Mercantilism: Introduction and Development - Coursework Example

MERCANTILISM Development Phase Mercantilism or “commercial capitalism” can be thought of a phase of approximately one and half century heralding from sixteenth century till the late eighteenth century. The rise of mercantilism and its impact dominated the Western Europe throughout the given phase. The development of mercantilism emerged as an outcome of friction among the monarchs and the then feudal class focusing basically over who will authorize their supremacy over territories and have immense control over wealth expansion, thus giving rise to the concept of “nation state” (Hunt 19) weakening the feudal strength and influence of the church. The impact of mercantilism was mainly predominant in France, England, Belgium, Germany and several counterparts of Europe. Crux of Mercantilism The undercurrent which played behind mercantilism is the so called concept of ‘profit maximization’ which is one of the most pronounced attribute of human being back to the very discovery of fire by early man. During the fifteenth century, the rise of feudal classes became a serious cause of tension for the monarch society and planning a way out from this situation became their prime concern. On the other hand, the capitalist or merchant class gained their strong foothold in accumulating wealth and they became pioneers in the field of trade and commerce and revenue generating mechanism. They were responsible for primordial accumulation, the prime sources of which were increasing volume of trade, putting out system of industries, brutal plunders in territories and many other factors (Hunt 19). But they were much lacking in social uplift domain. The monarchs took the advantage of this situation and sought the support from capitalist class in order to suppress feudal power and they concentrated on establishing a central authoritative control and emphasized on colonial expansion. So in this way mercantilism emerged and their major area of concern was accumulation of wealth and expansion of territories in the form of colonies. Mercantilism can also be defined with respect to basic GNP identity i.e, Y=C+I+G+(X-M).Mercantilist basically focused on the positive magnitude of Y which means C+I+G> (X-M), where C= consumption expenditure, I=Investment, G=Government expenditure, X=Exports, M =Imports all measured in monetary terms. (X-M) refers to the trade balance of the country. Journey of Mercantilism The Early Phase A major part of trade and commerce in those days were gold, silver and other precious metals. From this came the name “bullionist”. Early mercantilism was mainly known as bullionism which originated from the deficit of gold and silver bullion in order to cope up with the exaggerated volume of trade. The bullionist suggested that keeping reserves of gold and silver in the country and not letting them flow out would account for the prosperity and development of the country. For Antoine de Montchrestien, ‘money is the sinews of war’ (Aron, 245). Gold, silver and precious metal reserves were absolutely essential for the accumulation of wealth and weapons required for warfare. The major application of bullionism was found in Spain. Major part of the gold and silver inflow from America accumulated in Spain and France. Between the fifteenth and seventeenth century Spain was recognized as one the strongest economic and military power. WHOLESALE MERCHANTS’ NET INCOME BY NATIONALITY, 1771 Net Income(pieces of eight of old silver French German (Damascene, Swedish and Prussian) Irish (and English) Flemish Italian Spanish 0-7,999 80 14 38 18 43 283 8,000-15,999 15 4 4 1 4 1 16,000-23,000 6 1 0 0 0 0 24,000-31,999 2 0 2 0 0 0 32,000-39,999 3 0 0 0 0 0 40,000+ 2 0 0 0 0 0 Total number 108 19 44 19 47 284 Net income per capita 6,606 5,605 5,418 3,932 3,198 954 (Nogues-Marco 9) From the above table of wholesale merchants’ net income it can be found out that possession of pieces of eight of old silver (0-7,999) were the maximum among the Spanish people which is a clear representation of “bullionist policy”. Although the net income per capita was the highest in France among these European countries in comparison, it was a long time after England and France that Spain actually made the exports of gold and silver legal following strict bullionist policy which was also a major driving factor for huge inflationary pressure in Europe at that point of time (Hunt 20) The Latter Phase (Emphasis on Increasing Balance of Trade and Colonial Expansion) With this ongoing phase of bullionism the mercantilist classes focused on the balance of payment side and diverted their concentration on the revenue optimization policy. To enjoy a huge reserve of gold and silver the countries were pessimistic in imports and promoted exports to increase the trade balance. The outcome of which resulted in the creation of monopoly power in these countries (Hunt, 21). The English merchants slowly gained price mechanism control in their hands (selling at high prices in remote backward areas and buying at very cheap prices).This also led to the emergence of colonial expansion in several underdeveloped countries that translated into severe exploitation of the natural resources and common masses of those countries. Shortcomings of Mercantilism Mercantilism evolved as a phenomenon, which basically stands on the proposition of a centralized control structure and focused on revenue generation and colonial expansion. State played the authoritative role without aiming at pareto optimality of the resources available and general welfare of the common masses (Fontanel et al 337). As a result of emergence of monopolies in these countries inequality cast its dark shadow in different stratum of the society. Concentration of wealth in the hands of few gave rise to immense poverty exaggeration and agitations in countries. As discussed earlier it can be also said that mercantilism also led to inflationary spiral in several European countries. Relevance of Mercantilism in Present Scenario Although mercantilism has come with its loopholes in it, the very predominance of the same can also be found in the modern world. Following globalization and free flow of goods it has been found that the countries are continuously in a rat race in emerging as superpowers and attracting flow of capital towards them through various mechanisms in different sectors of the society like in education, Research and Development, trade, telecommunications and various other sectors. The countries are adopting furious competitive innovation leadership policies which can be apparently viewed as a policy of global growth dynamics but the implementation of those policy in a constructive way keeping in track with the laws of international trade lies in the hands of the nations, and it has been found that adoption of these policies have rather brought devastating results. According to the laws of welfare economics innovation policies can be thought of making all the nations in a better off condition but in course of moving into overall welfare paradigm, the countries are following “the beggar thy neighbor” policy which are actually hampering the global growth and making several countries in a worse off situation (Ezell 83). One of the most adverse mercantilist practices is the currency manipulation policy which signifies that depending upon low currency value of different countries some countries take the export led advantage that is making their exports more competitive at the international markets and discouraging imports. The countries which practice this mechanism are China, Japan, and Switzerland, Hong Kong, Taiwan, South Korea and others. As for example Chinese government plays a significant protectionist policy of holding down its currency (renminbi) purchasing 1 billion US dollars daily and approximately 30 to 40 billion US dollars making a great competitive edge in its exports in the international market (Ezell 85). Another form of mercantilist practices is innovation mercantilism by which countries force other countries by informal means to accept IP, transfer technologies although WTO have strict rules against market access. This leads to rampant piracy and corruption in softwares, patents and IT products. It has empirically found that majority of softwares used in China are pirated which is indeed a threat in itself. So these have to be effectively monitored and laws should be made very stringent in order to protect these. Although it has been found that mercantilist practices have high growth in the short run but in the long run the growth tends to be unsustainable. It can be said that placing high import tariff actually increased domestic cost of production and ultimately led to the negative magnitude in balance of payment side which has been empirically tested. References Aron, Raymond, Peace & War, Transaction Publishers, 2003 Ezell, Stephen, Fighting Innovation Mercantilism, Issues in Science and Technology, 27. 2, 83-90 Fontanel, Jacques, Hebert, Jean-Paul and Ivan Samson, The Birth of The Political Economy or the Economy in the Heart of Politics: Mercantilism, Defence and Peace Economics, (2008) 19.5, pp. 331-338 Hunt, Emery K. History of Economic Thought, A Critical Perspective, ME Sharpe Nogues-Marco, Pilar, THE MICROECONOMICS OF BULLIONISM: ARBITRAGE, SMUGGLING AND SILVER OUTFLOWS IN SPAIN IN THE EARLY 18TH CENTURY, Working Papers in Economic History, WP 11-05, 2011, March 6, 2012 from: http://e-archivo.uc3m.es/bitstream/10016/11425/1/wp%2011-05.pdf Read More