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Chapter Outline

4Mercantilism

PART II EARLY ECONOMIC SCHOOLS OF THOUGHT

Mercantilism

Factors that led to the spread of

Mercantilism

Theory and basic thoughts

Policy

Major beliefs

Criticism

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Preclassical theories

The major two Preclassical theories were Mercantilismand Physiocracy

• Mercantilism was applied from the 15th to the 18th century throughout Europe, and mainly in England and France

• Physiocracy was only applied in France in the late 18th

century

Thursday, October 15, 2015Chapter 2 - Mercantilism & Physiocracy2

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Mercantilism: the merchants’ economic system

Mercantilist ideas were the dominant economic ideology of all of Europe in the early modern period, and most states embraced it to a certain degree.

Mercantilism was centered in England (Thomas Mun) and France (Jean-Baptiste Colbert), and it was in these states that mercantilist policies were most often enacted.

It is the economic doctrine in which government control of foreign trade is of paramount

importance.

Mercantilism supported the absolutism of the state, and thus fueled European expansion and imperialism.


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I. Time framing Mercantilism

Factors that led to the spread of Mercantilism:


• The European economy was in a state of transition: Isolated feudal estates were being replaced by centralized nation-estates.

• Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade.

• The introduction of double-entry bookkeeping and modernaccounting made extremely clear the inflow and outflow of trade, in the balance of trade.

• The discovery of America: new markets and new mines propelled foreign trade to previously inconceivable heights.

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• All these factors led to an increase in the volume of merchant activity itself.

• Mercantilism focused on how this trade could best help the states.


The appearance of strong states and new urban centers

The discovery of America

The introduction of modern accounting

The technological changes in shipping

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2. The Rise of Mercantilism

• Mercantilism started in England during the Elizabethan Era (1558–1603)

• Mercantilism was economic warfare and was well suited to an era of military warfare.

• Since the level of world trade was viewed as fixed, it followed that the only way to increase a nation's trade was to take it from another.


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Evolution of the Mercantilist system

• England developed a merchant fleet to challenge the Spanish iron grip on trade and expand the growth of bullion at home.

• Queen Elizabeth promoted the Trade and Navigation Acts and issued orders for the protection and promotion of English shipping.


"We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and

enrich them."Statement on national balance of trade in 1549

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3. Theory and basic thoughts


• Mercantilists believed that a nation's wealth came primarily from the accumulation of gold and silver.

• Nations without mines could obtain gold and silver only by selling more goods than they bought from abroad.

• Leaders of those nations should intervene extensively in the market, imposing tariffs to restrict importation of foreign goods, and granting subsidies to improve exportation of domestic goods.

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• High tariffs, especially on imported manufactured goods;

• Monopolizing markets;

• Exclusive trade with colonies;

• Forbidding trade to be carried in foreign ships;

• Export subsidies;

• Banning all export of gold and silver;

• Limiting wages;

• Maximizing the use of domestic resources;

3. Theory and basic thoughts

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Major beliefs of mercantilism


a. Gold and silver is the most desirable form of wealth

• A nation's wealth came primarily from the accumulation of gold and silver. Nations without mines could obtain gold and silver only by selling more goods than they bought from abroad.

• All export of gold and silver should be prohibited

• Indispensable foreign goods are to be obtained in exchange for other domestic goods instead of gold and silver.

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b. Nationalism

• For the mercantilists, one country gains only at the expense of another country.

•Mercantilism fueled imperialism, as many nations build new colonies that would be sources of gold (as in Mexico) or sugar (as in the West Indies), as well as becoming exclusive markets.

• Mercantilism was economic warfare:

• Many wars waged at that time can be directly linked to mercantilist theories.

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c. International trade restrictions

• Duty free importation of raw materials that could not be produced at home

• Protection for manufactured goods and raw materials that could be produced domestically

• Export restrictions on raw materials

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Mercantilism helped create trade patterns such as the triangular trade in the North Atlantic, in which raw materials were imported to the metropolis and

then processed and redistributed to other colonies.


Triangular Trade Route

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d. Colonization and monopolization of colonial trade

Example of this policy: The English Navigation Acts of 1651 and 1660:

- Some colonial products had to be sold only to England (sugar, tobacco, cotton)

- Foreign imports into the colonies were restricted. - Colonial manufacturing was curbed or outlawed.

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e. Opposition to internal fees, taxes, and other restrictions on the movement of goods

Tolls and taxes could throttle business enterprise and drive up the price of the exports of a country.

However, mercantilists did not oppose monopoly grants and exclusive trading privileges.

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f. Strong central government

A Strong central government was needed to:

- Grant privileges to companies engaged in foreign trade.

- Promote agriculture, mining, and industry with subsidies and protect them from imports via tariffs.

- Set standards of quality in production to maintain reputation in foreign markets.

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g. Importance of a large, hard-working population

The mercantilists saw a large population living at the margins of subsistence as a form of wealth.

Why? - for bigger markets and armies - to keep wages low

Why keep wages low? - to keep low export prices - to reduce idleness

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Video: mercantilism

• In short, what are the basic components of mercantilism?

• How does mother country increase its riches in mercantilism?

• How did the shifting of the trade routes affect the Islamic world?


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Criticism (by Smith, Hume and Ricardo)


As a country accumulates gold, the price of gold will drop in this country, and it will no longer be cost-effective to import goods from higher-price countries. Thus, the balance of trade would reverse itself.

• Accumulating more gold ensures a constant positive balance of trade

• Nationalism

• International trade restrictions

• A large, hard-working population

Smith saw the mercantile system as an enormous conspiracy by manufacturers and merchants against consumers.

The inevitable results of restrictions and price ceilings were black markets.

The economy is not a zero-sum game, in which any gain by one party required a loss by another. (Comparative advantage of Ricardo)

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5. The positive impact of Mercantilism


The Navigation Acts greatly expanded the British merchant fleet, and played a central role in turning Britain into a naval and economic superpower

Some economists still feel that protecting infant industries, while causing short-term harm, can be beneficial in the long term.

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6. The end of Mercantilism


The publication of The Wealth of Nations in 1776 that attacked the Mercantile system had a profound impact on the end of the mercantilist era and the later adoption of free-market policy.

By 1860, England removed the last leftovers of the mercantile era: industrial regulations, monopolies and tariffs were withdrawn.

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