Demonstration of the Understanding of How Mercantilism Worked - Case Study Example

Demonstration Of The Understanding On How Mercantilism Worked, Its Essential Pillars. Strength and Its Weaknesses Name: Institution: Demonstration Of The Understanding On How Mercantilism Worked, Its Essential Pillars. Strengths and Its Weaknesses Introduction As economists, it often good to remember the economic history that helps us to evade the occurrence of a fatal crisis. The economists must as well account for the milestones of the business as well as show how it has contributed to the development of the same. When thinking of this economic history, mercantilism is one of the theory that flashes on our minds. It is currently being considered as a historical artefact and no update economists would associate themselves with mercantilism. Back in the 18th century, the European thought were intensively dominated by mercantilism (Ehrenberg, 1999). Behind the curtain of mercantilism is the motive of augmenting the net exports while regulating the imports to their minimal. This was adapted with the notions of increasing the nation’s prosperity. This was mainly influenced by the fact that if a country had more gold than the other, then the latter was considered better off. To increase the prosperity of a country, was to engage in less imports and increased exports (Pencak, 2011). This resulted to increasing the net flow of the foreign exchange as the country’s gold stock remained constant. Most countries adopted this in order to remain powerful and strong. For instance the Britain protected its traders with an aim of augmenting state’s income. There were also other examples such as the Navigation act the restricted the ability to trade between England verses other colonies. This essay will focus on how mercantilism worked, the essential pillars, its strength as well as its weaknesses. Three Main Pillars of Mercantilism Government intervention Mercantilism is argued on the basis of national economic policies that are meant to help accumulate monetary reserves by ensuring a positive trade balance that mostly relied on the finished goods. These policies however led to expansion of colonisation as well as colonial wars (Roberts, 1998). There were several policies that were applied by the state’s government in favour of mercantilism which included; Limiting wages, Prohibition of gold and silver exportation even if it’s for a fee, Markets monopolization, Export subsidies, maximum use of domestic resources, Establishment of overseas colonies, Criminalising the any trade in the foreign ships, Promoting domestic manufacturing industries with research subsidies, and greatly regulating the domestic consumptions that are non-tariff barriers to the trade. These policies made the mercantilism to be modelled as a simple form of bullionism but many writers have emphasized on it as money circulation and hoarding rejection (Barkin, 2003). The colonial Economy Mercantilism is a historical period that is associated with capitalism (Minchinton, 1969). Currently it is used to describe the colonial governments that imposed protective trading policies which were finally coupled with other regulations to either directly or indirectly subsidize production industries in an aim to augment state trading advantage. The state fiats were used to control the prices stabilization as well as making policies that restricted the trade roots. Japan is one of the examples that is classified to have even implemented the 20th century mercantilism which are characterised with the listed policies. However, this is banned by the free trade advocates who argue that the international as well as the domestic market place should be exposed to minimum or no state interference (Roberts, 1998). Stern & Wennerlind (2014) wrote that, for wealth to be achieved through mercantilism, the following elements were quite essential. (1) Policy and nationalism should go hand in hand, and all the policies should be biased towards nationalism. (2) Domestic country should always think foreign trade in terms of the effect it causes to the country’s precious metal stock. (3) The country’s that lack the precious metal should accumulate is by excess exports and minimum imports. This is in order for the domestic country to accumulate most of the precious metals to remain a super power at the expense of the country strength. (4) The government of a certain country should impose trade regulations that favours excess exports and restricts rampant imports. This is in an effort to encourage the citizen to embrace the exports and minimize imports. (5) The political foreign policy as well as the economic foreign policy should be coordinated to ensure achievement and effectiveness of Mercantilism (Stern & Wennerlind, 2014). Trade Surplus However, despite the fact that Mercantilism was used in 18th century in Europe, it is been replicated to greater depths and used to refer to the general principle of augmenting the state power with an aim of increasing the economy and its capitalist class. Mercantilism is used by some countries to control and manipulate the trade zones. At colonial periods mercantilism was used to take the form of military control of all trade routes, plundering of the colonies with an aim of retrieving gold and other precious raw materials and imposing of large tariffs on all the imported goods more so the manufactured goods. The merchant’s thought is that the profit originated form the fact of selling dear and buying cheap (Stockwell, 2006). Although this is the notion of any economist in the field of business, the mercantilists were applying this to the whole nation. This was to the contrary of the sacred beliefs of the market ideology that is supposed to be held by the classical economists. The economists hold on the ideology that any exchange should be transacted on the basis of equivalency. The Mercantilists, they were of the notion that the seller should always benefit whenever the buyer losses. This is the pillar against which the Mercantilism relied on in order to make the nation to become richer whenever it sold more and bought less. They promoted Mercantilism as a mean of gaining more surplus profits. They were of the argument that, the policy makers were after benefiting the whole nation as well as nourish the living standards if the domestic citizens (Pencak, 2011). Mercantilism strengths Mercantilism was one of the features that greatly influenced the transition of feudalism to industrialisation as well as capitalism. The Mercantilism immensely benefited the large merchant enterprises. For example the British East Indian Company which could be given access to the protected routes and export home goods. The route was maintained and protected by the state for that specific mission. The route was used to help accumulate the gold into the state since the domestic trade could not generate enough surplus for the state (Stern & Wennerlind, 2014). These states based on these arguments that this was their main source of profit, they prompted Mercantilism as a mean of gaining more surplus profits. The state could offer subsidies to exporting industries by; Imposing high tariff walls in order to encourage home production industries; banning selling of any gold to the foreigners; financing some of the industries in home country when the need arose; having control over some of the types of capital; and encouraging relentless importation of law material as well as gold from the foreign colonies. These are the strengths that the liberals who rose against the imperialism of the Mercantilists. The liberals argue that this mode of trade only benefited on side of the seller while it impoverished the buyers. The Mercantilist could buy cheaply and sell dearly. This was what made the merchants class to be declined in Europe. This led to the reinstatement of the doctrines of comparative advantage as merchant’s doctrines were earthed (Battaglia, 2007). The led to the introduction of the industrial capitalism which saw the labour as a mean of investment of the European countries as well as the Britain states. Also the tenets of Mercantilism were the main reasons behind the arguments that were tabled by the liberals. The tenets were meant to comprehensively strengthen the Mercantilism. One of the tenet stated that all the imports be discouraged and the exports welcomed as much as possible (Pencak, 2011). Mercantilism weaknesses During the period the Mercantilism was effective, it could control the trading system but not until the introduction of the Industrial capitalism (Koot, 2011). When the industrial capitalism emerged, the strength of the Mercantilist declined and they could no longer control the goods and services production. The merchants came to realize that getting involved in the ways of production, would actually earn them more surplus by controlling the labour productivity. However this tactic did not work well for the merchants since they were more specialized in controlling the importation of the law materials that were used to manufacture the various products. Now that the industrial capitalisation played part, the final product was of high quality that attracted huge prices compared to the original cost on exportation. This was the simplest way they could get the gold into the national treasury (Stockwell, 2006). This led to the suppressing of the mercantile system at the beginning of the 17th century in Europe. At this time most countries had already transformed into the mercantile system. Examples of these countries were; Holland, Low Countries found in Belgium, France and Spain. Also most modern states were emerging in form of political complement to the merchant economy. The coalition of merchants led to the dissolution of the old feudal and developed a system that was indeed being completed by the labour market. This competition led to the eventual formation of a group that found itself out of the feudal ties. The group was forced to inly trade their labour force in order to maintain their subsistence. There was also an emergence of an industrial and entrepreneurial class that could recruit members from the already declining merchant class (Rowe, 2000). The mercantile system finally lost bearing and could no longer control the new economic order. They were overpowered by the emerging forces that controlled the profits earned by regulating the accumulation of capital as well as the production processes. As long as the trading remained essential, the transactions were merely depicted as just sharing of the total selling price between the buyers and sellers without excluding the merchants (Pencak, 2011). The mercantilist idea that the profit was to be accrued from the trade was surpassed by the economist’s view that the reinvestment and production of profit was the only true source for the nation’s power and wealth. Adam smith once critiqued the mercantilist doctrine after the global shift of focus from the trade as a source of profit to the production. This led to massive economic dynamics as well as capital accumulation. As a result, the mercantilist doctrine was scrubbed off and the doctrine of comparative advantage was put in place. This doctrine enshrouds the idea of open and free trade which ensures a mutual benefit to both trade participants (Stern & Wennerlind, 2014). Conclusion The emerging of the free and open trade led to the declination of the mercantile trade. This was due to its limited strengths and numerous weaknesses. The mercantilist had a way of getting maximum profit after they shipped their home good to foreign colonies. They could take gold and restrict their gold accumulation. This led to a symbiotic relationship which saw only one participant benefit from any interaction. The demolition of the feudal class and the emergence of the capitalist industrialisation has shown that indeed the mercantilism theory was incompatible as well as weak. Considering the historical influence, the mercantilist policy is the one that accelerated the disintegration of the feudal economy and introduction of a mutual aid crafts system production. The mercantile system and the state policies were the complements of the other. The main objective that spearheaded these complements was to foster the growth and development of the foreign trade which could see the wealth of a certain state increase. This would be done in exchange of the inflow the precious metal, law materials and services which were added to the exports. Mercantilism could be credited for allowing and accelerating the transition of the European economy from being a land-based to being a monetary economy. However, although the pure state of the mercantilism is dead for our today society it can still be minutely traced. Some states are still using the above policies even in the free trade zones to maintain the dominance of the market place. References Barkin, J. S. (2003). Social construction and the logic of money: Financial predominance and international economic leadership. Albany, NY: State University of New York Press. Battaglia, W. L. (2007). Ethics as social conscience. Davis, Calif: California Expert Software. Ehrenberg, J. (1999). Civil society: The critical history of an idea. New York: New York University Press. Koot, C. J. (2011). Empire at the periphery: British colonists, Anglo-Dutch trade, and the development of the British Atlantic, 1621-1713. New York: New York University Press. Minchinton, W. E. (1969). Mercantilism; system or expediency?. Lexington, Mass: Heath. Pencak, W. (2011). Contested commonwealths: Essays in American history. Bethlehem, [Pa.: Lehigh University Press. Roberts, L. S. (1998). Mercantilism in a Japanese domain: The merchant origins of economic nationalism in 18th-century Tosa. Cambridge: Cambridge University Press Rowe, J. C. (2000). Post-nationalist American studies. Berkeley [u.a.: Univ. of California Press. Stern, P. J., & Wennerlind, C. (2014). Mercantilism reimagined: Political economy in early modern Britain and its empire. Stockwell, M. (2006). A journey through Maine. Salt Lake City, Utah: Gibbs Smith. . Read More