History of economic thought
Presentation 4
Petr Wawrosz
Mercantilism
Basic characteristic
• The concept of “mercantilism” designates either a system of economic
policy or an epoch in the development of economic doctrine during the
seventeenth and eighteenth centuries, or both of them, before the
publication of Adam Smith’s path-breaking Wealth of Nations (1776).
• Mercantilism' is the name given by late nineteenth century historians to
the politico-economic system of the absolute state from approximately
the sixteenth to the eighteenth centuries.
• The first mercantilist writers, who are explicitly named as such, we find
two Englishmen, Thomas Mun and Edward Misselden in the 1620s, while
James Steuart’s Principles of Political Oeconomy (1767) is conventionally
perceived as perhaps the last major “mercantilist” work.
• Most of the mercantilist writers during the seventeenth and eighteenth
centuries were businessmen, merchants and government officials. They
wrote mainly about practical matters concerning trade, shipping, the
economic effects of tariffs and protection of industries, monetary issues
(the devaluation of coins), interest rates, and so on.
Basic characteristic
• The concept was utilized in order to describe an economic
policy regime characterized by direct state intervention,
intended to protect domestic merchants and
manufacturers.
• The main creator of “the mercantile system” was Adam
Smith. According to Smith, the core of the mercantile
system – “the commercial system” as he called it –
consisted of the popular folly of confusing wealth with
money.
• Even though mercantilist writers mainly were practically
oriented, they nevertheless proposed an analytic principle;
namely, that a country must export more than it imported,
which would lead to net inflow of bullion. This goal would
be achieved through an active policy and thus make the
state – or commonwealth – richer.
Basic characteristic
• 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.
• The states that followed a policy of
mercantilism tended to see trade, colonialism
and conquest as the primary ways of
increasing wealth.
Basic characteristic
• How to obtain new money at that time?
- by mining or by foreign trade.
• The shortage of money would curtail economic
development. This was a major problem for
England in particular, as it had no silver or gold
mines of its own. The only solution to this
dilemma was to import money from abroad.
• Money as a capital to finance a greater volume of
trade?
• Could the circulation of goods expand so fast that
it would lead to a shortage of money?
Historical background
• 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 wellbeing of humans in the short term).
• The decline of feudalism was influenced by changes in
technology.
Historical background
• In the area of state absolutism, grants of special privilege
included the creation by grant or sale of privileged
'monopolies', i.e. the exclusive right granted by the Crown
to produce or sell a given product or trade in a certain area.
These 'patents of monopoly' were either sold or granted to
allies of the Crown, or to those groups of merchants who
would assist the king in the collection of taxes.
• The grants were either for trade in a certain region, such as
the various East India companies, which acquired the
monopoly right in each country to trade with the Far East,
or were internal - such as the grant of a monopoly to one
person to manufacture playing cards in England.
Practical examples of
mercantilistic policy
• In England agriculture was sheltered from foreign
competition through the sliding scale tariff
provided by the Corn Laws (which in years of
good harvests virtually excluded grain imports,
though when home supplies were low and prices
high, imported grain could then bear the cost of
the lowered protective duties).
• In the France of Colbert, manufacturing
establishments were launched and subsidized by
government.
Thomas Mun
• 1571–1641 (he lives in the period of 30 years war, 16181648)
• The main architect of the mercantile system of economic
thinking.
• His main published writings appear in two short treatises, A
Discourse of Trade from England unto the East Indies (1621)
and perhaps the more important England’s Treasure by
Forraign Trade (1664).
• The idea of a positive balance of trade in order to
propagate a protective trade policy in general, including
duties on imports, tariffs, bounties, and so on.
• Support export, restrict import.
William Petty (1623-1687)
• Petty had many characteristics of a mercantilist, however his work is more
systematic than most. His attempts to quantify economic and
demographic characteristics and to apply empirical methods helped lay
the foundation for Classical Economics.
• statistician” measurement, estimation and averages: Engaged in the
analysis of masses of quantitative data. Derived estimates from
fragmentary and dubious data - On basis of a 30% increase in exports
from Ireland, Petty estimates the population of Ireland increased 30%.
• Considered induced effects of additional spending, early forerunner of
“multiplier effect”.
• Theory of value is “Land and Labour”: “labour is the father and active
principle of wealth as lands are the mother.”
• “Doctrine of the Par,” common yardstick of value is average man’s daily
requirement of food. Value of land can be converted into the value of
labour, anticipates “opportunity cost”.
Mercantilism in France
• High and crippling regulation: total crippling of economic and
industrial growth in France.
• Enforcing of 'quality' standards on production and trade: That
effectively hobbled or even prevented the innovation .
• Jean-Baptiste Colbert (1619-83): engaged in a virtual orgy of grants
of monopoly, subsidies of luxury, and cartelizing privilege, and built
up a mighty system of central bureaucracy, of officials known as
intendants, to enforce the network of controls and regulations. He
also created a formidable system of inspections, marks and
measurements to be able to identify all those straying from the
detailed list of state regulations. The intendants employed a
network of spies and informers to ferret out all violations of the
cartel restrictions and regulations. In the classic mode of spies
everywhere, they also spied on each other, including the intendants
themselves. Penalties for violations ranged from confiscation and
destruction of the 'inferior' production, to heavy fines, public
mockery, and deprivation of one's licence to stay in business.
Todays view
• Mercantilism as “a rent-seeking society.
• They looked at international trade as at zero-sum
game: what one gained in trade someone else lost.
• Mercantilism expressed the economic interest of the
state and regarded economic wealth as a rational
means to achieve political power.
• The active role of the state in economic modernization
and growth.
• Fear of goods and love of money: an expression of the
transition from a barter economy to a money (gold and
silver) economy, which took place during this period.
Economic theory and economic policy
• The British Navigation Act of 1651, the
establishment of national standards of weights
and measurements, a national monetary system.
• Support of manufactories that increased division
of labor.
• Net inflow of money was a barometer that
signaled whether a nation won or lost in its trade
with other countries. Thus, a net inflow of money
could be a means of procuring wealth; but wealth
itself was always the result of production and
consumption.
A problem of active trade balance
(balance of payment)
• Inflow of money results in domestic prices
rising, relative prices in foreign economy fall,
since prices are relatively lower (to domestic
buyers) in foreign countries, domestic buyers
purchase more (increase imports).
• Foreign buyers are faced with higher relative
prices in our economy so buy less (decrease
exports) balance of trade automatically
reverses.