MERCANTILISM

MERCANTILISM. Mercantilism was an economic "system" that developed in Europe during the period of the new monarchies (c. 1500) and culminated with the rise of the absolutist states (c. 1600–1700). Mercantilism was not characterized by the blind adherence to a single, precisely defined economic theorem. Rather, its adherents embraced, in various degrees, parts of a set of commonly held theoretical beliefs or tendencies that were best suited to the needs of a particular time and state. The underlying principles of mercantilism included (1) the belief that the amount of wealth in the world was relatively static; (2) the belief that a country's wealth could best be judged by the amount of precious metals or bullion it possessed; (3) the need to encourage exports over imports as a means for obtaining a favorable balance of foreign trade that would yield such metals; (4) the value of a large population as a key to self-sufficiency and state power; and (5) the belief that the crown or state should exercise a dominant role in assisting and directing the national and international economies to these ends. As such, mercantilism developed logically from the changes inherent in the decline of feudalism, the rise of strong national states, and the development of a world market economy.

The shift from payments in kind, characteristic of the feudal period, to a money economy was one key development in this process. By the late fifteenth century, as regional, national, and international trade continued to blossom, European currencies expanded as well; circulation was more common, widespread, and vital. The early mercantilists recognized the seminal fact of this period. Money was wealth sui generis; it gave its holder the power to obtain other commodities and services. Precious metals, especially gold, were in universal demand as the surest means to obtain other goods and services. At the same time the rise of more powerful European states with burgeoning bureaucracies, frequent dynastic wars that required larger and more expensive armies, and more lavish court expenditures exacerbated this fundamental need for money in the form of precious metals. Foreign trade, not domestic trade, was viewed as the preferred method for obtaining bullion, while manufacturing, which provided the goods for such trade, was favored over agriculture. Finally, the discovery of the New World by Columbus in 1492 and the discovery of the sea route to India by Vasco da Gama in 1497–1499 also provided fertile ground for obtaining such wealth while creating an ever greater need for wealth to conquer and protect these colonies and their imperial trade. All of these factors ensured that the rising late medieval and early modern states embraced mercantilism as an economic theory that allowed them to adapt to and seek to exploit these shifting structures.

Since mercantilism at base postulated increased royal control over both the internal and external economic policies of the state, it found easy acceptance among the "new" monarchies of the late fifteenth century and the sixteenth century. In Portugal, Manuel I (ruled 1495–1521) and his successors embraced its tenets regarding bullion and colonies to help exploit their burgeoning Asian empire. In Spain both Charles I (ruled 1516–1556) and Philip II (ruled 1556–1598), given the boon of New World precious metals, also found comfort in bullionism as well as the tenets calling for the exploitation of colonies for the benefit of the mother country. In England, Henry VIII (ruled 1509–1547) and Elizabeth I (ruled 1558–1603) adhered to some mercantilist principles in an effort that was, at least in part, designed to combat the threat of universal Habsburg Monarchy and Iberian dominance in the developing world market economy.

PROPONENTS OF MERCANTILISM

During the seventeenth century, adherents of absolutism also found much to embrace in mercantilism. During the age of Stuart absolutism James I (ruled 1603–1625) and Charles I (ruled 1625–1649) found it logical to accept the premise that the monarch should not only control the political and social hierarchy but should enjoy control over the economy as well. Oliver Cromwell (1599–1658), after destroying Stuart pretensions in the Civil War, embraced both mercantilist warfare and the Navigation Acts in his commercial struggle with the Dutch. It was in France, however, that mercantilism found perhaps its greatest supporter in Jean-Baptiste Colbert (1619–1683). Colbert's career was as much a product of the sociopolitical dynamics of the absolutist state as the result of the unrivaled bureaucratic energies he displayed in the service of his early patrons and eventually the crown. His family rose through the social hierarchy based on the time-honored expedients of wealth and venality of office. Utilizing family connections, Colbert entered the service of Michel Le Tellier in 1643, soon after the latter became secretary of state in charge of military affairs. This promising foundation was solidified during Colbert's "apprenticeship" under Jules Cardinal Mazarin, a mutually advantageous relationship that began in 1651 and lasted until Mazarin's death in 1661. By the end of this decade of opportunity, Colbert had become baron de Seignelay, secretary of the orders of the queen, intendant general of the affairs of Mazarin, counselor of the king in all of his councils—not to mention a very wealthy man. Just as importantly, he had begun to create an apparatus for the implementation of his later policies by further enriching his family and arranging influential positions for a bevy of his brothers and cousins.

In this rapid ascent through the labyrinth of French political life, Colbert honed the ideas and theories that shaped his policies after 1661, the year Louis XIV (ruled 1643–1715) began his personal reign and Nicolas Fouquet was imprisoned, thus ensuring Colbert's ascent to ministerial preeminence. The basic theoretical tenets of mercantilism predated Louis XIV's reign, in some cases by half a dozen generations. Colbert was exposed to such ideas in the Paris of his youth, when the economic traditions of the first Bourbon king of France, Henry IV (ruled 1589–1610), and the theories of his able controleur général du commerce (comptroller general of finance), Barthélemy de Laffemas, were still relatively strong. Armand-Jean Du Plessis, Cardinal Richelieu (1585–1642) was still alive at that time, and Issac de Laffemas, the cardinal's creature, was in the midst of perpetuating his father's intellectual legacy. Although Colbert never referred to the writings of Antoine de Montchrestien (c. 1575–1621) and Jean Bodin (1530–1596), he was probably familiar with their works. Mercantilism reached its apogee under Colbert not because he was a theorist but rather because he was a man of action who judged its tenets to be the only natural and logical way to achieve his most cherished goal: a powerful and wealthy France united under a glorious monarch. The primary obstacle to France's economic greatness was the overweening economic power of the Dutch. If the mercantile power of the burghers of Amsterdam could be broken in both Europe and the lucrative Asian trade, France could prosper.

Colbert's anti-Dutch strategy evolved logically from his beliefs on political economy. Foremost among his particular tenets on mercantilism was the conviction that the volume of world trade was essentially static and that, to increase its share, France would have to win part of that controlled by its rivals. In one of his most quoted mémoires (Lettres VI: 260–270) Colbert wrote, "The commerce of all Europe is carried on by ships of every size to the number of 20,000, and it is perfectly clear that this number cannot be increased." Commerce caused "perpetual combat in peace and war among the nations of Europe, as to who shall win most of it." His exaggerated estimate on the maritime strength of the major European trading nations competing in this "war" was fifteen thousand to sixteen thousand Dutch ships, three thousand to four thousand English ships, and five hundred to six hundred French ships. Just as importantly neither the French nor the English could "improve their commerce save by increasing this number, save from the 20,000 . . . and consequently by making inroads on the 15,000 to 16,000 of the Dutch." (Lettres VI: 260–270). The bellicism inherent in such beliefs would in part culminate in the Dutch War of 1672, a war Colbert supported. Unfortunately, despite his most careful calculations regarding this struggle in both Europe and the Indian Ocean, Louis XIV's armies and fleets suffered increasing difficulties in the war from 1672 to 1679. These setbacks forced Colbert to undo many of his initial reforms from 1661 that had doubled the king's revenues, forged a powerful navy, and set France on a course for apparent dominance in Europe. By the time of his death in 1683, the kingdom was instead on the road to bankruptcy and revolt, and Louis XIV's penchant for continued warfare in the decades down to 1715 only exacerbated this decline.

OPPONENTS OF MERCANTILISM

During the eighteenth century the limits of mercantilism became increasingly obvious, and intellectual and political critics of its basic tenets gradually emerged. First, Louis XIV's spectacular failures in the kingdom viewed as the apogee of both absolutism and mercantilism certainly revealed the limitations of allowing the state to direct the economy for its own frequently selfish, if not self-destructive, purposes. At the same time, in parts of England, Holland, and northwestern France the initial adherence to mercantilist principles created the very conditions that fostered antimercantilist sentiments. These developments would ultimately cause the destruction of merchant capitalism. In short, merchant capitalism reached a level within the mercantilist system where state intervention and direction of the economy was threatening and even preventing further expansion. The critical spirit toward existing Old Regime structures embodied in the intellectual revolution of the Enlightenment found its antimercantilist champions in the Physiocrats. In part adapting "natural law" doctrines to the economy, this influential group of economic theorists, including François Quesnay (1694–1774), Jean-Claude-Marie-Vincent de Gournay (1712–1759), and Pierre-Samuel du Pont de Nemours (1739–1817), instead argued for laissez-faire. This theory argued that the economy functioned best when its own "natural laws" were allowed to function without government intervention. Complementing the work of the French économistes, the Scottish philosopher David Hume (1711–1776) sought to identify the natural advantages that various nations enjoyed in the flow of commerce and provided a new theory on international trade. In his Political Discourses (1752) and Essays and Treatises on Several Subjects (1753), Hume also sought to refute some of the principal tenets of mercantilism, including confounding money with wealth and the blind acceptance of bullionism. Yet by far the most important work criticizing mercantilist thought was Adam Smith's (1723–1790) An Inquiry into the Nature and Causes of the Wealth of Nations (1776), the first systematic economic analysis of the world market economy created during the preceding age of mercantilism. Smith's strong advocacy of free trade and his belief that world wealth was not static, as Colbert and others had held, did much to undermine mercantilism. At the same time his theories and those of other Physiocrats also encouraged colonies like British North America to reject the traditional dependence on their mother countries as defined by the mercantilist model while furnishing intellectual fuel for the industrial revolution then taking place in Great Britain. In France, however, only the French Revolution and Napoléon I (1769–1821) would facilitate the destruction of the economic remnants of both the late medieval and mercantilist periods.

See also Absolutism ; Colbert, Jean-Baptiste ; Hume, David ; Liberalism, Economic ; Physiocrats and Physiocracy ; Smith, Adam .

BIBLIOGRAPHY

Colbert, Jean Baptiste. Lettres, instructions, et mémoires. Edited by Pierre Clément. 7 vols. Paris, 1861–1882.

Cole, Charles Woosley. Colbert and a Century of French Mercantilism. 2 vols. New York, 1939.

——. French Mercantilist Doctrines before Colbert. New York, 1931.

Heckscher, Eli F. Mercantilism. Translated by Mendel Shapiro. Rev. ed. 2 vols. London, 1955.

Glenn J. Ames

Mercantilism

Although the term mercantilism encompasses the diverse trade practices followed by European states from the sixteenth until the late eighteenth century, its core assumptions may be summarized: that wealth is an absolutely indispensable means to achieve geopolitical power; that such power is valuable as a means to acquire or retain wealth; that wealth and power constitute the dual ends of national policy; and that these two ends are compatible and, indeed, complementary. English commercial writer Charles Davenant claimed that, in "matters of empire, whoever is the cause of another's advancement is the cause of his own diminuition" (Davenant 1704, pt. 1, p. 205). A nation could not remain, in his view, "unarmed, sit still and suffer another country to enlarge its dominions" (Davenant 1704, pt. 1, p. 205). Mercantilism, then, refers to the collection of policies designed to keep the state prosperous through economic regulation.

EARLY TRADE POLICIES

The keystone of the mercantilist system was the complex network of regulations controlling the trade of colonies with each other and with the mother country, the chief object being to secure monopoly and prevent competitor nations from enjoying the produce of, and trading with, one nation's colonies. As another English seventeenth-century writer, Josiah Child, noted: "If [colonies] are not kept to the rules" then the "benefit of them would be wholly lost to the nation" (Child 1688, pp. 177-178). England's Navigation Act of 1651 set the pace and tone of interimperial trade relations. It represented a genuine departure from past policy. Designed originally to eliminate the Dutch as the principal shippers of English imports, the Navigation Act signaled a new attitude toward government regulation, and put the power of the state squarely behind national economic development. It forbade the importation of plantation commodities from Africa, America, or Asia, except on ships owned and operated by English subjects.

Under the terms of its 1696 amplification, foreign agents or states were forbidden from engaging in any facet of colonial trade, articles could not be shipped from the colonies to foreign nations, and colonial imports were limited to goods shipped from England, thus creating a monopoly. The term monopoly was applied to any trade where there was a legal or legally sanctioned restriction on entry. The goal was to free England from its reliance on foreign commodities and to give English manufactures a free hand in its dominions. Every other European empire endeavored to create a closed, monopolistic trading system in order that all benefits of colonization would accrue to itself alone, rendering the empire self-sufficient and economically independent of the rest of the world. If the attempt by every nation to create a monopoly by excluding the merchants of all other nations from its colonies was one pillar of the mercantile system, the attempt to exclude all merchants other than those of a single privileged company was the second.

After trade legislation, the privileged (sometimes referred to as monopoly or chartered) commercial company was the second mainspring of mercantilism in the seventeenth and eighteenth centuries. Companies were forged out of the cooperation of state power and market-oriented entrepreneurship. Their creation entailed the delegation of government authority and property rights to the company in an overseas dominion. In exchange for rights of sovereignty and exclusive economic access to a colonial territory, such companies were required to construct forts and garrisons to protect against the depredations of indigenous inhabitants, to provide naval power and protection from aggression by other European nations, and to conduct diplomatic relations with indigenous rulers. Louis XIV's reforming minister in the late seventeenth century, Jean Baptiste Colbert, had viewed companies as effective in colonial trade where the traffic was not well established and long sea voyages and financial risks were involved. Other nations followed suit and by the end of the seventeenth century the globe was divided into rival empires of trade.

CHANGING ATTITUDES

Just before the turn of the eighteenth century, attitudes toward the mercantilist trading system began to change. Whereas the mercantilists maintained that a nation could develop economically only by outstripping and impoverishing its neighbors in a zero-sum world, new political writers began to rethink trade, the sources of wealth, and the bases of geopolitical power. In France, a group of political economists called Physiocrats contended that all wealth derived from agriculture and argued for the virtues of laissez-faire, or free trade. Two leading Physiocrats, François Quesnay and Marquis de Mirabeau, in their widely circulated 1763 tract Rural Philosophy, asserted that nations that adopted agriculture "sooner or later came to enjoy the benefits of society, of union, of population, of good and equitable laws, and of the appropriate arts and skills" whereas the others had "grown old in a state of barbarism" (Meek 1973, p. 110).

Although many of the French economists were connected to the world of imperial administration, Baron Turgot urged Louis XVI to contemplate an unimperial future, calling for the West Indian sugar islands to become independent states, connected to France only by the bonds of identity of origin, language, and customs. More radically, Abbé Raynal urged European nations to relinquish colonial monopoly and to remove "every obstacle … that intercepts a direct communication" (Paquette 2004b, p. 206) between the Americas and all of Europe. Raynal contended that privileged companies never recovered the money and rights advanced to them through the duties they levied. For Raynal, the world historical purpose of commerce was to corrode relentlessly the fences of colonial fiefdoms until it produced a universal society without national boundaries. The trend away from privileged companies in France culminated in the 1769 suspension of the Compagnie des Indes.

It was the Scot Adam Smith who coined the terms mercantile system, which he used derisively. In The Wealth of Nations (1776), Smith contended that the fundamental error of the mercantilists was their confusion of wealth with money. Since they believed, mistakenly, that a favorable balance of trade was the primary means of acquiring wealth and money, they had been unable to conceive of the advantages to be derived from foreign trade. Similarly, he explained that the exclusion of foreign competition from the colonial trade might indeed have raised profits, but that this apparent advantage was offset by an accompanying rise in prices that subjected the nation to "an absolute and relative disadvantage in every branch of trade of which she has not the monopoly" (Smith 1976, vol. 2, p. 592). The mercantile system, then, "rendered less secure" the long-term prosperity of the colonial power because "her commerce, instead of running in a great number of small channels, has been taught to run principally in one great channel" (Smith 1976, vol. 2, p. 604).

Even before the appearance of Smith's treatise, the British Navigation Acts had been loosened somewhat by the creation of free ports in the British Caribbean in 1766. These were designed, primarily, to allow silverladen vessels from Spanish ports to enter Britain, essentially making the de facto smuggling de jure. Such a reduction in restrictions was preceded by the Dutch free port at St. Eustatius (1737), the Danish example in St. Thomas and St. John (1763), French experiments in Martinique and Guadeloupe (1763–1765), and the Spanish Caribbean in 1765. The powers wielded by the British East India Company came under similar scrutiny, though the company was not dismantled. British statesman Edmund Burke observed with dismay that it did not seem to be only a company formed for the extension of British commerce, but in reality a delegation of Britain's sovereignty deployed to the East.

This late-eighteenth-century skepticism presaged further attacks on the various components of the mercantile system by the classical political economists of early-nineteenth-century Britain: David Ricardo condemned colonial trade restrictions on free trade grounds, arguing that the existence of such exclusive colonial markets neither affected profits nor were necessary for the employment of the mother country's surplus capital. James Mill opposed such colonial monopoly on utilitarian grounds, claming that the mother country was gaining at the expense of the colonies, thereby decreasing the sum of overall public welfare of the empire as a whole.

SHIFTS IN MERCANTILISM

Although the reservations voiced by the Physiocrats and Adam Smith were ascendant after 1760, some European powers clung to, and benefited from, the reinvigoration of the mercantile system. In Portugal, the powerful reforming prime minister, the Marques de Pombal, derided "all business which is done in foreign countries [as] insecure and very contingent" because the "ambition and greed inspired in other countries gives rise to frequent attempts to impede or usurp [that commerce]" (Carvalho e Melo 1986, p. 42). None of these dangers, Pombal reasoned, "threatens commerce which is conducted with colonies," potentially a "secure and perpetual" relation so long as the "exclusion of foreigners" and "care in watching over the colony's commerce and fertilizing it each day more in order to sprout new branches" (Carvalho e Melo 1986, p. 42) were maintained.

Trading companies became the basic building block in his grand design upon his rise to power in 1755 and were realized most fully in Brazil. In creating the companies of Grão Pará and Maranhão, Pombal sought to develop new export commodities (such as cotton and rice) and encourage the growth of colonial manufactures. These companies, which did not survive Pombal's political fall, were abolished in 1778 and 1779 and a freer trade between Portugal and northern Brazil was established. The companies had failed to achieve their economic objectives: Less than one-quarter of the shipments to the colonies were composed of national manufacturers while Portuguese textiles represented only 30 percent of total dispatched to the empire.

ABBÉ RAYNAL

Born in Saint-Geniez, France, on April 12, 1713, Guillaume-Thomas-François Raynal is noted for his influential writings on slavery in the New World. Educated by the Jesuits, Raynal initially joined the Roman Catholic order and worked at the Parisian parish of Saint-Sulpice. Abbé Raynal, as he is more commonly known, eventually left the Jesuits and started a writing career, beginning with a popular work on the history of the Netherlands and another on the history of the English Parliament.

In 1770 Raynal published the controversial six-volume Philosophical and Political History of the Settlements and Trade of the Europeans in the East and West Indies, which strongly condemned both the Roman Catholic Church and the French government. The fourth volume of the collection criticizes in detail the use and treatment of slaves in the North and South American colonies, and advocates the abolition of the slave trade. Raynal warned European leaders that if the slaves were not freed, bloody revolutions would soon commence, a prediction vindicated shortly thereafter by the Haitian slave rebellion of 1791.

Four years after its publication, the Philosophical and Political History was banned by the church, and in 1781 it was burned by the French public executioner, after which Raynal fled the country. Raynal was allowed to return in 1787, and two years later witnessed revolution in France, followed in 1794 by a formal decree eliminating slavery in the French colonies. Raynal died on March 6, 1796.

In the Spanish Empire, debates over colonial trade monopoly and privileged companies were particularly fierce. From the advent of its dominion in the New World, the Crown had zealously guarded its American dominions from foreign penetration. Until 1720 all ships had to pass through Seville, and between 1720 and 1765, through Cádiz. Foreign commercial ships were, in legislation at least, prohibited from entering Spanish American ports. Furthermore, in an attempt to guarantee markets for Spanish exports, the development of manufactures was strictly forbidden in the colonies. The early-eighteenth-century Spanish political economists, whose thought underpinned the changes that Spain imposed on the structure and functioning of its empire between 1759 and 1808, endorsed monopoly and trading companies: Geronimo Uztáriz attributed Spain's economic stagnation to the composition of its foreign and domestic trade and poor shipping facilities, both of which caused otherwise avoidable outflows of precious metals.

Spain had fallen behind its imperial rivals, but its plight was reversible. This realization unleashed the debate over the viability of Spain's mercantile system: On the one hand, Raynal's Spanish translator implored the reader to resist the French Abbé's siren call of liberty of commerce, warning that it often proved nothing but a chimera. On the other hand, in his 1794 preface to Wealth of Nations, Smith's translator mocked Britain for having granted trading companies sovereign power and the right to maintain garrisons and fortifications in overseas dominions. The so-called free trade decrees of 1765 and 1778 did away with some of the regulations constricting Spanish colonial commerce, represented the death knell of the Royal Havana Company, and seemed to prefigure a Smithian or physiocratic embrace of freer trade. Yet foreigners were still legally excluded from Spanish entrepôs and trading companies persisted: Less regulated trade did not prove to be the anticipated remedy for the deep-seated structural malaise brought on by belated industrialization and colonial undersupply. By the 1780s, such shortcomings of the new approach prompted the Crown to experiment with a combination of freer trade and regulated companies. A Philippines Company was empowered to conduct trade between Manila and the entire empire, as well as exclusive right to import slaves into Venezuela. In addition, widespread smuggling and Creole discontent conspired to render unworkable the mercantile system by the eve of Spanish American independence in 1808.

Although the trend was toward freer trade, it was hardly an inexorable and irreversible movement. Even in Britain, the old allegiance to the Navigation Acts, the bulwark of the mercantile system, persisted and even outpaced newfangled economic liberalism. One prominent writer accused Smith of not merely opposing monopoly, but favoring the "dismemberment of the empire" (Paquette 2004a, p. 200). Even when free trade was adopted in one area it sometimes proved to be a powerful inducement for protection in another, and the languages of these different systems mingled in the mouths of political writers and policymakers. Older views about the role of the state in international trade remained, as did the goals of economic self-sufficiency and the avoidance of reliance on foreign suppliers: In the aftermath of the American Revolution, English politician Lord John Sheffield famously remarked that "freedom of commerce is not a power granted to merchants to do what they please." Only after 1820 would liberal notions of wealth, trade, and empire fully take hold. When they finally did, they would underpin a new, nonmercantilist conception of colonialism: the imperialism of free trade.

see also Enlightenment Thought.

BIBLIOGRAPHY

Anderson, Gary, and R. D. Tollison. "Apologiae for Chartered Monopolies in Foreign Trade, 1600–1800." History of Political Economy 15 (4) (1983): 549-566.

Blussé Leonard, and Femme Gaastra, eds. Companies and Trade: Essays on Overseas Trading Companies during the Ancien Régime. Leiden, Netherlands: Leiden University Press, 1981.

Carvalho e Melo, Sebastião de [later, Marques de Pombal]. Escritos Económicos de Londres (1741–1742) (London Economic Writings). Edited by José Bareto. Lisbon, Portugal: Biblioteca Nacional, 1986.

Child, Josiah. A Discourse About Trade. London: 1668.

Crowley, John E. The Privileges of Independence: Neomercantilism and the American Revolution. Baltimore: Johns Hopkins University Press, 1993.

Davenant, Charles. Essays Upon Peace at Home, and War Abroad. 2 parts. London: 1704.

LaHaye, Laura. "Mercantilism." In The Concise Encyclopedia of Economics. The Library of Economics and Liberty. Available from http://www.econlib.org/library/enc/mercantilism.html.

Magnusson, Lars. Mercantilism: The Shaping of an Economic Language. London and New York: Routledge, 1994.

Maxwell, Kenneth. Pombal: Paradox of the Enlightenment. New York: Cambridge University Press, 1995.

Meek, Ronald L. The Economics of Physiocracy: Essays and Translations. Cambridge, MA: Harvard University Press, 1963.

Meek, Ronald L., ed. Precursors of Adam Smith. Totowa, NJ: Rowman and Littlefield, 1973.

Paquette, Gabriel B. "The Image of Imperial Spain in British Political Thought, 1750–1800." Bulletin of Spanish Studies 81 (2) (2004): 187-214.

Paquette, Gabriel B. "The Intellectual Context of British Diplomatic Recognition of the South American Republics, c. 1800–1830." Journal of Transatlantic Studies 2 (1) (2004): 75-95.

Rothschild, Emma. "Global Commerce and the Question of Sovereignty in the Eighteenth-Century Provinces." Modern Intellectual History 1 (1) (2004): 3-25.

Ruiperez, Mariano García. "El Pensamiento Economico Ilustrado y las Compañías de Comercio." Revista de Historia Económica 4 (3) (1986): 521-548.

Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. 2 vols. Oxford, U.K.: Oxford University Press, 1976.

Smith, Robert Sidney. "The Wealth of Nations in Spain and Hispanic America, 1780–1830." Journal of Political Economy 65 (1) (1957): 104-125.

Stein, Stanley J., and Barbara H. Stein. Apogee of Empire: Spain and New Spain in the Age of Charles III, 1759–1789. Baltimore: Johns Hopkins University Press, 2003.

Viner, Jacob. "Power Versus Plenty as Objectives of Foreign Policy in the Seventeenth and Eighteenth Centuries." In Revisions in Mercantilism, edited by D. C. Coleman. London: Methuen, 1969.

Winch, Donald. Classical Political Economy and Colonies. Cambridge, MA: Harvard University Press, 1965.

Mercantilism

Mercantilism is a notoriously difficult concept to define. It first appeared in print in Marquis de Mirabeau's "Philosophie Rurale" in 1763 as système mercantile. In France during the eighteenth century the concept was used to describe an economic policy regime characterized by state intervention to protect domestic merchants and manufacturers. The main creator of the concept of mercantilism, however, was Adam Smith. In An Inquiry into the Wealth of Nations (1776) Smith characterized the core of the mercantile system—"the commercial system"—as the popular folly of confusing wealth with money. According to Smith, mercantilist writers such as Thomas Mun, Edward Misselden, Josuah Child, and others proposed the principle that a country must export more than it imported, which would lead to a net-inflow of bullion. This was the central argument of the so-called "positive balance of trade theory." Further, according to Smith, the early-seventeenth-century merchant and writer Thomas Mun (1571–1641) was the main architect of this theory. Smith argued that the theory of the positive balance of trade was only a thin veil covering the special interest of the mercantile and trade class, which opted for protection from the state. This view of mercantilism as a policy of rent seeking developed by special interests has in recent times been further elaborated by economists inspired by positive and public choice theory, especially Robert E. Ekelund and Robert D. Tollisson, who have defined the policy regime of mercantilism as "a rent seeking society."

HISTORY OF MERCANTILIST THEORY

Since Adam Smith, the concept of mercantilism has been used to designate a system of economic policy as well as an epoch in the development of economic doctrines during the seventeenth and eighteenth centuries. The view that that mercantilism was built upon an "almost romantic value which our ancestors set upon the possessions of the precious metals" (Jones 1859, p. 312) and thus could be described as a mere fallacy was carried further by the classical school of political economists in Britain. However, from the middle of the nineteenth century the German historical school offered an alternative interpretation of mercantilism, according to which their doctrines were the rational expression of state building during the early modern period. For German historical economist such as Gustav Schmoller, mercantilism was the policy of unity and centralization pursued especially by the Prussian government during the seventeenth and eighteenth centuries. Earlier German historicists such as Wilhelm Roscher and Friedrich List (1789–1846) argued that the core of mercantilism consisted of dirigist (the term for state regulative policies) ideas propounding the active role of the state in economic modernization and growth. During the twentieth century this view of mercantilism was even more enforced by the Swedish economic historian Eli Heckscher, who in "Mercantilism" (1931) attempted to present mercantilism as a system of both economic thought and economic policy. He agreed with Smith that the balance of trade theory was at the core of the mercantilist doctrine. However, Heckscher also regarded mercantilism as a system of economic policy—as state making, as the historical economists had emphasized. In pursuing the goal of national power the mercantilists developed a number of nationalist economic policy tools, including tariffs. Hence, the British Navigation Acts, as well as the establishment of national standards of weights and measurements and a national monetary system, could be viewed as the outcome of the same mercantilist policies.

Heckscher's work provoked heated debate about mercantilism in the 1950s and 1960s. In 1939 A. V. Judges had vigorously rejected the notion of a particular mercantilist doctrine or system. Mercantilism had neither a common theoretical core nor any priests to defend the gospel, he stated. Another economic historian, D. C. Coleman, outrightly denounced the usefulness of mercantilism as a description of both economic policy and economic theory; it was "a red herring of historiography" (Coleman 1969, p. 117). Mercantilism was not a unified school of economic thinking and doctrine.

Although it is correct that mercantilism was not a finished system or coherent doctrine, and mainly appeared in pamphlets which dealt with economic and political issues of the day, this does not imply that economists writing during the seventeenth and early eighteenth centuries did not have some common aims and views and shared concepts to make intelligible the complex world of economic phenomena. Moreover, Smith and his followers helped to cement a view of the mercantilist writers that made them seem more old-fashioned than they actually were. Thus, to a large extent, writers of this branch can be regarded as forerunners to Smith and the liberal school, not their opposition. They were not totally devoted to dirigisme, and their demand-and-supply analysis has formed the nucleus of modern theorizing ever since. The mercantilist literature between 1620 and 1750—mainly by the British but with contributions from Spain, Italy, and other countries—mainly dealt with the issue of how to achieve national wealth and power. In the bulk of this literature these two goals were looked upon as identical.

MONEY VS. WEALTH

From Adam Smith in 1776 to Jacob Viner in the 1930s, the view that the early mercantilist writers had confused money with wealth has been repeated over and over again. However, recent scholars agree that this explication is not correct. It is quite clear that a majority of writers beginning with Thomas Mun insisted that to have an abundance of money in the country very important for economic progress and the wealth of the nation. Mun, as well as many others during this period, feared that without a steady inflow of money originating from a favorable balance of trade, trade and industry would stagnate, prices would fall, and so on. To counter this shortage of bullion in circulation, a steady inflow of money through a net trade surplus was necessary, they believed. Nor would it cause inflation, since a positive net inflow was necessary in order to cope with increased levels of trade activity. But this did not at all imply that money was identical to wealth. Rather, some would argue that a net inflow of money was a barometer that signaled whether a nation had won or lost its trade competition with other countries. Others would say that an increased money supply would help to speed up intercourse in the marketplace and stimulate growth and development. Thus, a net inflow of money could be a means to procure wealth, but wealth itself was always the result of production and consumption.

PROTECTIONISM

Instead, what makes it legitimate to speak of a specific "mercantile system" was its proponents' constant and stubborn preoccupation with the question how a nation could become rich and thus also achieve greater national power and glory. The mercantilists' main recipe for growth was state dirigisme and protection—that is, the introduction of duties and bounties to stimulate domestic industry and the export sector, and to discourage importation of manufactured goods. In the sense that mercantilism was an ideology for economic protection in order to achieve domestic growth, it is not applicable only to the period before Adam Smith. The nineteenth century saw the rise of a strong reaction towards the gospel of free trade propounded by British classical political economists. In both Germany and the United States a dominant protectionist school emerged as protectionism also found root elsewhere, including in Britain. Among the most prominent protectionists were the Americans Alexander Hamilton (1757–1804) and Henry Carey (1793–1879) and the German economist writer Friedrich List. Although quite different in style and ideas, they shared the view that an agricultural economy was always inferior to an industrial economy. Moreover, especially List and Carey stressed that the "cosmopolitanism" in much of English economics during the time was false, and concealed the fact that free trade was a tool for preserving Englandís superiority as an industrial nation. It is usually acknowledged that the first "national economist" was Hamilton, who in 1790 presented a "Report on Manufactures" in which he made a number of arguments for the protection of an infant industry which have been commonplace ever since.

Certainly, mercantilist ideas can also be found in modern forms of protectionism that have appeared since the nineteenth century. For example, Heckscherís synthesis was aimed at advocacy in favor of liberal and free-trade ideas against the protectionism and economic nationalism that characterized the interwar period. Despite Heckscherís insistence that mercantilism was a false ideology—free trade was better for economic growth, at least in the long run—mercantilism was hailed as a form of popular economics of common sense. As such, it still exists to some degree, but it has reappeared most clearly during periods of economic problems, such as the 1920s and 1930s.

POSTWAR NEOMERCANTILISM

After World War II, mercantilist ideas recurred in the form of neomercantilism and strategic-trade theory. From the end of the 1970s, strategic-trade theorists such as Lester Thurow, James Brander, Barbara Spencer, and Paul Krugman sought to replace the theory of comparative advantages set forth in the beginning of the nineteenth century by Robert Torrens and David Ricardo with something that Michael E. Porter prefers to call "competitive advantage." Their argument is that the pattern of international trade cannot be explained on the basis of comparative advantage or with the help of the simple Heckscher-Ohlin theorem. Instead, the flow of international trade is a consequence of scale and scope, economic muscle, and increasing returns to scale. The Brander-Spencer model and pleas for "strategic trade policy" were based on the fact that a country, which through early investment has gained control of an export market for a particular good, tends to keep its leading position. In cases where competition is not perfect, sunk investments (investments already made) lead to barriers of entries—at least in industries with high value-added content—which in its turn serves as a competitive advantage. The political implications of this were straightforward: governmental support can bring about a competitive advantage in an industry that would benefit its nation in the long term. Certainly, this was another way to defend the infant-industry argument, with clear implications for trade policy. An example often used by strategic-trade policy theorists is the fierce competition between the aircraft manufacturers Boeing in the United States and Airbus in Europe, co-owned by a number of private and public entities in Europe. Without a doubt, active governmental support in terms of provisions of credit, subsidies, etc., is of great importance in the international division of labor.

Without doubt, the nineteenth-century dismantling of the old dirigist economic regime of the seventeenth and eighteenth centuries played an important role in economic growth, the expansion of world trade, and the industrial revolutions that occurred in the Western Hemisphere, especially after 1850. Especially during the period 1850 to 1880, Western Europe experienced a period of almost unrestricted free trade, during which many domestic restrictions on industry and free enterprise and trade were lifted. Much the same is true of the twentieth century: the lifting of many restrictions by the General Agreement on Tariffs and Trade (GATT) and other institutions since 1945 has been an important driving force in the enormous expansion of world trade in the last half-century.

Against this background, it seems odd that protectionism—mercantilism in its modern form—remains attractive. The different versions of modern strategic-trade theory, the emphasis on national innovation systems, and the renaissance of the theory of increasing returns of scale applied to international economics are a clear sign of this. Indeed, there is ample evidence, historical and logical, that Adam Smith's model of free trade and international division of labor is much superior to the mercantilists' plea for economic nationalism and protection. Why, then, does protectionism persist?

What seems to be the best solution for all is not automatically and necessarily perceived so by every individual actor (nation). In the short-term (or even middle-term) an actor may recognize that some protection would benefit him. The main reason for this is that markets are not always perfect or clear. In the real world there exist such things as asymmetrical information and rent-seeking and special interests that opt for protection. We cannot expect that all nations will act as true altruists or keepers of the common good. To a large extent, it is such factors that explain the longevity of protectionism and the attractiveness of its policies in the modern world.

However, we have also to acknowledge the uncomfortable fact that most industrialized and wealthy countries, at some point during their development, have used protectionism as a means to achieve growth and economic modernization. We cannot know whether they would have been better off not using such methods. However, the stubborn persistence of ideas such as the infant-industry argument seems to suggest that it may contain a grain of truth. Hence, the argument pursued by Hamilton and List that latecomers to the industrial race gain from the protection of their nascent industries has remained vital. In the twentieth century this argument has appealed especially to developing countries. Radical economists with mercantilist arguments often have challenged free-trade liberalism and the theory of comparative advantages during the nineteenth and twentieth centuries. During the last decade mercantilist critiques have been advanced to explain development and underdevelopment as a consequence of economic globalization. According to this view the seventeenth-century mercantilist had a clear picture of the importance of a process which the modern developmental economists Raul Prebisch and Gunnar Myrdal stressed during the 1950s and 1960s: that in international trade there is an unequal advantage for the parties involved, depending on what they import or export. It could be argued that the mercantilists were aware that a higher productive potential in the form of "modern" industry provides a more developed country with a technological monopoly that can be used for producing higher incomes or even achieving better terms of trade. As long as such views are expressed, there will be a place for mercantilist and protectionist views.

SEE ALSO Colbert, John-Baptiste;Hanseatic League (Hansa or Hanse);Navigation Acts.

BIBLIOGRAPHY

Appleby, Joyce Oldham. Economic Thought and Ideology in Seventeenth-Century England. Princeton, NJ: Princeton University Press, 1978.

Beer, Max. Early British Economics. London: Allen and Unwin, 1938.

Brander, J., and Spencer, B. "Tariffs and the Extraction of Foreign Monopoly Rents Under Potential Entry." Canadian Journal of Economics 14, no. 3 (1981): 371–389.

Coleman, D. C. (ed.) Revisions in Mercantalism. London: Methuen and Co., 1969.

Ekelund, Robert B. and Tollison, Robert, Politicised Economics. College Station, TX: A&M University Press, 1997.

Gould, J. D. "The Trade Crisis of the Early 1620s and English Economic Thought." Journal of Economic History no. 15 (1955): 121–133.

Heckscher, Eli F. Mercantilism. 2 vols. London: Allen and Unwin, 1955.

Jones, Richard. "Primitive Political Economy of England," in Literary Remains Consisting of Lectures and Tracts on Political Economy. [1859]. New York: Augustus M. Kelley, 1964.

Krugman, Paul. Geography and Trade. Cambridge, MA: Massachusetts Institute of Technology Press, 1991.

Magnusson, Lars. Mercantilism: The Shaping of Economic Language. London and New York: Routledge, 1994.

O'Rourke, Kevin. "Tariffs and Growth in the Late Nineteenth Century." Economic Journal 110 (2000): 456–483.

Perrotta, Cosimo. "Is the Mercantilist Theory of the Favourable Balance of Trade Really Erroneous?" History of Political Economy 23, no. 2 (1991): 301–336

Porter, Michael E. Competitive Advantage. New York: Free Press, 1985.

Porter, Michael. On Competition. Cambridge, MA: Harvard University Press, 1998.

Schumpeter, J. A. History of Economic Analysis. London: Allen and Unwin, 1972.

Semmel, Bernard. The Rise of Free Trade Imperialism. Cambridge, U.K.: Cambridge University Press, 1970.

Lars Magnusson

Mercantilism

BIBLIOGRAPHY

The term mercantilism designates a system of economic policy as well as an epoch in the development of economic doctrines, lasting from the sixteenth to the eighteenth century. It first appeared in print in Marquis de Mirabeau’s Philosophie rurale in 1763 as système mercantile. The main popularizer of the “commercial system”—as he preferred to call it—was Adam Smith. According to him the core of the mercantile system consisted of the folly of confusing wealth with money. Despite the practical orientation of the mercantilist writers, they did propose a principle: the so-called positive balance of trade theory, which implied that a country must export more than it imported. According to Smith, the mercantile system was put into place by a mercantile special interest that would be able to profit from duties on imports, tariffs, and bounties.

From Smith onward, the view of the mercantile system, or simply mercantilism, as state dirigism and protectionism serving a special interest through the maintenance of positive balances of trade was developed further by classical political economy. During the nineteenth century this viewpoint was contested by the German historical school, which preferred to define mercantilism as state-making in a general sense. According to its view mercantilism as a system of theory was the rational expression of nation-building during the early modern period. An attempt to combine these two interpretations was made by the Swedish economic historian Eli Heckscher in his Mercantilism ([1935] 1994). A response to Heckscher’s wide definition of mercantilism was to altogether reject the notion of a particular mercantilist system.

This latter position goes too far, however. It is certainly correct that mercantilism was not a finished system or coherent doctrine in the nineteenth- and twentieth-century sense. It is better described as a literature of pamphlets and books that mainly dealt with practical political economy, published roughly between the late sixteenth century and 1750. The underlying issue dealt with in this literature was the question of how to achieve national wealth and power. This general agenda can be traced in English, Italian, and French economic texts from the sixteenth century onward. From this point of view, Italian writers such as Giovanni Botero (1544–1617) and Antonio Serra (1580–?), as well as sixteenth-century Spanish writers such as de Vitorias, de Soto, de Azpilcueta, and Luis de Ortiz were perhaps the first “mercantilists.” In England, the most well-known mercantilists in the middle of the seventeenth century were Thomas Mun (1571–1641) and Edward Misselden (1608–1654). Later well-known mercantilist writers include Josiah Child (1630–1699), Nicholas Barbon (1640–1698), Charles Davenant (1656–1714), Malachy Postlethwayt (1707–1767), and James Steuart (1713–1780) in England and Antoine Montchrètien (1575–1621) and Jean Baptiste Colbert (1619–1683) in France. Most of these writers shared the view that the increase of trade and manufacture could only be accomplished through state intervention, and that it was not possible to rely only on the self-equilibrating forces of the marketplace.

From Adam Smith onward the view has been repeated that the mercantilist writers confused money with wealth. However, recent research has shown that this conception of the mercantilists is highly questionable. For the bulk of seventeenth-century writers on economic and trade issues, the quantity theory of money was a standard presupposition. Moreover, there were very few price inflationists among the mercantilists. Instead, a majority agreed that high prices would cause lower exports—that is, they argued that the effect of elasticity of demand was considerable on most export markets. However, Mun as well as many others during this period seems to have feared that without a steady inflow of money originating from a favorable balance of trade, trade and industry would stagnate and the price of land would fall. To counter this shortage of bullion in circulation, a steady inflow of money through a net trade surplus was necessary.

However, most writers had abandoned the favorable balance of trade theory in its simple form by the end of the seventeenth century. Some argued that the principle was impractical as a policy goal, as it was impossible to account for a trade surplus in quantitative terms. Others found problems on more theoretical grounds—that is, they directly or indirectly admitted to the argument later known as the specie-flow argument. Instead, from the 1690s writers such as Josiah Child (1630–1699), Charles Davenant (1656–1714), and Nicholas Barbon (1640–1698) developed a new idea that alternatively has been called the theory of foreign-paid incomes, the labor balance of trade theory, or the export of work theory. Instead of holding on to the dogma that a country should receive an inflow of bullion through the balance of trade, these authors stressed that a country should export products with as much value-added content as possible and import as little of such products as they could. The profit would come from the fact that the buyer—Spain, Portugal, or other countries—would not only pay England for its raw materials, but also for its laborers.

Hence, what makes it legitimate to speak of a specific “mercantile system” was its proponents’ preoccupation with the question of how a nation could become rich, and thus also achieve greater national power and glory. In the broader sense of an ideology promoting economic protection in order to achieve domestic growth, the term mercantilism is not applicable only to the period before Adam Smith. Mercantilist ideas can also be found in modern forms of protectionism that have appeared since the nineteenth century. For example, the period between World Wars I and II was characterized by protectionism and economic nationalism; it was this that led to Heckscher’s synthesis, which he intended as advocacy in favor of liberal and free-trade ideas. Despite Heckscher’s insistence that mercantilism was a false ideology—free trade, he argued, was better for economic growth, at least in the long run—mercantilism was hailed as a form of popular economics of common sense. As such, it still exists to some degree, though it has reappeared most clearly during periods of economic crisis, such as the 1920s and 1930s. Mercantilist theory has found only a very few proponents among more modern schools of economics. Some economists inspired by institutional economics have referred sympathetically to mercantilist doctrines concerning population growth (for example Joseph J. Spengler), as have others inspired by radical development economics (for example, Cosimo Perrotta).

After World War II, mercantilist ideas have instead largely recurred in the form of neomercantilism and strategic-trade theory. From the end of the 1970s, strategic-trade theorists such as Lester Thurow, James Brander, Barbara Spencer, and Paul Krugman sought to replace the theory of comparative advantages with a theory of “competitive advantage.” Their argument is that the pattern of international trade cannot be explained on the basis of comparative advantage or with the help of the simple Heckscher-Ohlin theorem. Instead, the flow of international trade is a consequence of scale and scope, economic muscle, and increasing returns to scale. The political implications of this were straightforward: Governmental support is appropriate when used to bring about a competitive advantage for an industry that would benefit its nation in the long term. Certainly, this was another way to defend the infant-industry argument, with clear implications for trade policy.

SEE ALSO Beggar-Thy-Neighbor; Postlethwayt, Malachy; Smith, Adam; Zero-sum Game

BIBLIOGRAPHY

Heckscher, Eli F. [1935] 1994. Mercantilism. London and New York: Routledge.

Hutchison, Terence W. 1988. Before Adam Smith. Oxford: Blackwell.

Magnusson, Lars. 1994. Mercantilism. The Shaping of an Economic Language. London and New York: Routledge.

Lars Magnusson

MERCANTILISM (ISSUE)

Mercantilism was a set of economic ideas followed by many northern and western European countries from the sixteenth to the nineteenth century. These included Portugal, Spain, France, the Netherlands, and England. By the nineteenth century, however, mercantilism was considered discredited as an economic theory. Although it began as a rather vague collection of economic ideas, it was continually refined, elaborated, and modified over time. By the eighteenth century it had shifted from a loosely enforced set of commercial laws to a tightly regulated imperial policy, especially throughout the British Empire.

At the core of mercantilism was the belief that foreign trade could be made to serve the interests of the government and vice versa. The prime objective was the acquisition and retention of as much money (gold and silver) as possible. The state needed gold and silver to wage war. Mercantilism was a form of economic warfare between competing nations. European monarchs realized that in order to secure their political positions and compete with their rival monarchs in other nations they could no longer rely solely on an increase in tax rates. They had to increase their tax base. To do so, many nation-states turned to increased trade and the establishment of colonies.

In the mercantilist system colonies were expected to help the mother country achieve a favorable balance of trade, favorable specie inflow, economic self-sufficiency and an export surplus. Colonies were expected to supply products which would otherwise have to be obtained from non-imperial sources, generate exports by the production and sale of products in high demand outside the empire, and provide a market for the mother country's exports. The mother country would provide the colonies with centralized governmental control of the economy, as well as naval and military protection.

The English laws that systematized these developments for North America were enacted over a century and were built around a series of Navigation Acts beginning in 1651. They were given a comprehensive form in 1696. They confined the transport trade within the Empire to British or colonial ships, required all exports from Europe to the colonies to be shipped via England (and vice versa), and specified a list of goods that could not be shipped to European ports (other than England). These included sugar, cotton, tobacco, indigo, wool, naval stores, rice, furs, and copper. By the mid-seventeenth century, the colonies were prosperous and were encouraged in their prosperity by credits from home. The plantation colonies especially fitted nicely into the mercantilist system because the economies of the South and Britain naturally complemented one another. Britain carried the burden of colonial defense and gave colonial goods and ships protection abroad. From the early eighteenth century until 1763 the colonial policy was on the back burner, as England concentrated on a series of wars with France. The casualness of imperial administration and enforcement soothed points of disagreement and where discord continued, laws were tacitly evaded. Systematic smuggling was confined mainly to tea and molasses. For the most part the mercantile system provided easy credit, assured commercial markets, and brought economic prosperity to colonies and mother countries alike.

English intervention in the economy in order to serve national interests produced financial and strategic advantages to the colonies. By giving the colonies the bulk of the shipping rights on trade with England, British mercantilism benefited the colonies. Mercantilism inevitably brought trade disputes with other countries, which in turn often degenerated into military struggles.

Mercantilism had its critics. In 1776 economist Adam Smith (1723–1790) in his Wealth of Nations defined a country's wealth in terms of labor and not money. Smith advocated the free play of individual enterprise and free trade. Historians such as George Bancroft (1800–1891) condemned mercantilism as the source of foreign policy. He concluded that the Navigation Acts and mercantilism in general were the basic causes of the American Revolution (1775–1783).

Many colonists realized that England looked on them purely for their economic role under mercantilism. They also realized that their own prosperity was largely the result of mercantilist policies. As British statesman and political philospher Edmund Burke (1729–1797) declared, "the Act of Navigation attended the colonies from their infancy, grew with their growth and strengthened with their strength. They were confirmed in obedience to it even more by usage than by law."

Twentieth century historians such as Lawrence A. Harper and O. M. Dickerson disagreed with Bancroft that the Navigation Acts presented a great impediment to colonial trade. They argued that the real bitterness among American colonists after 1763 was aimed at British customs and revenue collectors, stamp officials, and enforcement agents. They had a distaste not for mercantilism but for their role in a reorganized empire that emerged after the end of the French and Indian Wars (1754–1763) in 1763. In particular, they objected to the taxation policy. Overzealous officers, racketeering practices, seizures, and new bonding regulations among other things were what brought hostility from colonists.

See also: Navigation Acts, Adam Smith

FURTHER READING

Barrow, Thomas C. Trade and Empire; The British Customs Services in Colonial America: 1660–1775. New York: Excel, 1999.

Ekelund, Jr. Robert B., and Robert D. Tollison. Politicized Economies: Monarchy, Monopoly, and Mercantilism. Texas A&M University Economics Series, No. 14. College Station: Texas A&M University Press, 1997.

Johns, R.A. Colonial Trade and International Exchange: The Transitions From Autarky to International Trade. London: Pinter Pub. Ltd., 1989.

Sen, Sudipta. Empire of Free Trade: The East India Company and the Making of the Colonial Marketplace. Philadelphia: University of Pennsylvania Press, 1998.

Wallerstein, Immanuel. Modern World System II: Mercantilism and the Consolidation of the European World-Economy, 175600–1750. New York: Academic Press, 1980.