Origin and History of Mercantilism - Case Study Example

Introduction Mercantilism is the first systematic attempt to comprehend the economic phenomena of the emerging capitalist system and to justify the state’s economic policy. The merchants were given foremost priority under mercantilism and the interests of the bourgeoisies, above all the commercial bourgeoisies were expressed under the system. Merchants higher position was justified by the fact that trade and circulation of money was the main economic activity under this economic system. Mercantilism is a trend of bourgeois political economy and the economic policy of states during the age of the ‘Primary Accumulation of Capital’ (15th -18th centuries), which reflected the interests of the merchant’s capital when it was still linked with industrial capital (Volkov 1981). This ‘mercantile economic system’ was based on the notion that country’s wealth and power should be used for increasing export and collecting ‘precious metals’ in return to that. Increasing the wealth of the nation by trading more was the basic principle of mercantilism. Origin and History of Mercantilism Mercantilism was an economic system which was dominant in Europe during the period from 15th to 18th centuries. When it was emerged, the term ‘mercantilism’ was not coined. It was in 1763 by Victor de Riqueti and Marquis de Mirabeau coined the term and the term was popularized by Adam Smith in 1776 in his ‘Wealth of Nations’. Adam Smith was the first person who identified and organized the main features and contributions of mercantilists in a systematic way and in fact, he was the profound critic of mercantilists. The mercantile system was emerged from the inherent decline of feudalism and from the thought of a strong ‘nation state’ and emergence of a international market economy. They argued for the use of nation’s power to protect the local market and supply sources (Niehaus 1990). Majority of the writings of mercantilists appeared during 1600-1700 in Great Britain. English merchant Thomas Mun (1571-1641) is considered as “the father of mercantilism” by even Adam Smith. It was Thomas Mun who propounded important and basic ideas of mercantile economic system in his “England’s Treasure by Foreign Trade” , which was called as ‘manifesto of the mercantile movement’. While Thomas Mun is considered by the first mercantilist, James Steuart is called as the last major mercantilist. The last important work which was in pace with the mercantilists’ ideology was “Inquiry into the Principles of Political Economy” published in 1767. Both the first and last mercantilists were merchants of England, while many other writers were included in the category of public officials. Beyond understanding mercantilism as an advocacy of the power and wealth of nations, Mun was appreciated for his view points on a wide array of economic thoughts. Mun presented the earlier mercantile policies in his manuscript written in 1630 and published in 1664 by his son. To Mun, England’s treasure (national wealth) could be increased by the way of engaging trade with other countries With this aim of national wealth, many policies were advocated by Mun which include limited consumption for increasing the amount of available goods for export, increased utilization of land and other internal resources to decrease the imports, cutting off the export duties of domestic goods for exports and promotion of goods with inelastic demand so that more benefits would be availed. The skilled industrial population and shipping industry were effectively created by mercantilists in England. (Mangusson, 2003). It was argued for the historical promotion of mercantilism in Europe by the authors like Athens and Delian League during 15th century by contributing special points of trade policies. They had also made special mention of the control of value of trade in bullion as necessary fro the advancement of Greek. They had also noted the competition of ‘Medieval Monarchs’ for the supremacy of the ‘market towns’ and of the trade of the spices. Regarding the control over ‘Venice’ and Mediterranean Sea, trade of billion was considered important by them. These aspects clearly point out the early understanding of the principles of mercantilist. However, as a systematic school and codified school, mercantilism’s real origin was noticed by the “empiricism” of the ‘Renaissance’ which was marked by the beginning of large scale trade. The first large scale and intensive approach to mercantilism really emerged during the ‘Elizabethan Era’ of 1558-1603 (Heckscher, 1935). The works of mercantile thinkers were also extended even beyond England. Italy, France and Spain deserve special mention here as those countries were the motherlands of many mercantilists. Italy’s Giovanni Botero (1544-1617) and Antonio Serra (1580-?), France’s Jean Bodin and Jan Baptiste Colbert and Spain’s School of Salamanca writers like Francisco de Vitoria (1483-1546), Domingo de Soto (1494-1560), Martin de Azpicueta (1491-1586) and Luis de Molina (1535-1600) were the most important earlier mercantilists. Straits of mercantilist themes were seen in the works of thinker from German historical school, American system and British ‘free trade imperialism’ (Mangusson, 2003). Mercantilism was an important school of thought, especially in Europe from the late ‘renaissance’ and ‘early modern period’ from 1500-1800. Mercantilist school was the only dominant thought of economics through out this period. Mercantilism encouraged the many wars in Europe during this period and it argued for the expansion of Europe because the main idea of the mercantilist writers was focused on the advocacy of strong nation state. Expansion of the nation and imperialism were fueled by them in Europe as well as other parts of the world until 19th century (Mangusson, 2003). Mercantilism began to decline in the mid 17th century because, as capitalism developed, capitalist production became the main way of increasing wealth. But as capitalism developed, the main propositions of mercantilism became outmoded and the bourgeoisie advanced new economic theories based on the requirements of free trade and free enterprise. Physiocratism replaced mercantilism as a trend of bourgeois economic thought. Theoretical Contributions made by Mercantiists Mercantilism was an economic theory, the main idea of which was the prosperity of the nation, which again dependent of its supply of capital. The crux of all mercantile works was on this idea of economic prosperity of the country and many economic and national policies were advocated for keeping the country economically prosperous. Mercantilism was a shift from period of ‘payment in kind’ to the period of ‘money economy’. By this period, the regional, national and international trade continued to be emerged and developed. The use of money and its circulation became more common and widespread under mercantilism. The Concepts of Wealth and Bullionism Mercantilist identified wealth and assets are the same. They did not make any clear distinction between wealth and assets. They considered economic assets were in terms of valuable assets like gold and silver, and these were considered of high trade value. The assets of these valuable metals could be increased by engaging healthy balance of trade with other countries. Positive and healthy balance of trade was encouraged by them only for increasing the wealth of nations. Mercantilism believed that profit is created in the realm of circulation, while money is the wealth of nations. Therefore, the policy of mercantilism was aimed at attracting to the country as much gold and silver as possible. The first mercantilists (Stafford and others) insisted that all expatriation of currency from a country be banned. Their aim was to accumulate currency within the country by exporting goods to a foreign market. (Rempel, 1998). The centuries from 15th to 19th witnessed many religious and commercial warfare all over the world. Large amount of income were required to maintain the army and civil government. Mercantilist nations were under the impression that the ‘precious metal’ of gold was needed by all and it had universal demand as gold bullions were the ready means of transfer (or means of obtaining other commodities). Hence the countries tended to identify money with gold bullions and this idea of gathering maximum gold bullions is called as ‘bullionism’. Economic Wealth through ‘bullionism’ would be attained on the three major conditions: i) Agriculture should be encouraged as it would reduce the burden of imports and the prosperous farmers would be the providers of taxation ii) Control over sea is essential for controlling foreign market as it would smoothen internal as well as international trade iii) For economic prosperity of the nation, imposition of internal taxes is very much needed (Rempel, 1998). Concept of Foreign Trade Mercantilists hold that the international economy of trade is “unchangeable” and one country may be benefited by sacrificing the benefit of other country. One country can not better off without worsening off by other country. The international trade was based on the principle of “Zero Sum Game”, though that principle was not shaped during the period of mercantilism. The benefit of one country and cost of other country become equalized and nullified each other, according to Zero Sum Game theory. As capitalist forms of the economy developed and foreign trade expanded, the policy of a favorable money balance was replaced by the trade balance policy. It was advocated by mercantilists (T.Mun, A.Serra and others). They felt that the state must have an export balance of trade, that is, that the country should not import more goods than it exports. Hence, the manufacture of export goods was encouraged. Mercantilism regarded foreign trade as a source of wealth and, since export goods were manufactured by artisans, the mercantilists concluded that the handicraft industry had to be developed (Volkove, 1981). Protectionist policy of the State The mercantilism was emerged from the decline of feudalism and rise of the ‘nation state’ and ‘world economy’. For protecting the local market and wealth of nations, mercantilism suggested that the ruling government should follow the policy of protectionism. For encouraging export and discouraging imports, appropriate policies of taxation and subsidy should be followed by the government. The mercantilist theory was a driving force of many projectionist economic policies of Western Europe from 16th to the 18th century. Main Ideas of Mercantilists - summation Austrian mercantilist, Phillip Wilhelm Von Hornick, in his “Austria Over All, If She Only Will” of 1684 had summed up the main ideas and theories of mercantilists, into nine points. In this work, the main tenets of mercantilism had been discussed comprehensively. The following are the underlying ideas of mercantilism, as summed up by Hornick. 1) The economic wealth of a country can be identified with the amount of precious metals like gold or silver which are possessed by the country. 2) A surplus balance of trade is essential for the increasing wealth of any nation. Exports should be more than the imports. 3) Economic Self-sufficiency should be the driving principle of every nation, depending on internal production and increasing new domestic industries. 4) Agriculture should be encouraged as it would reduce the imports 5) High tariffs could be imposed on the import of manufactured goods. 6) Fleet of the merchant is of immense importance and hence the dependence on foreign assistance for transportation should be avoided. 7) The markets for the manufactured goods and source of raw materials should be the colonies. 8) Increase of population should be encouraged as it would give labor force 9) The state should highly intervene in the economy by implementing appropriate regulations whenever necessary (Rempel 1998; Miller, 1996 and; Harry and Colander, 2002). Relevance of Mercantilism as a School of Thought Capitalist production was in its birth, and the mercantilists’ outlooks were conditioned by the level of economic development of the time. Marx called mercantilism the pre-history of political economy. “The real science of modern economy only begins when the theoretical analysis passes from the process of circulation to the process of production”. (Marx, Capitall, Vol. II, P. 337). The mercantilists limited themselves to analyzing the process of circulation and thus failed to disclose the inner laws of the capitalist mode of production. Mercantilists identified capital with its money form in which it operates in the sphere of circulation and did not regard capital in the form it assumed in the production process. Mercantilism was progressive for its time, since it facilitated the development of the first big capitalist enterprises-manufactories- and encouraged the development of the productive forces and the victory of capitalism over feudalism. Classical economists criticized mercantilists by pointing out that even the successful implementation of mercantilist policies would ultimately lead to the oversupply of money and inflation, hence the imbalance of the economy. Conclusion Though prominent criticism was that under mercantilism, government focused attention on the development of trade and the accumulation of money instead on the creation of an abundance of the ‘fuits of the earth’, which the physiocrats called , the real wealth of the nation lay, mercantilism was of immense importance as it was the beginning of an political economy. All the theories of classical economics and later schools have got the theoretical roots of mercantilism. References Blecker, Robert A (2003). Global Keynesianism Versus the New Mercantilism: International Economics After Joan Robinson. www1.american.edu/cas/econ/faculty/blecker/Blecker%20JR%20paper.pdf Heckcher, Eli F. (1935). Mercantilism. London: Routledge Landreth, Harrry and David C. Colander (2002). History of Economic Thought. Boston, M A: Houghton Mifflin. Mangusson, Lars G. 2003. Mercantilism, in Biddle, Jeff E, Jon B Davis and Warren J Samuels, A Companion to the History of Economic Thought. Malden , M A : Black Well Publishing. Miller, J C 1996. Way of Death: Merchant Capitalism and the Angolan Slave Trade. University of Wisconsin Press. Neihans, Jurg. 1990. A History of Economic Theory: Classic Contributions, 1720-1980. Baltimore, MD: Johns Hopkins University Press. Rempel, Gerhard. 1998. Mercantilism http://mars.wnec.edu/~grempel/courses/wc2/lectures/mercantilism.html Volkov, M I (1981). A Dictionary of Political Economy. Progress Publishers, Moscow. Read More