A painting of a French seaport from 1638, at the height of
is an economic theory
that holds the prosperity of
a nation is dependent upon its supply of capital
, and that the global volume
of international trade
Economic assets or capital, are represented by bullion
(gold, silver, and trade value) held by the
state, which is best increased through a positive balance of trade
with other nations
(exports minus imports) and assumes wealth and monetary assets are
identical. Mercantilism suggests that the ruling government should
advance these goals by playing a protectionist
role in the economy; by
encouraging exports and discouraging imports, notably through the
use of tariffs
Mercantilism was the dominant school of thought throughout the
early modern period
16th to the 18th century). Internationally, mercantilism encouraged
the many European wars
of the period and fueled
. Academic belief in
mercantilism began to fade in the late 18th century, as the
arguments of Adam Smith
and the other
Today, mercantilism (as a whole) is rejected by economists, though
some elements are looked upon favorably by non-economists.
The related school of economic
, which emphasizes the nation and government
intervention but deemphasizes bullion in favor of productive
capacity, has been and continues to be a dominant model of development economics
, as practiced in
the 19th century in United States in the National System
, Germany in the Zollverein
, and Japan, and as practiced in the
late 20th and early 21st century by other Asian nations such as the
Four Asian Tigers
of Hong Kong,
South Korea, Taiwan, and Singapore, and most significantly,
China.The export-led economies of present-day Japan and Germany are
also cited as latter-day variants 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
The bulk of what is commonly called "mercantilist literature"
appeared in the 1620s in Great Britain. Smith saw English merchant
(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 of manifesto of the movement. Perhaps the last major
mercantilist work was James
’s Principles of Political Economy
Beyond England, Italy, France, and Spain produced noted writers who
pursued mercantilist themes in their work, indeed the earliest
examples of mercantilism are from outside of England: in Italy,
(1580–?), in France,
and some other precursors to
, in Spain, the School of Salamanca
writers Francisco de Vitoria
1483–1546), Domingo de Soto
(1494–1560), Martin de
(1491–1586), and Luis de
(1535–1600). 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 nineteenth 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.
The Austrian lawyer and scholar Philipp Wilhelm von Hornick
his Austria Over All, If She Only Will
of 1684, detailed a
nine-point program of what he deemed effective national economy,
which sums up the tenets of mercantilism comprehensively:
- That every inch of a country's soil be utilized for
agriculture, mining or manufacturing.
- That all raw materials found in a country be used in domestic
manufacture, since finished goods have a higher value than raw
- That a large, working population be encouraged.
- That all export of gold and silver be prohibited and all
domestic money be kept in circulation.
- That all imports of foreign goods be discouraged as much as
- That where certain imports are indispensable they be obtained
at first hand, in exchange for other domestic goods instead of gold
- That as much as possible, imports be confined to raw materials
that can be finished [in the home country].
- That opportunities be constantly sought for selling a country's
surplus manufactures to foreigners, so far as necessary, for gold
- That no importation be allowed if such goods are sufficiently
and suitably supplied at home.
Other than Von Hornick, there were no mercantilist writers
presenting an overarching scheme for the ideal economy, as Adam Smith
would later do for classical
economics. Rather, each mercantilist writer tended to focus on a
single area of the economy. Only later did non-mercantilist
scholars integrate these "diverse" ideas into what they called
. Some scholars thus reject the idea of
mercantilism completely, arguing that it gives "a false unity to
disparate events". Smith saw the mercantile system as an enormous
conspiracy by manufacturers and merchants against consumers, a view
that has led some authors, especially Robert E. Ekelund and Robert
D. Tollison to call mercantilism "a rent-seeking society". To a
certain extent, mercantilist doctrine itself made a general theory
of economics impossible. Mercantilists viewed the economic system
as a zero-sum game
, in which any gain by
one party required a loss by another. Thus, any system of policies
that benefited one group would by definition harm the other, and
there was no possibility of economics being used to maximize the
"commonwealth", or common good. Mercantilists' writings were also
generally created to rationalize particular practices rather than
as investigations into the best policies.
Mercantilist domestic policy was more fragmented than its trade
policy. While Adam Smith portrayed mercantilism as supportive of
strict controls over the economy, many mercantilists disagreed. The
early modern era was one of letters
and government-imposed monopolies
; some mercantilists supported these,
but others acknowledged the corruption and inefficiency of such
systems. Many mercantilists also realized that the inevitable
results of quotas
and price ceilings
were black markets
. One notion
mercantilists widely agreed upon was the need for economic oppression
of the working
population; laborers and farmers were to live at the "margins of
". The goal was to maximize
production, with no concern for consumption
. Extra money, free time,
or education for the "lower classes
was seen to inevitably lead to vice and laziness, and would result
in harm to the economy.
Scholars are divided on why mercantilism was the dominant economic
ideology for two and a half centuries. One group, represented by
, argues that mercantilism
was simply a straightforward, common-sense system whose logical fallacies
could not be discovered by
the people of the time, as they simply lacked the required
analytical tools. The second school, supported by scholars such as
Robert B. Ekelund
, contends that mercantilism was
not a mistake, but rather the best possible system for those who
developed it. This school argues that mercantilist policies were
developed and enforced by rent-seeking
merchants and governments. Merchants benefited greatly from the
enforced monopolies, bans on foreign competition, and poverty of
the workers. Governments benefited from the high tariffs and
payments from the merchants. Whereas later economic ideas were
often developed by academics and philosophers, almost all
mercantilist writers were merchants or government officials.
A third explanation for mercantilism is monetary. European trade
exported bullion to pay for goods from Asia, thus reducing the
money supply and putting downward pressure on prices and economic
activity. The evidence for this hypothesis is the lack of inflation
in the English economy until the Revolutionary and Napoleonic wars
when paper money was extensively used.
Mercantilism developed at a time when the European economy was in
transition. Isolated feudal
being replaced by centralized nation-states
as the focus of power.
Technological changes in shipping and the growth of urban centers
led to a rapid increase in international trade. Mercantilism
focused on how this trade could best aid the states. Another
important change was the introduction of double-entry bookkeeping
modern accounting. This accounting made extremely clear the inflow
and outflow of trade, contributing to the close scrutiny given to
the balance of trade.Of course, the impact of the discovery of
America cannot be ignored. New markets and new mines propelled
foreign trade to previously inconceivable heights. The latter led
to “the great upward movement in prices” and an increase in “the
volume of merchant activity itself.”
Prior to mercantilism, the most important economic work done in
Europe was by the medieval scholastic
theorists. The goal of these thinkers was to find an economic
system that was compatible with Christian doctrines of piety and
justice. They focused mainly on microeconomics
and local exchanges between
individuals. Mercantilism was closely aligned with the other
theories and ideas that were replacing the medieval worldview. This
period saw the adoption of the very Machiavellian realpolitik
and the primacy of the raison d'état
in international relations
mercantilist idea that all trade was a zero sum game, in which each
side was trying to best the other in a ruthless competition, was
integrated into the works of Thomas
. The dark view of human nature also fit well with the
view of the world, and some of the
most stridently mercantilist legislation, such as the Navigation Acts
, were enacted by the
government of Oliver Cromwell
Mercantilist ideas were the dominant economic ideology of all of
Europe in the early modern period, and most states embraced it to a
certain degree. Mercantilism was centered in England and France,
and it was in these states that mercantilist polices were most
often enacted. Mercantilism arose in France in the early 16th
century, soon after the monarchy had become the dominant force in
French politics. In 1539, an important decree banned the
importation of woolen goods from Spain and some
parts of Flanders.
The next year, a
number of restrictions were imposed on the export of bullion. Over
the rest of the sixteenth century further protectionist measures
were introduced. The height of French mercantilism is closely
associated with Jean-Baptiste
, finance minister for 22 years in the 17th century, to
the extent that French mercantilism is sometimes called
"Colbertism". Under Colbert, the French government became deeply
involved in the economy in order to increase exports. Protectionist
policies were enacted that limited imports and favored exports.
Industries were organized into guilds and monopolies, and
production was regulated by the state through a series of over a
thousands directives outlining how different products should be
produced. To encourage industry, foreign artisans and craftsmen
were imported. Colbert also worked to decrease internal barriers to
trade, reducing internal tariffs and building an extensive network
of roads and canals. Colbert's policies were quite successful, and
France's industrial output and economy grew considerably during
this period, as France became the dominant European power. He was
less successful in turning France into a major trading power, and
Britain and the Netherlands remained supreme in this field.
In England, mercantilism reached its peak during the Long Parliament
Mercantilist policies were also embraced throughout much of the
periods, with Robert Walpole
being another major proponent.
In Britain, government control over the domestic economy was far
less extensive than on the Continent
, limited by common law
and the steadily increasing power of
Parliament. Government-controlled monopolies were common,
especially before the English Civil
, but were often controversial. British mercantilist writers
were themselves divided on whether domestic controls were
necessary. British mercantilism thus mainly took the form of
efforts to control trade. A wide array of regulations was put in
place to encourage exports and discourage imports. Tariffs were
placed on imports and bounties given for exports, and the export of
some raw materials was banned completely. The Navigation Acts
expelled foreign merchants from England's domestic trade. The
nation aggressively sought colonies and once under British control,
regulations were imposed that allowed the colony to only produce
raw materials and to only trade with Britain. This led to friction
with the inhabitants of these colonies, and mercantilist policies
were one of the major causes of the American Revolution
. Over all, however,
mercantilist policies had an important effect on Britain helping
turn it into the world's dominant trader, and an international
superpower. One domestic policy that had a lasting impact was the
conversion of "waste lands" to agricultural use. Mercantilists felt
that to maximize a nation's power all land and resources had to be
used to their utmost, and this era thus saw projects like the
draining of The
The other nations of Europe also embraced mercantilism to varying
degrees. The Netherlands, which had become the financial center of
Europe by being its most efficient trader, had little interest in
seeing trade restricted and adopted few mercantilist policies.
Mercantilism became prominent in Central Europe and Scandinavia
after the Thirty Years' War
(1618-1648), with Christina of
and Christian IV of
being notable proponents. The Habsburg Holy Roman Emperors
had long been
interested in mercantilist policies, but the vast and decentralized
nature of their empire made implementing such notions difficult.
Some constituent states of the empire did embrace Mercantilism,
most notably Prussia, which under Frederick the Great
had perhaps the most
rigidly controlled economy in Europe. During the economic collapse
of the seventeenth century Spain had little coherent economic
policy, but French mercantilist policies were imported by Philip V
with some success. Russia under
Peter I (Peter the Great)
attempted to pursue mercantilism, but had little success because of
Russia's lack of a large merchant class or an industrial
Mercantilism also fueled the intense violence of the 17th and 18th
centuries in Europe. 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
and the Franco-Dutch Wars
, can be linked directly
to mercantilist theories. The unending warfare of this period also
reinforced mercantilism as it was seen as an essential component to
military success. It also fueled the imperialism
of this era, as each nation that was
able attempted to seize colonies that would be sources of raw
materials and exclusive markets. During the mercantilist period,
European power spread around the globe. As with the domestic
economy this expansion was often conducted under the aegis of
companies with government-guaranteed monopolies in a certain part
of the world, such as the Dutch
East India Company
or the Hudson's Bay Company
and David Hume
are considered to be the founding
fathers of anti-mercantilist thought. A number of scholars found
important flaws with mercantilism long before Adam Smith
developed an ideology that could fully
replace it. Critics like Hume, Dudley North
, and John Locke
undermined much of mercantilism, and
it steadily lost favor during the 18th century. In 1690, John Locke
made perfectly clear that prices vary in proportion to the quantity
of money, but in general, the mercantilists did not put this
together . Locke's Second Treatise
towards the heart of the anti-mercantilist critique: that the
of the world is not fixed, but created
by human labor (represented embryonically by Locke's labor theory of value
failed to understand the notions of absolute advantage
and comparative advantage
idea was only fully fleshed out in 1817 by David Ricardo
) and the benefits of trade . For
instance, suppose Portugal was a more efficient producer of both
wine and cloth than England, yet in England it was relatively
cheaper to produce cloth compared to wine. Thus if Portugal
specialized in wine and England in cloth, both
would end up better off
if they traded. This is an example
of the reciprocal benefits of trade due to a comparative advantage
. In modern
economic theory, trade is not
a zero-sum game of cutthroat
competition because both sides can benefit.
Hume famously noted the impossibility of the mercantilists' goal of
a constant positive balance of trade . As bullion flowed into one
country, the supply would increase and the value of bullion in that
state would steadily decline relative to other goods. Conversely,
in the state exporting bullion, its value would slowly rise.
Eventually it would no longer be cost-effective to export goods
from the high-price country to the low-price country, and the
balance of trade would reverse itself. Mercantilists fundamentally
misunderstood this, long arguing that an increase in the money
supply simply meant that everyone gets richer.
The importance placed on bullion was also a central target, even if
many mercantilists had themselves begun to de-emphasize the
importance of gold and silver. Adam Smith noted at the core of the
mercantile system was the "popular folly of confusing wealth with
money," bullion was just the same as any other commodity, and there
was no reason to give it special treatment. More recently, scholars
have discounted the accuracy of this critique. They believe Mun and
Misselden were not making this mistake in the 1620s, and point to
their followers Child and Davenant, who, in 1699, wrote: "Gold and
Silver are indeed the Measure of Trade, but that the Spring and
Original of it, in all nations is the Natural or Artificial Product
of the Country; that is to say, what this Land or what this Labour
and Industry Produces." The critique that mercantilism was a form
of rent-seeking has also seen criticism, as scholars such Jacob Viner
in the 1930s point out that merchant
mercantilists such as Mun understood that they would not gain by
higher prices for English wares abroad.
The first school to completely reject mercantilism was the
physiocrats, who developed their theories in France. Their theories
also had several important problems, and the replacement of
mercantilism did not come until Adam Smith published The Wealth of Nations
This book outlines the basics of what is today known as classical economics
. Smith spends a
considerable portion of the book rebutting the arguments of the
mercantilists, though often these are simplified or exaggerated
versions of mercantilist thought.
Scholars are also divided over the cause of mercantilism's end.
Those who believe the theory was simply an error hold that its
replacement was inevitable as soon as Smith's more accurate ideas
were unveiled. Those who feel that mercantilism was rent seeking
hold that it ended only when major power shifts occurred. In
Britain, mercantilism faded as the Parliament gained the monarch's
power to grant monopolies. While the wealthy capitalists who
controlled the House of Commons benefited from these monopolies,
Parliament found it difficult to implement them because of the high
cost of group decision making.
Mercantilist regulations were steadily removed over the course of
the Eighteenth Century in Britain, and during the 19th century the
British government fully embraced free
and Smith's laissez-faire
economics. On the continent, the process was somewhat different. In
France economic control remained in the hands of the royal family
and mercantilism continued until the French Revolution
. In Germany mercantilism
remained an important ideology in the 19th and early 20th
centuries, when the historical school of
In spite of Adam Smith's repudiation of mercantilism, it was
favored in the United States by such prominent figures as Alexander Hamilton
, Henry Clay
, and Abraham
and in Britain by such figures as Thomas Malthus
. When Britain passed its
in 1815, Malthus thought such
restrictions were a good idea, but Ricardo disagreed. Eventually
Smith's view was accepted in the English-speaking world, and in
1849 the corn laws were repealed largely on "Free Market" arguments
given by Sir Robert Peel
Adam Smith rejected the mercantilist focus on production, arguing
that consumption was the only way to grow an economy. Keynes argued
that encouraging production was just as important as consumption.
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 for bullion was one of
the few ways to increase the money
. Keynes and other economists of the period also realized
the balance of payments is an important concern. Since the 1930s,
all nations have closely monitored the inflow and outflow of
capital, and most economists agree that a favorable balance of
trade is desirable. Keynes also supported government intervention
economy as necessity, as did mercantilism. Today the word remains a
pejorative term, often used to attack various forms of protectionism
. The similarities between
Keynesianism, and its successor ideas, with mercantilism have
sometimes led critics to call them neo-mercantilism
. Some other systems that
do 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,
Robert J. Samuelson
argued that China was pursuing
an essentially mercantilist trade policy that threatened to
undermine the post-World War II
international economic structure.
The Austrian School
always an opponent of mercantilism, describes it this way:
One area Smith was reversed on well before Keynes was in the use of
data. Mercantilists, who were generally merchants or government
officials, gathered vast amounts of trade data and used it
considerably in their research and writing. William Petty
, a strong mercantilist, is
generally credited with being the first to use empirical
analysis to study the economy. Smith
rejected this, arguing that deductive reasoning
from base principles
was the proper method to discover economic truths. Today, many
schools of economics accept that both methods are important, the
Austrian School being a notable exception.
In specific instances, protectionist mercantilist policies also had
an important and positive impact on the state that enacted them.
Adam Smith himself, for instance, praised the Navigation Acts
as they greatly expanded the
British merchant fleet, and played a central role in turning
Britain into the naval and economic superpower that it was for
several centuries. Some economists thus feel that protecting
causing short term harm, can be beneficial in the long term.
Nonetheless, The Wealth of Nations
had a profound impact
on the end of the mercantilist era and the later adoption of free
market policy. By 1860, England removed the last vestiges of the
mercantile era. Industrial regulations, monopolies and tariffs were
Despite common assertions that the world system is neo liberal,
some have challenged this, arguing that the current system does not
represent a 'positive sum' game in which all benefit. Some suggest
disparities of wealth and power have been exacerbated rather than
allieviated by current financial practices and institutions.
In response to this situation, the term 'Structural Mercantilism'
has been developed to describe the institutional and ideational
structures perceived to have been built by, and in the interests
of, rich countries and corporations.
- Magnusson (2003), p. 46.
- Magnusson (2003), p. 47.
- Magnusson (2003), p. 50.
- Landreth & Colander (2002), p. 44.
- Ekelund & Tollison (1981), p. 9.
- Landreth & Colander (2002), p. 48.
- Ekelund & Hébert (1975), p. 46.
- Ekelund & Hébert (1975), p. 61.
- Niehans (1990), p. 19.
- Landreth & Colander (1981), p. 43.
- Wilson (1963), p. 10.
- Landreth & Colander (2002), p. 53.
- Hermann Kellenbenz. The Rise of the European Economy.
- E.N. Williams. The Ancien Regime in Europe. pg.
- E. Damsgaard Hansen. European Economic History. pg.
- Christopher Hill. The Century of Revolution. pg.
- Wilson pg. 15
- Ekelund & Hébert (1975), p. 43.
- Magnussen (2003), p.46.
- Referenced to Davenant, 1771 , p. 171 in Magnussen
(2003), p. 53.
- Magnussen (2003), p. 54.
- Niehans (1990), p. 19.
- Ekelund & Tollison (1981).
- Wilson (1963), p. 6.
- See Donald Markwell (2006), John Maynard Keynes and
International Relations: Economic Paths to War and Peace,
Oxford & New York: Oxford University Press.
- Wilson (1963), p. 3.
- Hansen, p. 64.
- Gee, T, The World System is not Neo Liberal: The Emergence of
Structural Mercantilism, Critique, Volume 37, Issue 2 May 2009 ,
pages 253 - 259