Economic Theory: Mercantilism

Introduction:

Mercantilism was deemed a dominant system of economic thought that triumphed in Europe from the 16th to 18th century. It was based on the principle that nations need to be rich and self-sufficient. In a stark contrast to the agricultural system of the physiocrats or the laissez-faire of the 19^th and early 20^th centuries, the mercantile system-aided merchants and producers including the British East India Company whose activities were encouraged by the state. The growing criticism against mercantilism reached its climax towards the end of the 18th century when Adam Smith published his book “The Wealth of Nations” and propounded basic notions such as division of labour and the law of supply and demand which is present today.

Mercantilism

Simply put, mercantilism is an economic theory wherein government regulation of international trade is fostered in order to maximize exports and restrict imports. It is based on a principle that all of the world’s wealth is finite, leading many European nations to strive and achieve a balance of trade. Money is wealth and accumulation of gold or silver is the key to prosperity was the driven factor for mercantilism. In mercantilism, the private owners of the factors of production such as labour, natural resource, entrepreneurship and capital goods are supported by the government.

It establishes a monopoly, allows tax-free status and pensions to certain industries. On imports, tariff is imposed and emigration of labour, tools and labour is strictly prohibited if it may benefit another nation.

In short, nothing that benefits foreign companies was permitted. In return, businesses grabbed wealth earned from foreign expansion and brought it to their governments. These fiscal policies were a method of economic protectionism that welcomed self-reliance but conflicted with the free-market economics of trade and globalization.

History

The feudal economic system was replaced by mercantilism in Western Europe and it became the dominant theory between 1500 and 1800. While England was at the epicentre of the British Empire, they unfortunately had limited natural resources and were eager to increase their wealth. During this period, there was frequent military conflict and tension than before. Every government’s main objective was to back their military base to prevent attacks from other nations whilst also expanding their territory and the only way to do so was to earn sufficient money.

Mercantilists took up this opportunity to persuade their governments to enact policies that would protect their own businesses against foreign ones. In exchange, they would pay taxes to back the military. This resulted in the introduction of fiscal policies that were against the colonists which banned them from buying foreign items. All nations wanted to export more than they imported and receive bullion in return as they strongly believed that a nation’s economic health could be weighed by comparing how much they owned in precious metals. Shipping was also considered imperative during the mercantile period as they were used for merchant or military purposes and whoever controlled the oceans was deemed the strongest. Subsequently, countries paid each other in bullion for exports and it was regarded that the nations which owned the most precious metals were the richest. They used the bullion to fund wars against other nations who sought to wrongfully profit off from them. All countries wanted a trade surplus rather than a deficit and, in this way, mercantilism grew out of the ashes of feudalism.

Mercantilism was known by different names in different countries. In England, it was recognized as “mercantile system” because it accentuated the significance of business and free trade but it was alternately also called as “Restrictive system” due to the restrictions and regulations on policies and commerce. In France it was nicknamed as “Colbertism” and in Germany and Austria, it was termed as “Cameralism”. Mercantilism was also popularly called as “Bullionism” due to the paramount value that was bestowed upon gold and silver. Russia, Spain and Scotland too practised mercantilism.

Characteristics

1. Wealth- Mercantilists strongly believed that the only way to make their country strong was by maximising profit and that could be found in the wealth that a country possessed especially gold or silver. All economic activities and policies were based on increasing the wealth.
2. Foreign Trade- Foreign trade was held to be the only option for getting gold and silver. Mercantilists believed that even nations that previously did not possess their own billions could be economically prosperous after procuring gold and silver from other nations through the process of trade and commerce. Hence exports were encouraged and imports strongly discouraged. This theory has no place in modern times as it would end international trade.
3. Population- A larger population and immigration of people was encouraged in order to strengthen and have a strong military power while also increasing its productivity. Low-priced, ample supply of labour would reduce the cost of production was their outlook.
4. Commerce and Industry- It was believed that business and trade were the only leading occupations and agriculture was the least productive. Thus, they focused on regulating the industry and commerce to increase national efficiency.
5. Natural Resources- Maximum utilization of natural resources was encouraged as it led to more exports. This led to the development of colonies to garner raw materials.

Moreover, commercial regulation was deemed essential to maximum social welfare and Land Banking Schemes were introduced.

Examples

• In England, the Navigation Act of 1651 prohibited foreign vessels from dealing in coastal trade. It was mandatory for all imported goods from the continent of Europe to be carried on either an English vessel or a vessel that was duly registered in the country where the goods were being exported from or colonial vessels.
• The Staple Act of 1663 made it mandatory for all colonial exports that were being sent to Europe to first land at an English port before being re-exported to Europe.
• The British East India Company defeated the princes of India with an armed force of 260,000 and looted them as the British government protected the company’s interests. As many members of Parliament owned stock in the company, its victories lined their pockets.
• The British Empire increased taxes on colonists after a recent war against France proved to be quite costly and they needed to restock their revenue. The colonists consequently protested by shunning British products and decreasing the price of imports by one-third. The Boston Tea Party in 1773 was undertaken by British colonists who invaded 3 British ships, and hurled a hundred trunks of tea into the harbour, to object and voice their dissent against the taxes levied on tea and the monopoly rights that were granted to the East India Company. Great Britain emphasized its mercantilist control by rebelling against the colonies which prompted in the Revolutionary War.
• In the 17^th century, France promoted a controlled economy which was backed with strict regulations regarding the economy and labour markets.
• Domestic industries were restricted in India and people were forced to import salt from the UK while under the control of the British domain. Gandhi led the protests and revolted against this salt tax.

Decline and Criticism

The barrage of criticism against mercantilism gained momentum towards the end of the 17^th century and was predominantly robust in France, leading to the following disapprovals-

1. Excessive importance to gold and silver was given and other commodities were neglected.
2. The notion that one nation’s gain resulted in another nation’s loss was held inaccurate.
3. The importance of business, commerce and trade that were previously over-emphasized which led to undermining the purposes of agriculture amongst others was held invalid.
4. Ideas concerning ‘utility’ and ‘value’ were ambiguous and abstract.
5. Capital and interest were flawed and the mercantilists lacked broad-mindedness.
6. The mercantilists erred by believing that a beneficial balance of trade and commerce was the only way to achieve prosperity and wealth.

Given the situation in those times, the mercantilist theories cannot be disparaged completely. Viewing it from an economic point of view, it lacked universal application as it failed to offer the right guidance. Mercantilists muddled the idea of means and ends by exaggerating on the importance of bullion and regarded it as well as labour as the ultimate goal of existence.

Mercantilists were practical administrators, merchants, traders who put forth such ideas which brought about the advancement of various modern economic theories. Mercantilism was indirectly a macro-economic approach to face issues in a civilization. The mercantilists stressed upon the need for maximising exports not only to accumulate bullion, but because they anticipated that if exports flourished then it would lead to employment. The excessive emphasis on money can be acceptable on economic grounds as they were familiar with the dynamic nature and viewed it as a store of value.

End of Mercantilism

Mercantilism deteriorated due to several reasons but especially due to democracy and free trade that triumphed in the late 1700s. The American and French revolutions led to large nations being ruled by democracy and endorsing capitalism. Adam Smith’s seminal book,” The Wealth of Nations” along with the Revolutionary War and Napoleonic Wards marked the end of mercantilism. Smith, in his book, argued that foreign trade strengthens the economies of both countries alike. He stated that each country’s speciality is what it produces best, giving it a relative benefit and thus, trading can be mutually beneficial for both nations. Furthermore, he elucidated that any government that put their business ahead of its citizen’s would be short-lived. Under Smith’s influence, modern economists accepted and promoted free trade for their nation’s well-being. Development in banking decreased the importance of bullion and coins. The expansion of market economy showed that factories, real estates and machinery were more crucial and vital as compared to bullion.

After the mass destruction of World War II, allied nations strived to attain global cooperation. This led to the creation of the World Bank, the United Nations and the World Trade Organization. Mercantilism was seen as dangerous and globalization was its redemption. But other nations such as the Soviet Union and China continued to promote a form of mercantilism known as neomercantilism. As they have communist governments, neomercantilism fit perfectly as it allowed them to control foreign trade. The objective behind neomercantilism was to increase foreign reserves that were being held by the government and safeguard a competent monetary policy.

Present Scenario

Globalism and the interdependence of free trade put nations under the impression that they had lost all control and power. Although mercantilism is mostly considered obsolete, there has been a recent surge in mercantilist policies. Present-day mercantilism typically refers to tariffs on imports, subsidizing domestic industries, devaluation of currencies and restrictions on the migration of foreign labour. Mercantilist policies can also explain the recent escalation of tariffs and trade restrictions between the United States of America and China.

To summarize, nations grasped the knowledge that the wealth of all nations could expand concurrently by resourcefully utilising natural resources and via science and technology. This realization gave birth to the advent of the market economy, where prices and means of production were driven by the forces of supply and demand. Under a system of free trade, consumers can profit from lower prices due to increased competition and gain access to goods from all over the world.

Conclusion

Modern economics considers currency a measure of wealth rather than a form of it. It is how nations interact with and trade but the real wealth of nations is measured by the goods and services that currency gives access to. Free trade really opened doors with increased exports, increased competition, reducing tariff barriers and so on. As economies are constantly evolving through population and technology, it can lead to productivity for every nation. This theory weakens the mercantilism theory. But it is pertinent to point out that the mercantilists ideas are powerful even today. Mercantilism paved the way for many nations who then proceeded to transform from ‘commercial/profitable capitalism’ to ‘industrial capitalism’. Hence, traces of mercantilism will always be visible when discussing the function of the economy but it is vital to put the well-being of all nations first in order to achieve true wealth.

“Down to the present day they all reappear from time to time in various guises as symptoms and weapons of economic conflict”.

Eric Roll

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References:

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