THE MERCANTILIST SCHOOL
Mercantilist school (1500-1776)
 between middle age and period of laissez-faire triumph
 main goal- increase nation’s wealth
 (how?) impose government regulation concerning all of nation’s
commercial interests.
 (why?) to achieve “favourable” balance of trade that’d bring gold and
silver into country.
Historical Background
 Start from 1500,
 Self-sufficiency of feudal community gave ways to new system of
merchant capitalism.
 Cities became increasingly important.
 Trade flourished both within each country & between country -- use of
money expanded.
 Discovery of gold in Western Hemisphere facilitate growth of commerce
and stimulate theorizing about precious metals.
 Sphere of commerce extended due to great geographical discoveries (in
line with development of navigation)
 Merchant capitalist became key figures in business world.
 National states were rising, and the most powerful nation were acquiring
colonies and influence.
 Economic rivalries between nations intensified.
 A body of doctrine(which became mercantilist school) evolved that;
 superseded feudal concepts
 promoted nationalism
 gave new dignity and importance to the merchant
 justified a policy of economic and military expansion
1. Major Tenets
There are 7 main principles of mercantilist school;
I) Gold & silver the most desirable form of wealth
 Wealth of nation = amount of gold & silver possessed
 Early mercantilist believed these precious metals are the only type of
wealth worth pursuing.
 Mercantilists valued G&S as way to achieve power & riches.
 Surplus of exports from a country was necessary to generate payment in
hard money.
 Even at war, nations would export goods to enemy as long as paid in gold.
II) Nationalism
 Only powerful nation could capture & hold colonies, dominate trade
routes, n war against rival & compete successfully in international trade.
 Mercantilists believed in “static” concept of economic life, that
 There were fixed quantity of economic resources in the world.
 One country could increase resources only at expense of another.
 Mercantilism nationalism quite naturally led to militarism.
 Strong navies & merchant fleet were an absolute requirement.
 Fisheries as “nurseries for seaman”, that is, because they were training
grounds for naval personnel, the mercantilists imposed “political Lent”
on England in 1549.
 People were forbidden to eat meat on certain days of the week to
ensure a domestic market for fish & hence a derived demand for
sailors.
III) Export > import (surplus)
 Mercantilists try to promote X & restrict M to enhance country’s wealth &
power.
 If X>M, surplus will exist & more G&S can be accumulated
 M only allowed for raw materials that could be produced domestically.
 To protect local manufactured goods, X of local raw materials were
prohibited.
 It helped keep the price of finished exports low.
 Example: a law passed in 1565-1566 during Queen Elizabeth’s reign
forbade X of live sheep.
 Penalties of law violation: confiscation of property, a year in prison &
cutting off left hand.
 Death penalty prescribed for second offense.
IV) Colonization & monopolization of colonial trade
 Merchant capitalists favoured colonization & wanted to keep colonies
eternally dependant & subservient to mother country.
 Any benefits that spilled over to colonies from home country’s growth &
military power were an accidental byproduct of policy of exploitation.
 According to The English Navigation Act (TENA)-1651&1660;
 Goods imported into GB & the colonies had to move in English or
colonial ships or in ships of the country where the goods originated.
 Certain colonial products had to be sold only to England.
 Foreign import into the colonies were restricted or prohibited.
 Colonial manufacturing was curbed so that dependant territories would
remain suppliers of low cost raw materials & importers of English
manufactured goods.
V) Opposition to internal tolls, taxes & other restriction on the movement
of goods
 Tolls & taxes could throttle business enterprise & drive up the price of a
country’s X.
 Mercantilists, on the other hand, did not favor free internal trade in the
sense of allowing people to engage in any trade that they wished.
 On the contrary, mercantilists prefer monopoly grants & exclusive trading
privilege whenever they could acquire them.
VI) Strong central government
 Generally, a strong central government was needed to promote
mercantilists goals discussed previously;
 Nationalism
 Protectionism
 Colonialism
 International trade unhampered by tolls & excessive taxes
 Specifically, a strong central government was needed to;
 Grant monopoly privileges to company engaged in foreign trade.
 Restrict free entry into business at home to limit competition.
 Support local economic sector (agriculture, mining, industry) by giving
subsidies & protect all the sectors from imports via tariffs.
 Closely regulate the methods of production & the quality of goods (so
that a country would not gain bad reputation for its product in foreign
markets, thereby hampering exports).
 To ensure uniform national regulation.
VII) Importance of large, hard working population
 Importance of large population:
 Provide soldiers & sailors ready to fight for the glory & the wealth of
nation.
 Keep labour supply high & wages therefore low.
 The low wages would:
 Enable lower price on X, thereby increasing the inflow of gold.
 Reduce idleness & promote greater participation in labour force.
 Idleness & begging by able-bodied people were dealt with mercilessly, and
thievery was severely punished.
 Example, during King Henry VIII reign in GB (1509-1547), 7200
thieves were hanged.
2. Criticism of Mercantilism
 Protectionism
Critics argued that protectionism hindered economic growth and efficiency.
 Colonialism
Colonialism was criticized for its exploitation of colonies and its negative
impact on economic development.
 Zero-sum game
The idea of a zero-sum game was challenged by later economists, who
argued for the possibility of mutually beneficial trade.
 Inefficiency
Mercantilist policies often led to inefficiencies and hindered economic
growth.
3. Whom did the mercantilist school benefit or seek to benefit?
 Generally, mercantilists benefited the merchant capitalists, the kings &
government officials.
 Specifically, mercantilists benefited those who were most powerful and had
the most favored monopolies & privileges
4. How was the mercantilist school valid, useful or correct in its time?
 To illustrate, old & silver were important during that time because:
 The rapid growth of commerce required more money in circulation &
banking was insufficiently develop to produce it.
 Wars were fought on a pay-as-you-go basis, & bullion provided a
reserve that could be used to hire & maintain soldiers, build ships, buy
allies & bribe enemies.
 Some mercantilist were also aware the increases in the amount of gold
& silver in circulation reduced interest rate and promoted business.
 Before the development of international finance and multilateral trade ,
bullion was of major significance in making international payment.
 British trade with the Baltic region & the East Indies required
international liquidity by way of precious metals.
 GB produced little that could have been exported to those areas, and
latter would not accept paper sterling because of the underdeveloped
international money market.
 The British colonies were therefore tapped to yield gold & silver that
could be used in payment for Baltic & East Indian wares.
5. Which tenets of the mercantilist school became lasting contributions?
 Cannot be used anymore:
 Wealth of nation = amount of G&S possessed
Most of them failed to grasp that a country could become richer not only
by accumulating gold & silver but also by discovering a greater quantity
of natural resources, producing more capital goods & using labour more
efficiently.
 Static concept of economy
They also did not comprehend that all nations can enrich themselves
simultaneously through specialization & trade. (without have to
impoverish its neighbours).
 Lasting contribution:
 The importance of international trade
Develop the economic & accounting notion known today as “balance of
payment”.
 Promoting nationalism
 Some developing nations still promote nationalism as a way of
overcoming tribalism & local loyalties that impede economic
development.
 They also frequently offer monopoly grants to encourage new
investments & erect trade barriers to protect infant domestic
industries.
 For example: China’s strategy for economic growth in the
2000s includes maintaining large trade surplus by keeping
exports cheap & import expensive.
 Indirectly// Permanently influenced attitudes toward the merchant
 The medieval aristocracy had classed people engaged in business
as second class citizen.
 The mercantilists gave respectability and important to merchants
by arguing that, when their activities were properly channel by
government, merchant enriched not only themselves but also the
king & the kingdom.
 The landed aristocrats eventually began to participate in business
ventures without losing their status & dignity.
 In short mercantilist ideas are still alive & well.
 It is important to realize, however that ideas & policies reflect only selected
aspects of the overall doctrine of mercantilism.
 Furthermore, nations are applying these ideas today in different
circumstances, for different reason, and in the context of social policies
different from those of the mercantilist era.
Prominent Economists
Individuals who expressed mercantilist ideas;
 Thomas Mun (1571-1541)
 Thomas Mun was one of the directors of the British East India
Company, one of the largest companies engaged in colonial trade.
 He involved in a controversy over the company’s policy of exporting
gold & silver in exchange for spices. (loss of precious metals was
hurting the British economy).
 Mun published A Discourse of Trade from England unto the East
Indies (1621) to defend his company.
 He promoted multilateral rather than bilateral trade.
 He argued that as long as total exports exceeded total imports, the drain
of the species from a country in any one trade area did not matter.
 He claimed that the goods imported by the East India Company were
generally goods needed by the British exporters.
 Some imports were improved by British firms and re-exported,
thus leading to a net influx of precious metal into Britain.
 His second book England’s Treasure by Forraign Trade (1664)
establish him as an important mercantilist thinker.
 In this book, he adopts the viewpoint of the nation as a whole by
looking at trade in general, rather than trade by the East India Company.
 He makes the case that foreign trades enriches a nation whenever it
leads to a trade surplus (exports > imports).
 He also examines the factors that cause a country to run trade surpluses.
 Finally, he advances a set of proposals that British leaders could
implement if they wished to improve the national trade position.
 Among other suggestions in England’s Treasure by Forraign Trade
(1664):
 Use wasteland for agricultural activities to reduce imported foods
& products.
 Use English ship for exports to gain insurance & freight charges.
 Increase trade with other country because trade at home could not
enrich a country (the gain of one subject is the loss of another).
 Include invisible items in overall balance of payment (For example:
ship lost at sea, international payment of bribes & etc.)
 Jean Baptiste Colbert (1619-1683)
 Represents the heart & soul of mercantilism, which is called
Colbertism in France.
 He was the French minister of finance from 1661 to 1683.
 Among his ideas:
 The strength of the states depends on it finances.
 its finances rest on its collection of taxes, and tax revenue in
turn are greatest if money is abundant.
 Favored expanded exports, reduced imports and laws preventing
the outflow of bullion from the country.
 Four professions are useful for great purposes
 agriculture, trade, war on land & from the sea)
 Colonies were desirable as markets for French goods & as source of
raw materials.
 a big navy & merchant marine were essential
 One nation could become richer only at the expense of another.
 the volume of trade, the number of ship engaged in commerce and the
production of manufactured goods were all relatively fixed.
 Try to facilitate internal trade.
 tried to give France a uniform system of weights & measures but
was rebuffed by feudal provincialism & tradition & the vested
interest of the church & the nobility.
 He unsuccessfully opposed tolls on the movement of goods,
internal customs barriers & excessive local taxes.
 By enforcing the feudal system of compulsory labor of peasants on
the roads (called the corvee), he made himself thoroughly hated;
but 15,000 miles of roads were surfaced.
 Support government regulation on business.
 Considered businessman a shortsighted, selfish, grasping lot who
sacrificed the national interests to their own profit.
 The quality of goods & methods of production were thus closely
regulated to attain uniformity, protect the consumer & earn a good
name for French goods in foreign markets.
 Despite his contempt for businessman, Colbert had laws passed
that permitted aristocrats to participate in commerce without losing
their status & privileges
 Favored a large, hard -working & poorly paid population.
 He also enforced child labor (start working at the age of 6 or
parents must pay a penalty per child).
 Regarded monks, nuns, lawyer & officials as unproductive idlers and
tried to reduce their number.
 Attempts were made to curb religious feeling & limit religious
institutions
 Canceled seventeen holy days.
 However, it remained for the French Revolution of 1789 to abolish
feudal rights, internal tolls & tariffs, special privileges & local power.
A mercantilist who developed some concepts that foreshadowed classical
economics;
 Sir William Petty (1623-1687)
 Before he was 16, Petty had mastered Latin, Greek, French,
mathematics, astronomy and navigation.The son of a poor clothier, he
achieved great wealth, fame and honor.
 This is an example of the upward mobility that was slowly
becoming possible in seventeenth century Britain
 During his life, Petty was:
 a sailor
 a physician
 a professor of anatomy
 an inventor
 a surveyor
 a member of Parliament
 a promoter of iron & copper works
 an experimental shipbuilder
 an author
 a statistician
 a large landowner.
 Petty’s economic views were set forth in several important works:
 A Treatise of Taxes and Contributions (1662)
 Verbum Sapienti (1664)
 The Political Anatomy of Ireland (written in1672, published in
1691)
 Political Arithmetick (written from 1672 to1676, published in 1690)
 Contributions:
I) Petty’s mercantilist views
 Favoured free trade.
 partly because he felt it would circumvent the widespread
smuggling that was occurring.
 Wanted imported goods taxed except for the import of raw materials
(lightly taxed)
 Favour a large population.
 Based his position on the concept of increasing return to
government, which would reduce unit costs of governing a larger
population.
 Advocate public service employment.
 Those out of work should be employed by the state working on
roads, dredging rivers, planting trees, building bridges, mining
minerals and manufacturing various goods.
 However, this employment should be “without expense of foreign
commodities”.
 It doesn’t matter whether the employment given is useless like
building a new pyramid in other place as long as it can solve the
problem of unemployment.
 Against hanging thieves.
 Why should not insolvent Thieves be rather punished with slavery
than death? So as being slaves they may be forced to as much
labour, and as cheap fare, as nature will endure, and thereby
become as two men added to the Commonwealth, and not as one
taken away from it; for if England be under-peopled (suppose by
half) I say that next to the bringing in of as many more as now are,
is making these that are, to do ,double the work which now they do;
that is, to make some slaves. -Petty, Taxes and Contributions 1:69.
II) Petty as forerunner of classical economics
 Pioneer statistician
 “Instead of using only comparative and superlative Words, and
intellectual Arguments, I have taken the course…. to express my
self in Terms of Number, Weight, or Measure; to use only
Arguments of Sense, and to consider only such Causes, as have
visible Foundations in Nature,” leaving “those that depend on the
mutable minds, opinions, appetites and passions of particular men
to the consideration of others.” -Petty, “Political Arithmetic” in
Economic Writtings 1:244
 The notion of velocity
 In “Verbum Sapienti”, Petty recognized that the velocity of
circulation – the rate at which money changes hands – can be as
important as the quantity of money.
 If payments are made weekly rather than quarterly, less money will
do the same work.
 Division of labour
 “clothe must be cheaper when one cards another spins, and another
weaves…than when all the operations above were clumsily
performed by the same hand.”
 Rent as surplus from land
 Suppose a man could with his own hands plant a certain scope of
Land with Corn, that is, could Digg, or Plough, Harrow,Weed,
Reap, Carry home, Thresh,and Winnow so much as the
Husbandary of this Land requires; and had withal Seed wherewith
to sowe the same, I say, that when this man hath both eaten and
given to others in exchange for Clothes, and other Natural
necessaries; that the remainder of Corn is the natural and true
Rent of the Land for that year. -Petty, Taxes and Contributions
1:43
 A labour theory of value
In A Treatise of Taxes and Contributions (1662):
 Petty stated that labour is the father & land the mother of wealth.
 The value of a bushel of corn will be equal to that of an ounce of
silver if the labour necessary to produce each is the same.
 His groping for the theory of value that determines price initiated
new lines of reasoning.
 His ideas were to be extended & improved by economists who
followed.