Mercantilism Research Paper

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The term mercantilism designates a system of economic policy as well as an epoch in the development of economic doctrines, lasting from the sixteenth to the eighteenth century. It first appeared in print in Marquis de Mirabeau’s Philosophie rurale in 1763 as système mercantile. The main popularizer of the “commercial system”—as he preferred to call it—was Adam Smith. According to him the core of the mercantile system consisted of the folly of confusing wealth with money. Despite the practical orientation of the mercantilist writers, they did propose a principle: the so-called positive balance of trade theory, which implied that a country must export more than it imported. According to Smith, the mercantile system was put into place by a mercantile special interest that would be able to profit from duties on imports, tariffs, and bounties.

From Smith onward, the view of the mercantile system, or simply mercantilism, as state dirigism and protectionism serving a special interest through the maintenance of positive balances of trade was developed further by classical political economy. During the nineteenth century this viewpoint was contested by the German historical school, which preferred to define mercantilism as statemaking in a general sense. According to its view mercantilism as a system of theory was the rational expression of nation-building during the early modern period. An attempt to combine these two interpretations was made by the Swedish economic historian Eli Heckscher in his Mercantilism ([1935] 1994). A response to Heckscher’s wide definition of mercantilism was to altogether reject the notion of a particular mercantilist system.

This latter position goes too far, however. It is certainly correct that mercantilism was not a finished system or coherent doctrine in the nineteenthand twentiethcentury sense. It is better described as a literature of pamphlets and books that mainly dealt with practical political economy, published roughly between the late sixteenth century and 1750. The underlying issue dealt with in this literature was the question of how to achieve national wealth and power. This general agenda can be traced in English, Italian, and French economic texts from the sixteenth century onward. From this point of view, Italian writers such as Giovanni Botero (1544–1617) and Antonio Serra (1580–?), as well as sixteenth-century Spanish writers such as de Vitorias, de Soto, de Azpilcueta, and Luis de Ortiz were perhaps the first “mercantilists.” In England, the most well-known mercantilists in the middle of the seventeenth century were Thomas Mun (1571–1641) and Edward Misselden (1608–1654). Later well-known mercantilist writers include Josiah Child (1630–1699), Nicholas Barbon (1640–1698), Charles Davenant (1656–1714), Malachy Postlethwayt (1707–1767), and James Steuart (1713–1780) in England and Antoine Montchrètien (1575–1621) and Jean Baptiste Colbert (1619–1683) in France. Most of these writers shared the view that the increase of trade and manufacture could only be accomplished through state intervention, and that it was not possible to rely only on the self-equilibrating forces of the marketplace.

From Adam Smith onward the view has been repeated that the mercantilist writers confused money with wealth. However, recent research has shown that this conception of the mercantilists is highly questionable. For the bulk of seventeenth-century writers on economic and trade issues, the quantity theory of money was a standard presupposition. Moreover, there were very few price inflationists among the mercantilists. Instead, a majority agreed that high prices would cause lower exports—that is, they argued that the effect of elasticity of demand was considerable on most export markets. However, Mun as well as many others during this period seems to have feared that without a steady inflow of money originating from a favorable balance of trade, trade and industry would stagnate and the price of land would fall. To counter this shortage of bullion in circulation, a steady inflow of money through a net trade surplus was necessary.

However, most writers had abandoned the favorable balance of trade theory in its simple form by the end of the seventeenth century. Some argued that the principle was impractical as a policy goal, as it was impossible to account for a trade surplus in quantitative terms. Others found problems on more theoretical grounds—that is, they directly or indirectly admitted to the argument later known as the specie-flow argument. Instead, from the 1690s writers such as Josiah Child (1630–1699), Charles Davenant (1656–1714), and Nicholas Barbon (1640–1698) developed a new idea that alternatively has been called the theory of foreign-paid incomes, the labor balance of trade theory, or the export of work theory. Instead of holding on to the dogma that a country should receive an inflow of bullion through the balance of trade, these authors stressed that a country should export products with as much value-added content as possible and import as little of such products as they could. The profit would come from the fact that the buyer—Spain, Portugal, or other countries—would not only pay England for its raw materials, but also for its laborers.

Hence, what makes it legitimate to speak of a specific “mercantile system” was its proponents’ preoccupation with the question of how a nation could become rich, and thus also achieve greater national power and glory. In the broader sense of an ideology promoting economic protection in order to achieve domestic growth, the term mercantilism is not applicable only to the period before Adam Smith. Mercantilist ideas can also be found in modern forms of protectionism that have appeared since the nineteenth century. For example, the period between World Wars I and II was characterized by protectionism and economic nationalism; it was this that led to Heckscher’s synthesis, which he intended as advocacy in favor of liberal and free-trade ideas. Despite Heckscher’s insistence that mercantilism was a false ideology—free trade, he argued, was better for economic growth, at least in the long run— mercantilism was hailed as a form of popular economics of common sense. As such, it still exists to some degree, though it has reappeared most clearly during periods of economic crisis, such as the 1920s and 1930s. Mercantilist theory has found only a very few proponents among more modern schools of economics. Some economists inspired by institutional economics have referred sympathetically to mercantilist doctrines concerning population growth (for example Joseph J. Spengler), as have others inspired by radical development economics (for example, Cosimo Perrotta).

After World War II, mercantilist ideas have instead largely recurred in the form of neomercantilism and strategic-trade theory. From the end of the 1970s, strategic-trade theorists such as Lester Thurow, James Brander, Barbara Spencer, and Paul Krugman sought to replace the theory of comparative advantages with a theory of “competitive advantage.” Their argument is that the pattern of international trade cannot be explained on the basis of comparative advantage or with the help of the simple Heckscher-Ohlin theorem. Instead, the flow of international trade is a consequence of scale and scope, economic muscle, and increasing returns to scale. The political implications of this were straightforward: Governmental support is appropriate when used to bring about a competitive advantage for an industry that would benefit its nation in the long term. Certainly, this was another way to defend the infant-industry argument, with clear implications for trade policy.

Bibliography:

  1. Heckscher, Eli F. [1935] Mercantilism. London and New York: Routledge.
  2. Hutchison, Terence W. Before Adam Smith. Oxford: Blackwell.
  3. Magnusson, 1994. Mercantilism. The Shaping of an Economic Language. London and New York: Routledge.

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