MERCANTLIST THEORY AND ITS CRITICS

MERCANTILE THEORY- ITS EVOLUTION AND THE HISTORIOGRAPHY OF MERCANTALISM

The sixteenth century sees the rise of the nation state from the medieval locality. This creates a change in the social and economic order. The questions asked no longer pertain to the individual or the locality but instead focus on the state. Most prominent amongst these questions was the economic progress of the state. It was in response to this call for state prosperity that the mercantilist system was formulated.

Spain discovers the Americas in 1492. The motives that encouraged Europeans to colonization were according to Egerton Wealth and Missionary zeal. The second died quickly, wealth became the focus. The most abundant and visible source of wealth was found in Spanish American possessions- bullion. However the Spanish were unable to use the bullion profitably, and though Spanish policy tried to control external interference and tried to stifle the flow of bullion out of the country their efforts were unsuccessful. As Thomas Mun notes, “gold and silver are so scarce in England that they are forced to use base copper money.” And then later emphasizes the necessity for proper use of bullion saying, “Treasure is obtained by a necessity of commerce.”

Most countries initially trying to compete with Spain look for measures to raise general prosperity. Not having direct access to bullion they focus on trade. The idea is to maintain a favorable balance of trade. To ensure that exports are more than imports, this way less wealth flows out of the country and more flows and the balance can be paid in bullion.

Thus the economic policy of the time focused on increasing exports. The manner to do this was to produce one’s own goods through manufacture. These were to be exported while raw materials were to be imported while at the same time the reverse processes had to be minimized, that is the export of raw materials and the imports of manufactures had to be lowered.

The seventeenth century was marked thus by the implementation of a number of policies that looked to increase the manufactures. Bounties and stimulus was provided to certain industries that these manufactures looked to encourage. 

It is likely, as had been suggested by Egerton that mercantilist policy that followed through Europe was a lesson learnt from Spanish wastefulness. Mun was the first to propogate mercantilist policy through England. The golden rule was that of favourable balance of trade and as has been described by Adam Smith, ‘the title of Mun’s book, England’s Treasure in Foreign Trade, became the fundamental maxim of political economy.” Exports had to be higher than imports and for this manufactures had to be encouraged. The focus according to egerton was the producer and not the consumer. (the same critique was leveled by Smith.

According to Doyle, the commercial measures of the English and the French state stimulated the rise in productivity. British industry received enormous stimulus from the exclusive markets in Ireland and the thirteen amercian colonies. When the time came for takeoff mercantilist restrictions might well have prevented the launch; however they were, according to Doyle instrumental in taking England up to this point.

The word mercantilist was used for the first time much later by Adam smith who was to speak against mercantilism. It was considered by him to be a system tuned to encourage the interests of traders. As described by Charles Wilson, for smith the economic crime of the system is the accumulation of wealth, since they confused wealth with money, thus governments accumulated gold and silver. Thomas mun had claimed that the flow of money was governed by the balance of trade and thus the primary objective must be favourable balance of trade. However soon there was, in Wilson’s words an erroneous obsession with favourable balance of trade. Soon these errors spread outwards from England and the obsession for favourable balance grew through Europe.

CLOUGH

  1. THE THEORY OF MERCANTALISM
  2. Every group of individuals striving to a set of common ends constitute society- each society creates its own economic theory to progress the society- the theory, as it is built for, creates changes within the society
  3. The major factors that affected economic theory in early modern times include
  4. The growing amount of wealth
  5. The increasing usage of money
  • The expansion of trade
  1. The acquisition of colonies
  2. The rise of nation states
  3. The dominant economic theory between 1500 and the eighteenth century was that of mercatlalism. Clough believes that this name was an error as the theory had little to do with trade and more with state control of economic affairs. It was the theory and practice of economic state building and the use of state to enhance the interests of policy makers.
  4. However people soon grew bitter because of excessive state control and due to red tapism, by the eighteenth century mercantilism had been exchanged with laissez faire principles, a belief in letting natural laws govern the economy and a belief in individual rather than stat prosperity.

THE REACTIONS AGAINST MERCANTALISM

WILSON

  1. ATTACK ON MERCANTALISM
  2. Emerged during the latter half of the eighteenth century
  3. Came from two quarters
  4. From a school of philosophers who believed that it was an offence against the natural order to interfere with economic affairs
  5. From merchants who believed that the regulations harmed their own interests
  6. Conclusion
  7. Mercantilism didn’t come only from the top but from a variety of positions and was in itself varied in nature
  8. The ends too varied from immediate profit of individuals and pockets of princes to the power of state and the welfare of the people
  • Moreover the duality of power and wealth, economic and political power has been emphasized.
  1. One cannot judge mercantilist thought by later ideas.
  2. It was however based on materialism and it is possible that the comparable material progress of the west can be attriburted to it,
  3. Mercantalist century- 1660- 1760, was in western Europe the age of economic expansion

DOYLE

  1. However mercantilism had a number of critics.
  1. Colbert was scarcely dead before a set of French writers critiqued his policies as the source of ruin and misery that coincided with Louis II’s last great wars. The critique was largely that interference in what was the ‘natural law’ of economic life, had led the state to bring disaster
  2. In England writers like Child, North, Davenant denounced reflationary tariffs against foreign competitors as misconceived attempts to maintain favorable balance of trade.
  3. Half a century later full scale alternatives to mercantilism were suggested. Mercantilism was the product of the depression of the seventeenth century when resources seemed limited and when these were overcome, expansion continued and liberal policies were favored. Hume took the lead in exposing the hollowness in orthodoxies of the time. He pointed out that the true wealth of the nation lay in its peope and its industry and not in its store of bullion. All restrictions on trade were harmful as trade stimulated economic activity. Free trade would stimulate higher prices and higher prices, higher productivity thus resulting in abundance.
  4. Physiocrats similarly emphasized the avoidance of protective tariffs. They highlighted the role of agriculture and its necessity in the development of a country. Amongst them were gournaye and quensay and turgot. They created vast propaganda and were partly successful in implementing their views. However some critics, most prominently Adam smith realized that an overemphasis on agriculture while ignoring industry would simply retard the ongoing path to progress.
  5. SMITH- Inquiry into the nature and causes of the wealth of nations(1776)– had visited france’s physiocrats. According to him however the true basis for wealth was labor and the division of labor, i.e specialization in an environement of free trade, thus every state specialized in what it could produce, using to the best its resources and acquired the rest from outside. This would occur naturally according to smith as long as there wasn’t outside interference. He denounced the controls of mercantilism as this outside interference which was built on the greed of merchants and sought profits at the expense of the country. He argued that british prosperity had been created despite rather than because of mercantilism. He even emphasized the harm in regulating trade to and from the colonies saying that the same industries in whose favour these oppressive measures were conceived would fall under the burden of the measures. He condemned thud the apparatus of overseas empires, without even being aware of the fact that English control in America was dwindling. In this view the mother country derived nothing but loss from the management of colonies. The revolution occurred in the year Smith’s book was published, 1776 and by the time he died, American trade was flourishing, seeming to prove his theories right.
  6. Smiths ideas were by no means the first of their kind. Josiah Tucker had been propounding the same ideas even before the seven years war through pamphlets saying that a separation between great Britain and her colonies would ebinifit both sides.
  7. Another critic who stated the same ideas was Raynal, whose History of the two indies(1770) was an essential in his time. The book had a number of contributions and was in its own way an irrevocable text of European activity and its disastrous effects upon the world.

Recent events favored the critics, however other overseas colonies showed no change. England’s hold over india only grew stonger.Cndemnation of british subjugation, its miserable and oppressive system of slavery etc. were seen during the eighteenth century. Slave trade was criticized severly during this period raising hopes of the abolition of slave trade in the eighteenth century

No sooner had the statesman began considering the wisdom of colonization when malthus’s gloomy forecasts regarding overpopulation began to renew the fervor in favour of colonies. Veryone had read smith but were unconvinced that free trade would bring an end to the world’s problems.

And the success of great britian seemed to vindicate all that mercantalists had stood for.

CLOUGH

  1. SMITHS CRITIQUE OF MERCANTALISM
  2. He believed that mercantilism was a conspiracy contrived by a minority to encourage their own interests.
  3. Mercantalism according to him pretended to regulate trade in order to obtain favourable balance but its real objective was obtaining monopoly of the home markets for certain manufacturers.
  4. Moreover for Smith industry must be keyed to favour the consumer and any benefit to the producer must be only in so far as it does not harm the consumer. Mercantalism however it biased towards te producer and his needs, the ultimate objective is production and not consumption