MERCANTILISM

FINAL DRAFT SUBMITTED IN THE FULFILMENT OF THE COURSE OF

Legal History

NAME: Rahul Raj

COURSE: B.B.A., LL. B (Hons.)
ROLL NO: 1845
SEMESTER: 1 Semester
st

SUBMITTED TO: Dr. Priyadarshini

 ACKNOWLEDGEMENT

I would like to thank my faculty Dr. Priya Darshini whose guidance helped me
a lot with structuring my project. I will also like to thank my teacher for
providing an interesting and important topic which not only covers the legal
history but provides insights of world economics and trade practices.
I owe the present accomplishment of my project to my friends, who helped me
immensely with materials throughout the project and without whom I couldn’t
have completed it in the present way.
I would also like to extend my gratitude to my parents and all those unseen
hands that helped me out at every stage of my project.

Thanking You,

Rahul Raj,
2nd Semester,
B.B.A.LLB.
 RESEARCH METHODOLOGHY

Method of Research

The researcher has adopted a purely doctrinal method of research.

The researcher has made extensive use of the library at the Chanakya
National Law University and also the internet sources.

Aims and Objectives

The aim of the project is to present an overview of “Mercantilism”

through qualified information.

Limitation
The presented research is confined to a time limit of one month and
this research contains doctrinal works, which are limited to library
and internet sources and empirical research.
 CONTENTS

1. Introduction
2. History.
3. Factors shaping mercantilism.
4. Main characteristics of mercantilism.
5. Principles of mercantilism . Commented [rr1]:

6. Analysis of mercantilism.
7. Role of mercantilism in colonial expansion.
8. Effects of mercantilism.
9. Critical estimate of mercantilism.
10. Conclusion
11. Bibliography.
 INTRODUCTION

The dominant system of economic thought that prevailed in Europe from 16th
to 18th Century was Mercantilism. It was known by different names in different
countries. In England it was called as commercial system or mercantile system
because it emphasised the importance of commerce and free trade. It was also
known as “Restrictive system” because its practical policies consisted of
numerous restrictions and regulations on commerce.

Mercantilism is a national economic policy designed to maximize the trade of

a nation and, historically, to maximize the accumulation of gold and silver (as
well as crops)1. Mercantilism was dominant in modernized parts of Europe
from the 16th to the 18th centuries before falling into decline, although some
commentators argue that it is still practised in the economies of industrializing
countries in the form of individual rights2.

It promotes governmental regulation of a nation's economy for the purpose of

augmenting state power at the expense of rival national powers. Mercantilism
includes a national economic policy aimed at accumulating monetary
reserves through a positive balance of trade, especially of finished goods.
Historically, such policies frequently led to war and also motivated colonial
expansion3.
In France it was known as “Colbertism” after the name of Colbert, the Finance
Minister of Louie the XIV. In Germany and Austria it was called “Cameralism”.
It was also known as “Bullionism” because of the importance given to gold and
silver.

1
"Mercantilism," by Laura LaHaye, The Concise Encyclopaedia of Economics (2008)
2
China's Wrong Turn on Trade, Newsweek, by Samuelson, Robert J.
3
Johnson et al., History of domestic and foreign commerce of the United States (p. 37.)
Mercantilist thinkers did not form a group, advocating a fixed line of thought
and policy. They were businessmen, merchants, administrators, in different
countries. They left a number of pamphlets and papers regarding economic
problems. Only the later economists have analysed their writings and found
certain uniformity in their ideas and policies and have grouped them together
as mercantilists.
Mercantilism prevailed not only in England, France, Germany and Italy, but
also in countries like Russia, Spain and Scotland. It adopted itself to the
changing circumstances. Alexander Grey observed that “It had three hundred
years run and so it coloured the thought and still more the actions of every
country in Europe”. Haney says, “Mercantilism comprises the economic views
that prevailed among the European statesmen from 16th to 18th century”.

Mercantilist theory varies in sophistication from one writer to another and has
evolved over time. High tariffs, especially on manufactured goods, were an
almost universal feature of mercantilist policy. Even if mercantilism and
protectionism are applied through the same economic measures, they have
opposite aims. Mercantilism is an offensive policy aimed at accumulating the
largest trade surplus. Conversely, protectionism is a defensive policy aimed at
reducing the trade deficit and restoring a trade balance in equilibrium to protect
the economy.4

With the efforts of supranational organizations such as the World Trade

Organization to reduce tariffs globally, trade have assumed a greater
importance in neomercantilism.

4
John J. McCusker, Mercantilism and the Economic History of the Early Modern Atlantic
World
 HISTORY

The rise of mercantilism began in the early 1400s in Europe, with the end of
feudalism. This era marked the end of the barter system, where goods were
exchanged for one another, and saw the rise of currencies in the form of
precious metals like gold and silver. Realizing that the possession of more
bullion was beneficial, European empires of the time began concentrating on
attracting more of it by trade practices. This led to the rise of mercantilism,
which was adopted by Holland, Spain, Portugal, France, and eventually Great
Britain, though it was more prevalent in the latter two nations.5

Great Britain

Great Britain was late to catch up on this trend, as its first mercantile laws were
enacted in the 1620s, to deal with French, Spanish, and Dutch naval trade. By
the end of the medieval ages, the country was already rich, and with a surplus
of money, the demand for goods increased amongst its citizens. However, since
most goods were produced in other countries, this meant that they would have
to be imported, which didn't fit well with the economic beliefs of the time. So,
the nation embarked on a policy of increasing its domestic production and
reducing imports, which paved the way for mercantilism. The Crown granted
subsidies and other favors to merchants, aiming to remove all hurdles in the
manufacturing sector. The country enacted Navigation Acts to reduce imports
from other countries like Holland and Spain, and began annexing colonies, the
first of which was Jamestown, in the New World, in 1607. Mercantilism
continued in the country, until most powers of the Crown were transferred to
its parliament.

5
https://historyplex.com/history-significance-of-mercantilism
France

The history of mercantilism in France can be credited to Jean-Baptiste Colbert,

who served as finance minister to the Crown for almost 22 years. He advocated
that the Crown should regulate the economy of the state to ensure its progress.
Colbert introduced a number of financial reforms in the country, which made it
one of the dominant economies in Europe, and also greatly strengthened its
naval forces. The crown even specified a long list of rules that dictated how
products should be manufactured in the country to maximize its output. The
strong French Navy allowed the country's territorial expansion to obtain more
colonies, which would provide raw materials, along with serving as a captive
market. While initially, the plan worked as intended, soon this policy of state
intervention in the market led to rising prices, which made Colbert roll back
many of his mercantile reforms. The relentless wars for seeking more colonies
also dissatisfied the public, and contributed to the French Revolution.

Colonial America

When the first British settlers arrived in the New World, they established
Jamestown, the first European settlement, that was controlled by the Virginia
Company, a joint-stock organization, granted a monopoly by the British crown.
However, with time, the colony was taken over by the Crown, and expected to
serve the interests of the mother nation, meaning England. With this aim, it
introduced the Navigation Acts in the 1660s, which forbade the colonists from
trading their goods with any country other than England, apart from mandating
that all vessels used in trade should be British. The colonists were forbidden to
manufacture their own goods or import them from countries other than England.
However, for a long time, these laws were not enforced strictly, as the British
knew they would have to fight the French sooner or later for the control of their
colonies in America, and wanted the colonists' support. However, when the
French were finally defeated in 1763, after the French and Indian War, the
British began enforcing these harsh laws on the colonists, apart from taxing
newer commodities like sugar, oil, tea, and paper. This angered the settlers,
ultimately leading to the American War of Independence.
 FACTORS SHAPING MERCANTILISM

Some economic, political, religious and cultural factors were responsible for
the emergence of mercantilism6.

1. Economic Factors:
Towards the end of the 15th century changes were taking place in the economic
life of the people. Domestic economy was giving way to an exchange economy.
Agriculture was giving place to industry. Trade became very important and it
changed the foundation of socio-economic set-up of the middle ages.

Trade necessitated the use of money which was available in the form of gold
and silver. Along with the expansion of commerce there were improvements in
transport, agriculture, population, etc., so the Mercantilist thought was the
outcome of these developments.

2. Political Factors:
Towards the end of the middle ages nationalism became the strong force.
Europe changed greatly due to Renaissance. As a result, there was a
fundamental political change. It resulted in the emergence of strong nations like
England, France, Spain, etc., Feudalism came to an end and the King became
more powerful. Each nation wanted to preserve its independence and
considered other nations as enemies. In order to create a strong and powerful
state the Mercantilists tried to regulate the political and economic activities of
the people.

6
http://www.economicsdiscussion.net/mercantilism/mercantilism-concept-factors-and-
characteristics/20980
3. Religious Factors:
The Reformation Movement was revolt against Roman Catholic Church. It
challenged the authority of Pope. Initially the Roman Catholic Church
controlled the political and economic activities of the nation. But after the
Reformation the authority of the Pope was challenged.

4. Cultural Factors:
Culturally also Europe was undergoing a sharp change. Renaissance gave a new
light of learning to the people. People were made to realise that this worldly life
was more important than the heavenly life. As a result, money came to occupy
an important place in human activities.

5. Scientific Factors:
In the field of science and technology great improvements and inventions were
made. The discoveries of compass and printing press were of great importance,
with the help of compass navigation became easier and it led to the discovery
of new countries. Thus new countries opened the gates to a variety of raw
materials and markets. The invention of printing press helped the spread of new
ideas and knowledge.

Thus, all the above factors provided an atmosphere for the development of
Mercantilist thought:
1. The fundamental aim of Mercantilism was to make a country strong. The
strength of a country was tested with the help of the wealth of the country, above
all, in that portion of wealth which consisted of precious metals like gold and
silver. So the Mercantilists attached greater importance to bullion (gold)
because it was the most durable, useful and generally acceptable form of wealth.
2. If a country has gold mines and silver mines, it can get gold and silver but if
a country has no mines, it can get gold and silver through trade. The country
should have a favorable balance of trade. In other words, there should be an
excess of exports over imports.

3. In the Mercantilist system of thought trade was the most important

occupation. Industry and commerce were ranked second in importance.
Agriculture was the least important of all. The state had an important role to
play in the Mercantilist system. It should come forward to exploit the natural
resources of the country to increase its exports. There was regulation of
economic life by the government.
 MAIN IDEAS OR CHARACTERISTICS OF MERCANTILISM

1. Wealth:
The fundamental aim of the mercantilists was to make the country strong. The
strength of the country was found in the wealth of the country, especially that
portion of wealth which consisted of precious metals like gold and silver.

Mercantilism firmly believed that gold was the basis of wealth and power.
Hence the mercantilist slogan was ‘more gold, more wealth and more power’.
All the economic activities in the country were centred around wealth.
According to Gray, “Everybody thought that his country was engaged in a race
with other countries and in that race, it must not be the looser”.

In this respect it seems that the mercantilists should have drawn inspiration from
their predecessors because in ancient Greek and Roman and throughout the
middle ages power was considered to be synonymous with accumulation of
treasure or precious metals. Commerce was also encouraged on the same
ground. To quote Columbus “Gold is a wonderful thing; whoever possesses it,
is a master of everything he desires; with gold one can get souls into paradise”.

This greatest importance given to precious metals may be attributed to the

following reasons7:

(i) In the 16th century, the only form of wealth, most useful and generally
acceptable was gold and silver. Naturally the mercantilist attached more
importance to gold and silver.

7
https://www.britannica.com/topic/mercantilism
(ii) With the rise of absolute monarchy, taxation could be possible only if
money was used as measure of value. Thus on the political side also money
came to occupy greater importance.

(iii) For conducting wars money was essential. Three things were required for
war—money, more money and still more money.

(iv) Mercantilists believed that trade depended on plentiful of money.

(v) Money was also needed for development of exchange economy.

(vi) Money in those days was identified with capital.

Thus, the Mercantilists had a high regard for money. If we consider the
circumstances of the day, Mercantilists were justified in attaching greater
importance to gold. According to Keynes, “the Mercantilists understood the
important role of money in the economic system. They studied the effects of an
increase in the quantity of money on the price level and employment.”

2. Foreign Trade:
The Mercantilist theory of foreign trade is known as the balance of trade theory.
The aim of this theory was to get large amount of precious metals. Foreign trade
was considered to be the only Source for getting gold and silver. They believed
that all those nations which did not possess their own gold and silver mines
could become rich after getting gold and silver from foreign countries through
trade.

Sir Thomas Mun the greatest representative of Mercantilist declared that,

“foreign trade ought to be encouraged, for, upon it hinges the great revenue of
the King, the honour of the kingdom, the noble profession of the merchant, the
supply of our poor, the improvement of our lands and means of our treasure”.
The mercantilists insisted that the value of export should always be greater than
imports. In short, they advocated a favourable balance of trade. Hence, they
encouraged exports and discouraged imports. “Export more, import less and
collect the balance in the form of gold and silver”, was the essence of this
theory. Accordingly, every exporter was considered to be a close friend of the
state and every importer as an enemy.

However, the mercantilists theory of foreign trade has no validity in modern

times. If every nation exports more, there would be an end to international trade.
Further, the mercantilists did not distinguish between particular balance of trade
and general balance of trade. By general balance of trade, we mean balance of
the country’s trade with other countries and particular country.

Further, the mercantilists were ignorant of the fact that favourable balance of
trade cannot be maintained for ever because if gold comes into a country more
and more, there would be inflation. Thus, the mercantilist theory of foreign
trade is not a correct one.

3. Commerce and Industry:

The mercantilists considered commerce and industry as the most important

branches of the national economy. They wanted to increase the national
productive efficiency by means of regulation of industry and commerce. They
believed, that commerce and trade were the most productive occupation and
agriculture was the least productive.

Further, as they believed that manufacturing industries were more closely

connected with commerce, they must receive all attention from the government.
However, it should not be misunderstood that the mercantilists regarded
agriculture as insignificant. They thought that agriculture did not contribute
directly to the strength of the country.
4. Population:
Mercantilists encouraged large population for making the nation militarily
strong and for increasing its productive capacity. They believed that cheap and
abundant supply of labour would keep the cost of production low.

This would menable a country to sell its commodity at a lower price in the
international market According to Davenant, “People were the real strength of
a country”. The mercantilists even encouraged immigration because they would
bring wealth and enrich the country.

5. Natural Resources:
The mercantilists wanted to utilize all the natural resources to the maximum
extent so as to produce more, export more and import less. They also attached
importance to agriculture in order to solve the food problem. Colonies were
developed to supply the required raw materials. Further, the colonies were not
allowed to export directly to foreign countries. All the commodities should be
exported to the mother country only.

6. Wages and Rent:

The mercantilists discussed the problems of production only. So, they did not
give much importance to the problems of distribution, especially to wages and
rent.

7. Interest:
No unanimity existed among the mercantilist writers on the subject of interest.
Sir Thomas Mun, a famous mercantilist writer favoured interest taking for the
loans on the ground that lending helped the poor and young merchants. It also
led to the employment of the savings of the widows. Thomas Mun and his
followers told that the rate of interest would be high or low depending upon the
industrial conditions of the country.
8. Taxation:
The views of the mercantilists on taxation were interesting because they were
more scientific and ahead of their time. Broadly speaking the mercantilists
favoured a multiple tax system based on the principle of “each should pay
according to the benefits received from the state”.

9. Theory of Value:
Regarding value, both subjective and objective approaches existed. Prior to the
mercantilists, value was regarded as an intrinsic quality possessed by a
commodity, it depended upon the utility of the commodity. Value was thus
considered to be different from price. By the end of the mercantilist period,
market value was recognised. Scarcity also determined the value of a
commodity. According to the mercantilists the normal value of a commodity
depended on the cost of production.

10. Factors of Production:

Mercantilists recognised three important factors of production, namely, land,
labour and capital. Here we can quote Sir William Petty’s saying “Labour is the
father and active principle of wealth as land is the mother”. The Mercantilists
emphasised the cultivation of agricultural waste lands so that food production
might increase and the country might become self-sufficient and imports might
be reduced.

11. Commercial Regulation:

Mercantilists believed that commercial regulations were essential for
maximising social welfare. Commercial laws were passed to restrict the import
of food materials. But no regulation was applied to the import of raw materials
because they were required for the industrial development of the country. The
state supported the export industries and shipping which would secure a
favourable balance of trade.
12. Role of State:
The mercantilists regarded the state as the supreme power for controlling the
activities of the people. State was the master and its citizens, the servants. The
mercantilists believed that state intervention was necessary to solve the
problems of the society. They believed that for securing success in wars a strong
nation was required.

Nearly, all the mercantilist writers believed that since the total economic
resources of the world were limited, the economic policy must be framed in
such a manner as to increase the power of the state. As a result, they suggested
the policy of protection.

The state policies were shaped according to this idea. Special acts were passed
to encourage exports and the development of industries. Protection was given
to the industries because their main objective was to maintain a favourable
balance of trade.

12. Land Banking Schemes:

Mercantilists ideas regarding money gave rise to the establishment of Land
Banking Schemes. Land Bank Schemes were introduced by Chamberlin and
Barbon .

13. Occupation:
Mercantilists believed that merchants were the most profitable members of the
society. To them occupation was productive only if it increased wealth of a
country.
 PRINCIPLES OF MERCANTILISM

Most of the European economists who wrote between 1500 and 1750 are today
generally considered mercantilists; this term was initially used solely by critics,
such as Mirabeau and Smith, but was quickly adopted by historians. Originally
the standard English term was "mercantile system". The word "mercantilism"
was introduced into English from German in the early 19th century.

The bulk of what is commonly called "mercantilist literature" appeared in the

1620s in Great Britain8. Smith saw the English merchant Thomas Mun (1571–
1641) as a major creator of the mercantile system, especially in his
posthumously published Treasure by Foreign Trade (1664), which Smith
considered the archetype or manifesto of the movement. Perhaps the last major
mercantilist work was James Steuart's Principles of Political Economy,
published in 1767.

Mercantilist literature also extended beyond England. Italy and France

produced noted writers of mercantilist themes, including Italy's Giovanni
Botero (1544–1617) and Antonio Serra (1580–?) and, in France, Jean
Bodin and Colbert. Themes also existed in writers from the German historical
school from List, as well as followers of the American system and British free-
trade imperialism, thus stretching the system into the 19th century. However,
many British writers, including Mun and Misselden, were merchants, while
many of the writers from other countries were public officials. Beyond
mercantilism as a way of understanding the wealth and power of nations, Mun
and Misselden are noted for their viewpoints on a wide range of economic
matters.

8
Magnusson, Lars G. (2003), "Mercantilism", in Samuels, Warren J.; Biddle, Jeff E.;
Davis, Jon B., A Companion to the History of Economic Thought
The Austrian lawyer and scholar Philipp Wilhelm von Hornick, one of the
pioneers of Cameralism, detailed a nine-point program of what he deemed
effective national economy in his Austria Over All, If She Only Will of 1684,
which comprehensively sums up the tenets of mercantilism9:

1. That every little bit of a country's soil be utilized for agriculture, mining or
manufacturing.

2. That all raw materials found in a country be used in domestic manufacture,

since finished goods have a higher value than raw materials.

3. That a large, working population be encouraged.

4. That all export of gold and silver be prohibited and all domestic money be
kept in circulation.

5. That all imports of foreign goods be discouraged as much as possible.

6. That where certain imports are indispensable they be obtained at first hand,
in exchange for other domestic goods instead of gold and silver.

7. That as much as possible, imports be confined to raw materials that can be

finished [in the home country].

8. That opportunities be constantly sought for selling a country's surplus

manufactures to foreigners, so far as necessary, for gold and silver.

9. That there should be no importation allowed under any circumstances of

commodities of which there is a sufficient supply of suitable quality already at
home.

9
Ekelund, Robert B., Jr.; Hébert, Robert F. (1997), A History of Economic Theory and
Method (4th ed.),
“If the might and eminence of a country consist in its surplus of gold, silver,
and all other things necessary or convenient for its subsistence, derived, so far
as possible, from its own resources (colonies and conquered territories
included) , without dependence upon other countries, and in the proper
fostering, use, and application of these, then it follows that a general national
economy should consider how such a surplus, fostering, and enjoyment can be
brought about, without dependence upon others, or where this is not feasible in
every respect, with as little dependence as possible upon foreign countries, and
sparing use of the country's own cash.” -Philipp Wilhelm von Hornick .
 ANALYSIS OF MERCANTILISM

Mercantilism is economic nationalism for the purpose of building a wealthy and

powerful state. Adam smith coined the term “mercantile system” to describe
the system of political economy that sought to enrich the country by restraining
imports and encouraging exports. This system dominated Western European
economic thought and policies from the sixteenth to the late eighteenth
centuries. The goal of these policies was, supposedly, to achieve a “favourable”
balance of trade that would bring gold and silver into the country and also to
maintain domestic employment. In contrast to the agricultural system of the
physiocrats or the laissez-faire of the nineteenth and early twentieth centuries,
the mercantile system served the interests of merchants and producers such as
the British East India Company, whose activities were protected or encouraged
by the state.

The most important economic rationale for mercantilism in the sixteenth

century was the consolidation of the regional power centres of the feudal era by
large, competitive nation-states. Other contributing factors were the
establishment of colonies outside Europe; the growth of European commerce
and industry relative to agriculture; the increase in the volume and breadth of
trade; and the increase in the use of metallic monetary systems, particularly gold
and silver, relative to barter transactions.

During the mercantilist period, military conflict between nation-states was both
more frequent and more extensive than at any other time in history. The armies
and navies of the main protagonists were no longer temporary forces raised to
address a specific threat or objective, but were full-time professional forces.
Each government’s primary economic objective was to command a sufficient
quantity of hard currency to support a military that would deter attacks by other
countries and aid its own territorial expansion.
Most of the mercantilist policies were the outgrowth of the relationship between
the governments of the nation-states and their mercantile classes. In exchange
for paying levies and taxes to support the armies of the nation-states, the
mercantile classes induced governments to enact policies that would protect
their business interests against foreign competition10.

These policies took many forms. Domestically, governments would provide

capital to new industries, exempt new industries from guild rules and taxes,
establish monopolies over local and colonial markets, and grant titles
and pensions to successful producers. In trade policy the government assisted
local industry by imposing tariffs, quotas, and prohibitions on imports of goods
that competed with local manufacturers. Governments also prohibited the
export of tools and capital equipment and the emigration of skilled labour that
would allow foreign countries, and even the colonies of the home country, to
compete in the production of manufactured goods. At the same time, diplomats
encouraged foreign manufacturers to move to the diplomats’ own countries.

Shipping was particularly important during the mercantile period. With the
growth of colonies and the shipment of gold from the New World into Spain
and Portugal, control of the oceans was considered vital to national power.
Because ships could be used for merchant or military purposes, the
governments of the era developed strong merchant marines. In France, Jean-
Baptiste Colbert, the minister of finance under Louis XIV from 1661 to 1683,
increased port duties on foreign vessels entering French ports and provided
bounties to French shipbuilders.

10
Mercantilism," by Laura LaHaye, The Concise Encyclopaedia of Economics (2008)
In England, the Navigation Act of 1651 prohibited foreign vessels from
engaging in coastal trade in England and required that all goods imported from
the continent of Europe be carried on either an English vessel or a vessel
registered in the country of origin of the goods. Finally, all trade between
England and its colonies had to be carried in either English or colonial vessels.
The Staple Act of 1663 extended the Navigation Act by requiring that all
colonial exports to Europe be landed through an English port before being re-
exported to Europe. Navigation policies by France, England, and other powers
were directed primarily against the Dutch, who dominated commercial marine
activity in the sixteenth and seventeenth centuries.

During the mercantilist era it was often suggested, if not actually believed, that
the principal benefit of foreign trade was the importation of gold and silver.
According to this view the benefits to one nation were matched by costs to the
other nations that exported gold and silver, and there were no net gains from
trade. For nations almost constantly on the verge of war, draining one another
of valuable gold and silver was thought to be almost as desirable as the direct
benefits of trade.

Adam Smith refuted the idea that the wealth of a nation is measured by the size
of the treasury in his famous treatise The Wealth of Nations, a book considered
to be the foundation of modern economic theory. Smith made a number of
important criticisms of mercantilist doctrine. First, he demonstrated that trade,
when freely initiated, benefits both parties. Second, he argued that
specialization in production allows for economies of scale, which
improves efficiency and growth11. Finally, Smith argued that the collusive
relationship between government and industry was harmful to the general
population. While the mercantilist policies were designed to benefit the
government and the commercial class, the doctrines of laissez-faire, or free
markets, which originated with Smith, interpreted economic welfare in a far
wider sense of encompassing the entire population.

While the publication of The Wealth of Nations12 is generally considered to

mark the end of the mercantilist era, the laissez-faire doctrines of free-market
economics also reflect a general disenchantment with the imperialist policies of
nation-states. The Napoleonic Wars in Europe and the Revolutionary War in
the United States heralded the end of the period of military confrontation in
Europe and the mercantilist policies that supported it.

Despite these policies and the wars with which they were associated, the
mercantilist period was one of generally rapid growth, particularly in England.
This is partly because the governments were not very effective at enforcing the
policies they espoused. While the government could prohibit imports, for
example, it lacked the resources to stop the smuggling that the prohibition
would create. In addition, the variety of new products that were created during
the Industrial revolution made it difficult to enforce the industrial policies that
were associated with mercantilist doctrine.

11
Smith, Adam. The Wealth of Nations. Edwin Cannan edition. 1937.
12
http://www.econlib.org/library/Smith/smWN.html
By 1860 England had removed the last vestiges of the mercantile era. Industrial
regulations, monopolies, and tariffs were abolished, and emigration and
machinery exports were freed. In large part because of its free trade policies,
England became the dominant economic power in Europe. England’s success
as a manufacturing and financial power, coupled with the United States as an
emerging agricultural powerhouse, led to the resumption of protectionist
pressures in Europe and the arms race between Germany, France, and England
that ultimately resulted in World War I.

Protectionism remained important in the interwar period. World War I had

destroyed the international monetary system based on the gold standard13. After
the war, manipulation of the exchange rate was added to governments’ lists of
trade weapons. A country could simultaneously lower the international prices
of its exports and increase the local currency price of its imports by devaluing
its currency against the currencies of its trading partners. This “competitive
devaluation” was practiced by many countries during the Great depression of
the 1930s and led to a sharp reduction in world trade.

A number of factors led to the re-emergence of mercantilist policies after World

War II. The Great Depression created doubts about the efficacy and stability of
free-market economies, and an emerging body of economic thought ranging
from Keynesian countercyclical policies to Marxist centrally planned systems
created a new role for governments in the control of economic affairs. In
addition, the wartime partnership between government and industry in the
United States created a relationship—the military-industrial complex, in
Dwight D. Eisenhower’s words—that also encouraged activist government
policies. In Europe, the shortage of dollars after the war induced governments
to restrict imports and negotiate bilateral trading agreements to economize on

13
Salvatore, Dominick, ed. The New Protectionist Threat to World Welfare. 1987.
scarce foreign exchange resources. These policies severely restricted the
volume of intra-Europe trade and impeded the recovery process in Europe in
the immediate post-war period.

The economic strength of the United States, however, provided the stability that
permitted the world to emerge from the post-war chaos into a new era of
prosperity and growth. The Marshall Plan provided American resources that
overcame the most acute dollar shortages. The Bretton Woods agreement
established a new system of relatively stable exchange rates that encouraged the
free flow of goods and capital. Finally, the signing of the GATT (General
Agreement on Tariffs and Trade) in 1947 marked the official recognition of the
need to establish an international order of multilateral free trade.

The mercantilist era has passed. Modern economists accept Adam Smith’s
insight that free trade leads to international specialization of labour and, usually,
to greater economic well-being for all nations. But some mercantilist policies
continue to exist. Indeed, the surge of protectionist sentiment that began with
the oil crisis in the mid-1970s and expanded with the global recession of the
early 1980s has led some economists to label the modern pro-export, anti-
import attitude “neomercantilism.” Since the GATT went into effect in 1948,
eight rounds of multilateral trade negotiations have resulted in a significant
liberalization of trade in manufactured goods, the signing of the General
Agreement on Trade in Services (GATS) in 1994, and the establishment of the
World Trade Organization (WTO) to enforce the agreed-on rules
of international trade. Yet numerous exceptions exist, giving rise to
discriminatory antidumping actions, countervailing duties, and emergency
safeguard measures when imports suddenly threaten to disrupt or “unfairly”
compete with a domestic industry. Agricultural trade is still heavily protected
by quotas, subsidies, and tariffs, and is a key topic on the agenda of the ninth
(Doha) round of negotiations. And cabotage laws, such as the U.S. Jones Act,
enacted in 1920 and successfully defended against liberalizing reform in the
1990s, are the modern counterpart of England’s Navigation Laws. The Jones
Act requires all ships carrying cargo between U.S. ports to be U.S. built, owned,
and documented.

Modern mercantilist practices arise from the same source as the mercantilist
policies of the sixteenth through eighteenth centuries. Groups with political
power use that power to secure government intervention to protect their
interests while claiming to seek benefits for the nation as a whole. In their recent
interpretation of historical mercantilism, Robert B. Ekelund and Robert D.
Tollison (1997) focused on the privilege-seeking activities of monarchs and
merchants. The mercantile regulations protected the privileged positions of
monopolists and cartels, which in turn provided revenue to the monarch or state.
According to this interpretation, the reason England was so prosperous during
the mercantilist era was that mercantilism was not well enforced. Parliament
and the common-law judges competed with the monarchy and royal courts to
share in the Monopoly or cartel profits created by mercantilist restrictions on
trade. This made it less worthwhile to seek, and to enforce, mercantilist
restrictions. Greater monarchical power and uncertain property rights in France
and Spain, by contrast, were accompanied by slower growth and even
stagnation during this period. And the various cabotage laws can be understood
as an efficient tool to police the trading cartels. By this view, the establishment
of the WTO will have a liberalizing effect if it succeeds in raising the costs or
reducing the benefits of those seeking mercantilist profits through trade
restrictions.

Of the false tenets of mercantilism that remain today, the most pernicious is the
idea that imports reduce domestic employment. LABOUR UNIONS have used this
argument to justify protection from imports originating in low-wage countries,
and there has been much political and media debate about the implications of
offshoring of service sector jobs for national employment. Many opponents
have claimed that offshoring of services puts U.S. jobs at risk. While it does
threaten some U.S. jobs, it puts no jobs at risk in the aggregate, however, but
simply causes a reallocation of jobs among industries. Another mercantilist
view that persists today is that a current account deficit is bad. When a country
runs a current account deficit, it is either borrowing from or selling assets to the
rest of the world to finance expenditure on imports in excess of export revenue.

However, even when this results in an increase of net foreign indebtedness, and
associated future debt servicing requirements, it will promote economic wealth
if the spending is for productive purposes that yield a greater return than is
forgone on the assets exchanged to finance the spending. Many developing
countries with high rates of return on capital have run current account deficits
for extremely long periods while enjoying rapid growth and solvency. The
United States was one of these for a large part of the nineteenth century,
borrowing from English investors to build railroads. Furthermore, persistent
surpluses may primarily reflect a lack of viable investment opportunities at
home or a growing demand for money in a rapidly developing country, and not
a “mercantile” accumulation of international reserves at the expense of the
trading partner.
 ROLE OF MERCANTILISM IN COLONIAL EXPANSION

Mercantilism became popular in Europe in the 1500s and was the primary
reason behind Europe’s desire to colonize new lands. The theory of
mercantilism states that there is a certain amount of wealth in the world and
that it is in a nation’s best interest to accumulate it. Through wealth, a nation
can achieve power14. A country achieves wealth by producing and exporting
more goods than it imports. These goods must be sold at a profit for wealth to
accumulate. Profits are large when a country spends a small amount of money
on raw materials needed to create a product and sells the finished product for a
high price. It is easy to see how a new colony in North America would be the
perfect place for Europeans to find a steady supply of new raw materials.
Mercantilism was meant to serve the interests of the empire, not the colony.
Colonies existed for the benefit of the home country. Colonies could not sell

14
Spiegel, Henry William (1991), The growth of economic thought (3rd ed.), pg.
93
their raw materials to anyone but the home country, and they were not allowed
to manufacture anything for export.
Mercantilism was the economic version of warfare using economics as a tool
for warfare by other means backed up by the state apparatus, and was well
suited to an era of military warfare. Since the level of world trade was viewed
as fixed, it followed that the only way to increase a nation's trade was to take it
from another. A number of wars, most notably the Anglo-Dutch Wars and
the Franco-Dutch Wars, can be linked directly to mercantilist theories. Most
wars had other causes but they reinforced mercantilism by clearly defining the
enemy, and justified damage to the enemy's economy.

Mercantilism fuelled the imperialism of this era, as many nations expended

significant effort to conquer new colonies that would-be sources of gold (as in
Mexico) or sugar (as in the West Indies), as well as becoming exclusive
markets. European power spread around the globe, often under the aegis of
companies with government-guaranteed monopolies in certain defined
geographical regions, such as the Dutch East India Company or the
British Hudson's Bay Company (operating in present-day Canada).

With the establishment of overseas colonies by European powers early in the

17th century, mercantile theory gained a new and wider significance, in which
its aim and ideal became both national and imperialistic.15

EFFECTS OF MERCANTILISM

Class System

15
Emory Richard Johnson; et al. History of domestic and foreign commerce of the United
States. pp. 35–37.
The policy of mercantilism resulted in a nexus between the administration and
the merchant classes. The latter were encouraged to increase industrial output,
and any competition in the market was forbidden by law, which enabled the
merchants to become even wealthier. The government also benefited from
levying taxes on the revenue earned by the merchants. On the other hand, the
oppression of the lower classes was encouraged, since it was thought that
keeping them poor was the key to obtaining labour for more industrial
production. So, mercantilism led to a widening economic divide between the
upper and lower sections of society.

Rise of Superpowers

Several European nations like Great Britain and France became economic and
military superpowers by focusing more on export, and increasing their stores of
precious metals. Since most of the trade was carried via sea routes, this gave
them a reason to expand and strengthen their navies, both to protect their trade
routes and for territorial expansion to obtain more colonies. The focus on
increasing domestic output resulted in the development of a highly-skilled
labour force in these countries, which was also a result of other policies, like
encouraging the immigration of manufacturers from their colonies and other
nations16.

16
https://historyplex.com/history-significance-of-mercantilism
Smuggling

The passing of laws which favoured mercantilism led to the establishment of a

thriving smuggling industry, especially in the colonies of America. Since a great
expanse of ocean separated them from England, the Crown was forced to send
British inspectors to regulate colonial trade. However, this distance ensured a
lax enforcement of laws, and the colonies could freely smuggle goods in and
out of sea ports. Moreover, since the inspectors received measly salaries from
the British administration, they were only too happy to receive bribes in order
to turn a blind eye to trade violations.

Triangular and Slave Trade

Great Britain's policy of mercantilism led to the development of the popular

Triangular Trade in the colonial province of New England. Rum was a major
product of the province, which was exported to Africa in exchange for slaves.
These slaves were then traded in West Indies in exchange for sugar and
molasses. These raw products were required for rum production. As can be
seen, this also encouraged the African slave trade.
Impoverishment of Colonies

The mercantile system led to the impoverishment of colonies like India. In the
17th and 18th centuries, India was a colony controlled by a British monopoly,
called the East India Company. The country was forced to export raw materials
like cotton, indigo, and salt to Britain, where they were highly taxed on entry.
Moreover, the colonists were forced to import expensive goods for their use
solely from Britain. This system worsened their living conditions, leading to a
catastrophic famine in the province of Bengal in 1770, killing almost 10 million
people. Similarly, in colonial America, the southern states like Virginia and
Maryland were agricultural economies, which were heavily affected by British
policies that had drastically reduced the rate of tobacco produce.

Positive Effects

Despite all the drawbacks, mercantilism had a handful advantages. Since the
colonies were forced to export raw materials produced by them, this gave them
a stable market. At the same time, they were under the military protection of
the 'mother' nation, which defended them from possible attacks from other
adversaries. As mentioned before, this policy brought about the development of
skilled labour in European nations, along with transforming them into military
and economic superpowers. Moreover, Adam Smith's criticism of mercantilism
greatly influenced the Founding Fathers of independent America, and paved the
way for capitalism, a system where markets are driven by profits and controlled
by private entities, rather than by the administration.
 CRITICAL ESTIMATE OF MERCANTILISM

Mercantilist theories and practices have been criticised by many writers. The
opposition actually started towards the end of the 17th century. The storm of
criticism against mercantilism was particularly strong in France. The criticism
against mercantilism reached its climax towards the end of the 18th century
when Adam Smith published his book “The Wealth of Nations”17, one fourth
of which was devoted to this.

Broadly speaking, the following criticisms have been levelled against

mercantilists and their policies:
(1) They gave too much importance to gold and silver and neglected the
importance of other commodities.

(2) They exaggerated the importance of commerce and undermined the

usefulness of agriculture and other branches of human history.

(3) They were wrong in believing that a favourable balance of trade was the
only source of prosperity.

(4) Their belief that the gain of one nation was necessarily the loss of another
was wrong.

(5) Their ideas regarding ‘utility’ and ‘value’ were vague and abstract.

(6) Their ideas about capital and interest were imperfect.

(7) They lacked broad-mindedness.

17
http://www.econlib.org/library/Smith/smWN.html
But at the same time, we should not completely criticize the mercantilist
doctrines and theories. While studying their ideas, one should not overlook the
circumstances and problems of their times. Mercantilism was essentially a
product of its age. It is no doubt true that they erred at places. But as Haney has
remarked “they are far from a mass of absurdities”. Thus the mercantilist system
had its own weaknesses18.

As an economic policy it lacked universal application. As a body of doctrines,

it could not provide right guidance to statesmen of the time. They confused the
means and the ends by overemphasizing the importance of bullion. Further, in
their zeal to increase the total productivity of the nation, they regarded wealth
and labour as the ultimate goal of human existence.

Mercantilists were not only practical administrators and traders, they also put
forward such ideas which led to the development of various economic theories
in modern times. Dr. Smith has rightly pointed out, “It is the mercantilists and
not Smith, who are the spiritual predecessors of modern economics”.
Mercantilism implied a general view of society which is often overlooked. They
developed a sort of macro-economic approach to the problems of the society.

The mercantilists emphasised the need for maximising exports not only with
the idea of accumulating gold and silver, but with the hope that a prosperous
export sector would provide more employment. Even the emphasis of the
mercantilists on more money can be justified on economic grounds. They were
aware of the dynamic functions of money.

18
Ekelund, Robert B.; Hébert, Robert F. (1975), A History of Economic Theory
and Method, New York:
An increase in the supply of money would result in lowering the rate of interest
which would serve as an inducement to invest. Knut Wicksell developed his
theory of interest with the mercantilist ideas as the basis. Keynes also admired
some of the mercantilist ideas. The mercantilists were aware of the fact that
money is not merely a medium of exchange but a store of value.

Keynes noted that the mercantilists were concerned with the economic system
as a whole and they were interested in securing optimum employment of the
resources. Keynes approved two mercantilist ideas – more money for business
expansion and more money for lowering the rate of interest.

Mercantilism paved the way for many western nations for their transformation
from ‘commercial capitalism’ to ‘industrial capitalism’. The mercantilists ideas
are powerful even today. In the words of Eric Roll, “Down to the present day
they all reappear from time to time in various guises as symptoms and weapons
of economic conflict”.
 CONCLUSION

Adam Smith rejected the mercantilist focus on production, arguing that

consumption was paramount to production. He added that mercantilism was
popular among merchants because it was what is now called rent seeking.
However, John Maynard Keynes argued that encouraging production was just
as important as encouraging consumption, and he favoured the "new
mercantilism". Keynes also noted that in the early modern period the focus on
the bullion supplies was reasonable. In an era before paper money, an increase
in bullion was one of the few ways to increase the money supply. Keynes said
mercantilist policies generally improved both domestic and foreign
investment—domestic because the policies lowered the domestic rate of
interest, and investment by foreigners by tending to create a favourable balance
of trade.

Keynes and other economists of the 20th century also realized that the balance
of payments is an important concern. Keynes also supported government
intervention in the economy as necessity, as did mercantilism.

As of 2010, the word "mercantilism" remains a pejorative term, often used to

attack various forms of protectionism. The similarities between Keynesianism
(and its successor ideas) and mercantilism have sometimes led critics to call
them neo-mercantilism. Paul Samuelson, writing within a Keynesian
framework, wrote of mercantilism, "With employment less than full and Net
National Product suboptimal, all the debunked mercantilist arguments turn out
to be valid."

Neomercantilism is a 20th-century economic policy that uses the ideas and

methods of neoclassical economics. The new mercantilism has different goals
and focuses on more rapid economic growth based on advanced technology. It
promotes such policies as substitution state taxation, subsidies, expenditures,
and general regulatory powers for tariffs and quotas, and protection through the
formation of supranational trading blocs19. Some other systems that copy
several mercantilist policies, such as Japan's economic system, are also
sometimes called neo-mercantilist. In an essay appearing in the 14 May 2007
issue of Newsweek, business columnist Robert J. Samuelson wrote
that China was pursuing an essentially neo-mercantilist trade policy that
threatened to undermine the post–World War II international economic
structure. Murray Rothbard, representing the Austrian School of economics,
describes it this way: “Mercantilism, which reached its height in the Europe of
the seventeenth and eighteenth centuries, was a system of statism which
employed economic fallacy to build up a structure of imperial state power, as
well as special subsidy and monopolistic privilege to individuals or groups
favoured by the state. Thus, mercantilism held exports should be encouraged
by the government and imports discouraged”.20

In specific instances, protectionist mercantilist policies also had an important

and positive impact on the state that enacted them. Adam Smith, for instance,
praised the Navigation Acts, as they greatly expanded the British merchant fleet
and played a central role in turning Britain into the world's naval and economic
superpower from the 18th century onward. Some economists thus feel that
protecting infant industries, while causing short-term harm, can be beneficial in
the long term .

19
Johnson, Harky G. (March 1974), "Mercantilism: Past, Present and Future" (pg .
1 – 17 )
20
Rothbard, Murray (1997), Mercantilism: A Lesson for Our Times? Pg. 43
 BIBLIOGRAPHY

 "Mercantilism," by Laura LaHaye, The Concise Encyclopaedia of

Economics (2008)

 China's Wrong Turn on Trade, Newsweek, by Samuelson, Robert J.

 Johnson et al., History of domestic and foreign commerce of the United

States

 John J. McCusker, Mercantilism and the Economic History of the Early

Modern Atlantic World

 Magnusson, Lars G. (2003), "Mercantilism", in Samuels, Warren J.;

Biddle, Jeff E.; Davis, Jon B., A Companion to the History of Economic
Thought

 Ekelund, Robert B., Jr.; Hébert, Robert F. (1997), A History of

Economic Theory and Method (4th ed.)

 Johnson, Harky G. (March 1974), "Mercantilism: Past, Present and

Future"

 Rothbard, Murray (1997), Mercantilism: A Lesson for Our Times?

 Smith, Adam. The Wealth of Nations. Edwin Cannan edition. 1937

Websites

 http://www.econlib.org/library/Smith/smWN.html
 https://historyplex.com/history-significance-of-mercantilism