile and mining urbanization

The decline of feudalism was influenced by changes in technology

rise of markets and fairs gunpowder improvements in navigation, shipping,

transport moveable type, (standardization, mass

production and marketing of books in a variety of languages)

mechanical clocks, mechanisms, instruments, Increased skills of craftsmen who made machines

The Decline of Feudalism and the Plague

The "Black Death" of 1346-61 restricted trade reduction in population Increased production of wool; need

industry and commerce to process and sell wool and textiles.

strengthening of guilds leads to an emphasis on trade

Reduction in Population

Population of England fell by about 1.5 million (out of a population of 3.5 to 5 million in 1346).

Result was more money per person but also more animals, land and goods per person, prices fell.

Labour shortage pushed wages and earnings up.

Less people with increased agricultural production (some problems with harvests and animals dying, but on average diets improved.

Labour became more mobile, masters on feudal estates had to "hire" labour. This led to the rise of "free" labour. If you couldn't hire workers, then you rent the land to others. Small farms with limited labour shifted to pasture and sheep rather than tilling the soil.

Medieval fiction to circumvent anti-usury laws

Lends at no interest

Insures A in case B fails to repay

Pays C interest rate for insurance

Pays

A-C c

osts

• Effectively, a “different set of books” to disguise breaching the laws against usury

B fails to repay A

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Medieval Breakdown Feudal system imposed many imposts upon

merchants/tradesmen/moneylenders; but social change went against feudalism: Growth of specialist manufactures in towns: the guilds Growth of specialist traders between nations: the

Mercantilists Revolt against religious strictures against

merchants/lending, church hypocrisy Religious revolts: beginnings of Protestantism bound up

with growth of merchants/financiers

A new ideology/analysis struggled for dominance: Mercantilism

1500s Rise of the nation-state John Calvin (1509-1564): Prosperity is

Piety Nicolo Machiavelli (1469-1527) and “The

Prince” Separates the church and the state Denies mankind’s desire for freedom Charity has no role for the individual

1500s and 1600s Elizabethan Poor Law of 1601 Invention of printing with movable type gave rise to

economic literature written by lay people Thomas Wilson (1525-81) wrote Discourse on Usury

(1572) Charles Dumoulin (Latinized as Molinaeus) wrote

Treatise on Contracts and Usury (1546) Denied that interest was forbidden by divine law Suggested public regulation of lending and interest

Influx of gold and silver from the New World

Main Points of Mercantilism

Economics as applied statecraft Promotion of National wealth and power Importance of trade surpluses Trade surplus leads to a net gold inflow, and

thereby to greater national wealth and power Analogy between nations and households Encourage domestic production and exports,

discourage imports

3. Main Points of Mercantilism Economics as statecraft not analysis Tendency to see gold and “treasure” as

constituting national wealth Emphasis on balance of trade surpluses Emphasis on maximizing productivity and

output Trade as a zero sum game Role of government in encouraging domestic

manufacturing and exports while minimizing imports

Link between money supply and prices

Two Ways to Increase a Nations Wealth

obtain as much gold and silver as possible

establish a favorable balance of trade, in which it sold more goods than in bought

Mercantilism Explained

Mercantilism = unfair or unbalanced trade

colonies existed for the benefit of the Mother Country

Source of Raw materials = cheap shipped to M. C. to be turned into finished

goods Finished good shipped to Colony =

expensive profit goes to M. C. Pass laws forbidding colonies from producing

their own goods

Triangular Trade Europeans transported manufactured

goods to the west coast of Africa

Triangular Trade

Traders then exchanged these goods for captured Africans who were then sold in the Americas

Triangular Trade

Merchants then bought sugar, coffee, and tobacco in the West Indies and sailed back to Europe to sell these products.

Long Term Results

global trade routes shifted over time the old silk routes declined West Asia and the Islamic world were displaced as the

centralized location of global trade the Atlantic and Pacific sea routes become the new

focus of global trade

Theories of International Trade It measures the wealth of nation by the

size of its accumulated treasures i. e. gold & silver.

Focus is international trade, rather than internal commerce Nationalism essential: promote nation by

gain from trade Trade imbalance the object: export more

than import

Theories of International Trade

Wealth (Gold) can be accumulated by encouraging exports and discouraging imports.

This theory aims at creating trade surplus. Limitations:

Accumulation of wealth takes place at the cost of another trading partner; a win-lose game & a zero-sum game for global wealth (international trade).

Supported only in short run. Overlooks other resources such as its natural

resources, manpower & its skill levels, capital, etc. Used by colonial powers as a means of exploitation

and not development.

Recap Feudal ideology significantly anti-

capitalist, anti-financier. But Merchants essential

“Exotic” commodities from other lands Trade between different fiefs/kingdoms

Finance essential Merchant activity Wars

Merchants tolerated (but controlled, taxed)

4. Early Writers

Niccolo’ Machiavelli (1469-1527) Jean Bodin (1530-1596) Antonio Serra (1580-1650)

Niccolo’ Machiavelli (1469-1527)

Author of The Prince, 1512 Machiavelli's work is associated with the rise of

nation state Morality was necessary as guide to private actions Politics should be free from ethical or theological

influence general postulate about human nature, self-

interest empirical bent [Bacon sees Machiavelli as

predecessor]

Jean Bodin (1530-1596)

Contributions to “quantity theory of money”

Accepted mercantilist position on balance of trade, but saw inflow of specie

believed in supreme power of the state and natural law

Antonio Serra (1580-1650)

Serra was one of the first writers who constructed a a systematic development of “Mercantilism.” In1613 he published, A Brief Treatise on the Causes which make Gold and SIlver abound in Kingdoms where there are no Mines

Agriculture and trade in manufactured goods most important source of wealth to a nation.

5. Mercantilist Thinkers

Josiah Child Bernard Mandeville David Hume Von Hornick Thomas Mun

Josiah Child Josiah Child was a seventeenth-century

mercantilist. Essentially a defense contractor, Child wrote

Circumstance on the Discourse on Trace, which he published anonymously.

His, while not iron-clad, suggested that Britain should lower interest rates since Holland had done so.

His self-interested recommendations did not have much economic foundation.

Jean-Baptiste Colbert Jean-Baptiste Colbert was the French

minister of finance from 1661 until 1683. Mercantilist considerations led Colbert to

advocate war as an instrument of economic policy.

He regulated the minute details of industry. He wanted to increase work, exports, and

child labor. This extreme government control still lives in

France today.

Bernard Mandeville Bernard Mandeville, a social satirist,

wrote the The Fable of the Bees. This satire preached the themes of hard

work and the beneficial social consequences of private self-interest behaviour.

It linked avaricious behaviour to increased trade.

David Hume David Hume questioned

mercantilist assumptions in his essays.

He denied that money and gold were equivalent to wealth. Instead, they had merely instrumental value.

David Hume

He thought that accumulating precious metals would result in higher prices.

Hume believed that imports as well as exports were beneficial.

He suggested that trade was not equivalent to warfare, since both to the parties to the transaction benefit.

Von Hornick Von Hornick: Austria Over All, If Only She

Will (1684) Some Mercantilist Programs:

- Full use of all land and natural resources for domestic industry - Large working population - Finish raw materials at home, as finished goods have a higher value- Discouragement of imports, and no imports where domestic supply is available- Imports be confined to raw materials to be finished at home

Von Hornick

- Prohibition of all bullion exports (bullionist position)

- Necessary imports be obtained in exchange for domestic goods, not gold or silver

- Sell surplus manufactures to foreigners, if possible for gold and silver

Hornick is very influential in Austria

Thomas Mun

Thomas Mun: England’s Treasure by Foreign Trade (1664)

Mercantilist Programs- Importance of trade and the social position of the merchant-Bring all unused land into production- Fully utilize natural resources including fisheries- Reduce consumption of imports, particularly luxuries- Export goods with inelastic demand—can charge higher prices

Thomas Mun

- Customs duties on imports to be consumed domestically-Export in own ships -Encourage distant trade- make England a trans-shipment point- Export of bullion permitted, if for purposes of trade (non-bullionist position)- “Make the most we can of our own”

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Mercantilism: Conclusion

Foreign trade as the source of surplus No analysis of production In practice

Added to feudal imposts on commerce Created government-sanctioned monopolies ostensibly to increase national wealth; but often in practice enriched favoured individuals

Point of criticism and departure for later Physiocrats & Classical Economists, with emphasis upon “laisser-faire, laisser-passer”