MERCANTILISM

Introduction:

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 “favorable” 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 centers 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 competition.

Meaning:

Alexander Gray observes that mercantilism is a misleading and deceitful word. Different writers have
defined mercantilism differently. According to Lekachman “mercantilism was a battle against
hampering medieval thought and practice”. It was revolt against medievalism resolve to reconstruct
economic life to a more rational scheme. To Edmund Whittaker mercantilism was the economic
counterpart of political nationalism”. Heiman described it as the ideological justification of
Commercial Capitalism. Thus mercantilist writers were essentially practical businessmen, merchants
and administrators in various European countries like England, France, Italy, Germany, Scotland, and
Spain etc. They left behind numerous works regarding contemporary national economic problems.
They do not form a school of economists. So the ideas and policies which dominated the economic
scene of England 'and a part of Europe between the close of the 16th century and the middle of the
18th century can rightly be called as mercantilism. Mercantilist writers put emphasis on foreign
trade as a means of accumulating treasure and building a strong nation.

Important Economic Theories of Mercantilism:

Whereas the economic literature of scholasticism was written by medieval churchmen, the
economic theory of mercantilism was the work of secular people, mostly merchant businessmen,
who were privately engaged in selling and buying goods. The literature they produced focused on
questions of economic policy and was usually related to a particular interest the merchant and
writer (in one person) was trying to promote. For this reason, there was often considerable
skepticism regarding the analytical merits of particular arguments and the validity of their
conclusions. Few authors could claim to be sufficiently detached from their private issues and offer
objective economic analysis. However, throughout the mercantilism, both the quantity (there were
over 2000 economic works published in 16th and 17th century) and quality of economic literature
grew. The mercantilist literature from 1650 to 1750 was of distinctly higher quality, these writers
created or touched on nearly all analytical concept on which Adam Smith based his Wealth of
Nations, which was published in 1776.

The age of mercantilism has been characterized as one in which every person was his own
economist. Since the various writers between 1500 and 1750 held very diverse views, it is difficult to
generalize about the resulting literature. Furthermore, each writer tended to concentrate on one
topic, and no single writer was able to synthesize these contributions impressively enough to
influence the subsequent development of economic theory.

Secondly, mercantilism can best be understood as an intellectual reaction to the problems of the
times. In this period of the decline of feudalism and the rise of the nation-states, the mercantilists
tried to determine the best policies for promoting the power and wealth of the nation, the policies
that would best consolidate and increase the power and prosperity of the developing economies.
What is especially important here is the mercantilist assumption that the total wealth of the world
was fixed and constant. These writers applied the assumption to trade between nations, concluding
that any increase in the wealth and economic power of one nation occurred at the expense of other
nations (the rest of the world). Thus, the mercantilists emphasized international trade as a mean of
increasing the wealth and power of a na on. Using some modern game theore c language, we may
say, that they perceived economic activity and international trade in particular as a zero-sum game
that is a game, where it is impossible for both players to win. So according to mercantilists, it is
impossible to increase a global wealth of the world in effect of international trade. It is a very sad
assumption, and modern economists do not share it. The goal of economic activity, according to
most mercantilists, was production, not consumption, as classical economists would later have it.
They advocated increasing the nation’s wealth by simultaneously encouraging production, increasing
exports and holding down domestic consumption. Thus, in practice, the wealth of nation rested on
the poverty of the many members of society.

Third general point about mercantilism is their insistence on the notion of balance of trade. Balance
of trade figures, also called net exports, are the sum of the money gained by a given economy selling
exports, minus the cost of buying imports. A positive balance of trade is known as a trade surplus
and consists of exporting more than one imports. A negative balance of trade is known as a trade
deficit and consists of importing more than one export. As we know today, neither positive nor
negative balance of trade is necessarily dangerous in modern economies, although large trade
surpluses or trade deficits may sometimes be a sign of other economic problems. According to
mercantilists a country should increase exports and discourage imports by means of tariffs, quotas,
subsidies, taxes and the like in order to achieve a so-called favorable or positive balance of trade.
Production should be stimulated by government interference in the domestic economy and by the
regulations of foreign trade. Protective duties should be placed on manufactured goods from
abroad; and the state should encourage the import of cheap raw materials to be used in
manufacturing goods for export .
Criticisms of Mercantilism:

The following criticisms were levelled against mercantilism by the opponents:

1. The mercantilists exaggerated the importance of Commerce to the extent of depressing

2. Undue importance was attached to gold and silver.

3. They were under erroneous belief that a favorable balance of trade alone would bring prosperity
to the country.

4. Their idea about value, utility capital and interest were vague and imperfect.

5. They are narrow minded nationalists and not cosmopolitans. They could not conceive the ideas of
mutually advantageous trade. However, we cannot dismiss their ideas as useless or impractical. The
idea of nationalism, self-sufficiency and economic strength were the outcome of their policies. The
mercantilist policy proved successful in France, England, Holland and Germany who were competing
for colonial supremacy

References:
Harry Landreth and David C. Colander, History of Economic Thought,
4th Edition, Houghton Mifflin Company, Boston, Toronto.
An Outline of the History of Economic Thought (2nd Edition),
(2003) Ernesto Screpanti and Stefano Zamagni.
Blaug, Mark(1985), Economic Theory in Retrospect, 4th Edition,
Cambridge: Cambridge University Press