Mercantilism: How it Works, its Essential Pillars, its Strengths and Weaknesses and Arguments - Essay Example

Running head: MERCANTILISM Mercantilism: How it Works, its Essential Pillars, its Strengths and Weaknesses and Arguments that Liberals have against it Name Course Tutor’s Name Date Introduction Mercantilism is defined differently by various authors. McDermott (1999, p. 56) defines it as the “collaboration between the government and private monopolies for the expansion of public revenue”. D’Aneri (2011) defines it more aptly as “a trading doctrine that focused on state power in a conflictual world” (p. 256). The government’s role is to help private enterprises establish monopolies and siphoning part of the profits made by the same enterprises. Through its actions, the mercantile government is able to make more revenue than it would in a different form of managing the economy (McDermott, 1999, p.57). While mercantilism benefits the monopolies and the political class managing a country’s governance, McDermott (1999, p. 57) observes that the citizenry always suffers because the conscious public policy adopted by the political class does not benefit everybody. Rather, the citizenry’s ability to enhance their own abilities or even to contribute to economic growth is limited by the selfish public policies. Rasul (2011, p. 75) observes that mercantilism had its best days during the 16th, 17th and 18th centuries. During the aforementioned centuries, economies were made to believe that they could get rich by exporting more and limiting the imports. It was argued that by exporting more and limiting imports, the resulting balance of trade would enhance a country’s profitability. Rasul (2011, p. 75) further notes that it is Adam Smith (a bitter opponent of mercantilism) who popularised mercantilism since he perceived it as a system that upheld protection. Notably, mercantilism was a means to attaining political powers through the attainment of economic power. It was argued that the richer a country was, the more powerful it would be. Yet, wealth was perceived as the composition of precious metals, with silver and gold being the two most important such precious metals (Rasul, 1999, p. 76). The mercantilism thought further upheld the belief that wealth was “static in the universe and one nation could gain only at the expense of another” (Rasul, 1999, p. 75). Therefore, to prevent a country from losing its wealth, governments imposed heavy tariffs charges on imports. To enhance their wealth, countries would greatly subsidise exports with the intention of getting as much gold from foreign trade as possible (Rasul, 1999, p. 76). It is also worth noting that countries had prohibited the movement of gold to other countries. In other words, mercantilism imposed multiple restrictions on trade. Defining how mercantilism works, Aristotle (cited by Dean-Smith, 1992, p. 76) indicates that most countries believed that to make money, they needed to make monopolies. Through monopolising their respective economies, countries which upheld mercantilism discouraged competition. However, the absence of competition discouraged innovation and this meant that consumers faced sub-optimal quality in the products that were sold to them by the monopolies (Deans-Smith, 1992, p. 76). Haring (1952) also notes that mercantilism exerted a great drag on “innovation in the new world” (p. 321). On his part, Magnusson (2002, p. 54) indicates that mercantilists thrived in state regulation and protectionism. The Essential Pillars of Mercantilism According to D’Aneri (2011, p. 256), mercantilism is based on five essential pillars namely: the clamour for positive trade balances, regulation of economic activities, the labour theory of value, powerful and strong governments, and that international trade was a zero-sum game by nature (D’Aneri, 2011, p. 256). To gain positive balances, D’Aneri (2011, p. 256) indicates that the mercantile economies would target exporting more than they would import. This would be done with the intention of accumulating more gold, silver and precious metals, which acted as means of exchange at that time. Regulation of economic activities mainly meant that the government would restrict imports through the imposition of heavy tariffs and enhance export through issuing subsidies on all export goods. In relation to the labour theory of value, mercantilism mainly relied on production in order to gauge the value of the commodity. The raw material imports were for example regarded as less valuable compared to the processed goods which specific countries would export (D’Aneri, 2011, p. 256). Prychitko (2008) indicates that the labour theory of value’s premise is that “the value of a commodity can be objectively measured by the average number of labour hours required to produce that commodity” (para. 4). Therefore, the attention of mercantilist economies was focused on importing raw materials since they were cheaper, and exporting processed goods since they would attract more wealth to the exporting country. On it part, the zero-sum game nature of the international trade is a concept that argues that trade benefits one country (Prychitko, 2008, para. 4). In other words, mercantilism is premised on the argument that the winner takes it all at the expense of the trading partner. Arguably, the zero-sum game argument is a misconception because nations often trade with an expectation of gaining from the trade. Strengths of Mercantilism According to Lipson and Cohen (1999, p. 71), mercantilism has worked for some countries like Japan and as such, it cannot be entirely bad. One of the major strengths that are evident from the case of Japan is the patriotism with which the economy serves the interest of the nation-state (Balaam, David & Veseth, 2008, p. 25). It has even been argued that the patriotic political economy is very common in the world despite the fact that nations declare that they are pursuers of free trade (Balaam et al., 2008, p. 25). Examples of mercantilism at the nation-state level include the promoting of domestic industries and offering subsidies to enhance exports while subjecting imports to tariffs. Balaam et al. (2008, p. 26) further observe that the desire or motivation to have a stronger economy runs in every country and is thus arguably occasioned by mercantilism. Another major strength of mercantilism is that the manner that the economy is structured does not dictate growth (Armstrong, 2008, para.2). In other words, mercantilist countries still attain growth regardless of how their economy is structured. Finally, the connection between power and economics is perceived as an additional strength for mercantilism since wealthy countries have more bargaining power politically and economically compared to their less wealthy and powerful countries. Since power and politics are linked to the economy, Gilpin (1987, p. 47) notes that mercantilism provides an anchor for political stability for countries that support it. This is because leaders understand the link between political stability, the economy and the country’s power in the world. Weaknesses of Mercantilism One of the major weaknesses of mercantilism is the claim that it looks after the interests of producers and sellers more than it does the interest of consumers. Smith (1904, p. 662) specifically argues that mercantilism sacrifices the interests of consumers. Consequently, there is possible disgruntlement by the consumers who have to pay higher prices for goods and services, where a select few involved in the production of the same goods and services keep benefiting more from trade. Another possible weakness is related to governmental failure (Lipson & Cohen, 1999, p. 71). Notably, proponents of mercantilism argue that the economy is inferior to politics. Effectively, poor politics would affect the economy negatively. Since mercantilism advances the argument that economics is a tool for use in international politics, a failure by government would thus mean that the country would lose its ‘battles’ in international politics. Mercantilism also lacks a theory to explain how the foreign policy, the state and the domestic social factors work (Gilpin, 1987, p. 115). This is because mercantilism perceives the nation-state as the sole and real actor in international relations; however, it fails to explain how political groups on the domestic front serve self-interests by using national policies and how such self-serving tendencies benefit the larger economy (Gilpin, 1987, p. 116). Finally, it has been argued that mercantilism’s view of trade as a zero-sum game made the pursuit of wealth and power create hostilities in the world (Lipson & Cohen, 1999, p. 71). Such hostilities pose the threat of making international trade impossible since a country whose exports have been slapped with heavy import tariffs in another country with retaliate with similar tariffs on imports from that other country. The probable result is a world where countries simply cannot trade with each other. Arguments that Liberals have against Mercantilism According to O’Brien and Williams (2010, p. 65), liberals believe that trade is a positive-sum game that is based on a win-win notion among trading partners. Notably, the belief that trade is a positive-sum game is a departure from the mercantilism thought, which argues that one country attains wealth at the expense of the other countries it trades with – hence indicating that trade is a zero-sum game. Liberals also advocate for free trade, which is contrary to the mercantilism thought that advocates protectionism. Liberals advocate for the comparative advantage approach, where a country produces the products it can produce best (for internal use and export) and buys products that it cannot produce efficiently from other countries that have a capacity to those products produce effectively. Liberals further believe that nations have different technological advancements and resource endowments that can be used to enhance the comparative advantage of each nation (Landsburg, 2008, para. 4). The resources and technologies that each nation has, therefore, can be used to produce something at a faster and cheaper rate when compared to other nations, hence the source of comparative advantage (Ricardo, 1821, p. 50). Liberals, therefore, argue that a nation needs to produce things that it can produce efficiently, consume and sell the surplus to other countries. Additionally, the same country should buy products that it cannot produce efficiently from other countries that have the capacity to produce efficiently. As O’Brien and Williams (2010, p.65) note, mercantilists believe that protectionism will enhance the economic welfare of nations by increasing local production. Advocates of mercantilism indicate that free trade only favours the big countries hence perpetuating poverty in smaller countries. Liberals on the other hand hold the opinion that free trade favours the major economic powers just as it does the emerging economic powers. Another point of difference between mercantilists and liberals is that the latter argue that politics and economics are different factors of a nation-state, indicating that different logics and rules guide how politics and the economy are directed in the nation-state (Oatley, 2004, p. 32). Mercantilists however insist that political policies affect how the economy operates. Liberals also criticise monopolies, while mercantilists support them. Smith (1904, p. 11) was among the first liberal thinkers that had strong views against monopolies. In his book, Smith (1904, p. 11) argued that monopolies only restrict supply to consumers, hence artificially hiking the price of commodities. Smith (1904, p. 11) further argued that the prices offered by monopolies were unnatural since they were a result of artificial shortages created by the same monopolies. He indicated that a natural price should be achieved in a market where free competition is allowed, since in such a market, consumers would be allowed to take the lowest price available for specific products. Mercantilists on the other hand perceive monopolies as an ideal way of enhancing the political control on the economy and attaining good revenues from the taxes obtained from the monopolistic businesses. Conclusion This paper demonstrates how mercantilism worked by indicating that it was an economic thought that advocated for restricted trade where a nation-state would pursue to create wealth by enhancing its exports while restricting imports. Through import restrictions, mercantilists believed that nation-states would create trade surpluses that would enhance their wealth and hence make individual nation-states a political force to reckon with in the world. The paper has also identified the five essential pillars of mercantilism as theories that indicate that trade is a zero-sum game; that governments need to be strong and powerful; that the labour theory of value is true; that there was need for economic activity in a nation-state to be regulated; and that nation-states need to have positive trade balances. The paper has also identified several strengths and weaknesses of the mercantilism school of thought. Finally, the paper has identified arguments that liberals have against mercantilism, which include the monopolistic businesses that are encouraged in mercantilism and the connection that mercantilists believe there is between politics and the economy. References Armstrong, A. (2008). Mercantilism, 1754-1776 (overview). American history. Retrieved from http://wrld-hisgeo-ii--2-p3-yrh-m.freedomhs.schools.pwcs.edu/modules/locker/files/get_group_file.phtml?gid=4693262&fid=26694150 Balaam, N., David, B., & Veseth, M. (2008). Introduction to international political economy. New Jersey: Pearson Publishers. D’Aneri, P. (2011). International politics: Power and purpose in global affairs. London: Cengage Learning. Dean-Smith, S. (1992). Bureaucrats, planters, and works: The making of the tobacco monopoly in Bourbon Mexico. Austin: University of Texas Press. Gilpin, R. (1987). The political economy of the international relations. New Jersey: Princeton University Press. Haring, C. (1952). The Spanish empire in America. New York: Oxford University Press. Landsburg, L.F. (2008). Comparative advantage. Retrieved from http://www.econlib.org/library/Topics/Details/comparativeadvantage.html Lipson, C., & Cohen, B.J. (1999). Theory and structure in international political economy: An international organization reader. Cambridge, MA: MIT Press. Magnusson, L. (2002). Mercantilism: The shaping of an economic language. New York: Routledge. McDermott, J. (1999). Mercantilism and modern growth. Journal of Economic Growth, 4, 55-80. O’Brien, R., & Williams, M. (2010). Global political economy (3rd ed.). London: Palgrave MacMillan. Oatley, T. (2004). International political economy: Interests and institutions in the global economy. New York: Pearson Longman. Prychitko, D.L. (2008). Marxism. Retrieved from ttp://www.econlib.org/library/Enc/Marxism.html Rasul, H.F. (2011). The return of mercantilism. Pakistan Economic Social Review, 4(1), 74-78. Ricardo, L.F. (1821). On the principles of political economy and taxation. London: John Murray. Smith, A. (1904). An inquiry into the nature and causes of the wealth of nations (5th ed.). London: Methuen & Co. Ltd. Read More