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A Look into the History of Economic Thought: Mercantilism

As a new editor for Rostra Economica with a particular interest in history, I would like to contribute to the magazine’s diversity of topics by presenting a peek into the history of economic thought, which can prove insightful when looking at present and future economic systems. Mercantilist theory was dominant in most of Europe throughout the 16th up to the 18th centuries and as arguably one of the earliest forms of protectionism, mercantilism still proves relevant to this day as protectionist sentiments seem to be on the rise once again.

The dominance of mercantilist thinking covers fittingly the time span of the period of early modern globalization; the time when maritime empires such as those of the Spanish and Portuguese, later the Dutch, French and British flourished. A deeply held belief by mercantilist policy makers was that international trade could only come to the benefit of a few profiteers rather than all countries, which made the global economy a zero-sum game. Key was to accumulate as much gold and silver as possible by retaining and developing a positive balance of payments. It had resulted from the belief that only precious metals ultimately define the wealth of a nation, which Adam Smith (1723-1790) later firmly rejected in his work.

From Feudalism to Empire Building

To understand how mercantilism came into being, let us look at the major political changes at the beginning of the 16th century. In Europe, the turn of the century was characterized by the discovery of America and the replacement of feudal manors with increasingly powerful centralized nation states, that sought to increase their power by making use of the rise in international trade through the progress in technology and the process of urbanization. One of those changes was also the invention of modern accounting that enabled the state to keep better track of trade flows into and out of the country. Historians’ views on how mercantilism became dominant amidst such a time of upheaval differ, but these conditions certainly helped to uphold the system for almost 300 years. Mercantilist economic policy was considered a means for nations to extend their power and gain an advantage over their competitors. What makes mercantilism so interesting to look at here is the fact that it can be considered as a nationalist form of early capitalism. Adam Smith, the founder of modern economics, developed his theories at a time when mercantilist policies were still in place.

Mercantilist Policy

As we will see, mercantilist policy already comprised many aspects of running an economy that would later become relevant for the industrial revolution and modern capitalist systems. In a way, countries sought to create a productive economy with relative autarky. Policy and theory were mainly designed by authorities and merchants (hence the name) and less by academics. One implication of this was the fact that policy targets consisted mainly in increasing merchants’ profits and state income in order to expand power and maintain larger armies rather than increasing general social welfare. In order to do this, a large working population needed to be utilized and the land to be optimally used for agriculture and mining. The economic reforms shaped by the French minister of finance Jean-Baptiste Colbert (1619-1683) in the

Jean-Baptiste Colbert (1655)

17th century provide a good example of such policy. He introduced the system of pre-industrialized manufacturing to the country. Although these features of domestic policy are recurring, mercantilism is more defined by its trade policies. A ubiquitous feature is the imposition of high protective tariffs on imports as well as the prohibition of exports of precious metals. Within the mercantilist view, focus was put on the domestic manufacture of raw materials to obtain higher value goods, which in a case of surplus, can be exported profitably. As a consequence, domestic raw materials were supposed to be kept; good imports were supposed to be limited to exactly those low value raw materials on the one hand, and to goods that were not sufficiently supplied domestically on the other hand. In order to gain access to these raw materials, many nations considered it vital to create overseas colonies to ensure their supply. This process has led the way to the European conquest of the Americas.

Not much economic knowledge is required to see the logical fallacy of such a system. If every country pursues such a policy, this significantly increases the likelihood of trade wars and international trade will be very much inhibited by being stuck in an undesirable equilibrium of each country trying to maximize exports and minimize imports. Such trade wars did, in fact, occur. Remarkable examples for that are the Anglo-Dutch Wars and the Franco-Dutch War, which were all fought between the Dutch Republic, a notable advocate of free trade at the time, and particularly mercantilist countries. For those countries, creating a positive trade balance could be achieved by trading with the colonies’ heavily regulated economies. That way the mother country could create its own global economy with itself as the leader.

The most notable countries to embrace mercantilism to its fullest were France and Great Britain. In France, the rise of mercantilism can be partly attributed to the increasing power of the monarchy, later culminating in the absolutism of Louis the Great. Under his rule, Colbert could enact several policies that were later labeled as colbertist. As part of that, he created an early capitalist economy with strong state intervention by reforming the tax and tariff system as well as strict industry reforms that included the monopolization of certain industries. This was mainly aimed at improving the competitive standing of the French economy and to break the commercial hegemony exhibited by Dutch merchants.

In contrast to France, which never managed to obtain supremacy in world trade and shipping, England and Scotland (later Great Britain) mostly put mercantilist theory into practice through their trade and colonial policies rather than establishing a tight grip on the domestic economy. An “issue” these powers had in common was the dominance of Dutch commerce in the profitable trade with, for instance, the Mediterranean, but also even within the English colonies in America. The competitively advantageous position of the Dutch trade in the world, incidentally, highlights why the Dutch Republic mainly rejected mercantilist trade policies as it was arguably the main beneficiary of low restrictions on trade.

Battle of Leghorn (1653) during the First Anglo-Dutch War

A critical response by the English was, amongst others, to ban foreign vessels from trading with their colonies, as well as the order that all trade with the colonies pass through England first. These enactments are known as the Navigation Acts and prompted several wars with the Dutch Republic. Resulting tensions in the colonies are often seen as one of the precursors for the American Revolution. The Navigation Acts were only repealed in the 19th century and facilitated the rise of the Royal Navy and of Great Britain as the world’s leading power.

The End of Mercantilism and Modern Protectionism

Despite the relative economic successes of mercantile nations such as Great Britain and France, the system of mercantilist policy is widely considered to have exacerbated economic inefficiencies. Due to the high trade restrictions and the strive for national autarky, specialization in goods in accordance with comparative advantages was impeded, which promoted the overproduction of certain goods with high opportunity costs. However, smuggling was a concomitant feature of these trade restrictions and with the Industrial Revolution originating in England, Great Britain gradually started promoting free trade, to its continued success in manufacturing and financing. Adam Smith’s contributions to the discipline of economics also helped reach the widely recognized conclusion that free trade can increase overall wealth, which stands in sharp contrast to the mercantilist idea of trade as a competitive zero-sum game. However, this notion still remains contested. In particular, in times of economic and political uncertainty, governments readily revert to protectionist measures.

Early in this article I claimed that understanding mercantilism has relevance for the world in its present stage. So what are the links between mercantilism and, say, modern day protectionism? Let us first define their relationship with mercantilism as an aggressive type of protectionism, which not only seeks to protect domestic markets from foreign competition, but even more so pursues an active trade policy that promotes exports in order to obtain a balance of payments surplus. Modern-day application of this concept is sometimes called neomercantilism. Since the end of the mercantilist era, aspects of protectionism have still been commonplace in most countries. Nowadays, this has particular relevance in developed countries were certain social factions such as lobby groups and labor unions fear to be be replaced by cheaper production in emerging markets. This ambition for privilege by specific interest groups shows similarity to the privileges sought after by the merchant class during the mercantilist era. Without wanting to go too deep into the discussion on the adequacy of protectionist measures (which would deserve a whole other article on its own), these are often also justified with the will to prevent social inequalities. Apart from protectionist policies, we can also detect economic policies that resemble mercantilist thinking. The Common Agricultural Policy by the European Union combines heavy subsidization of the domestic agricultural sector combined with extremely high tariffs on agricultural imports when compared with other types of products. Critics state that this leads to domestic overproduction and hurts many developing countries, which are oftentimes very much dependent on exports from this sector. Another legacy from mercantilism is the fact that the balance of payments presents a simple number from which to derive many, often false, conclusions. The recently elected American president’s understanding thereof illustrates it quite well. Claiming that other countries running a surplus with the US and thus causing the country’s enormous trade deficit need to be punished with tariffs[1], Donald Trump demonstrates the same kind of reasoning that drove mercantilist thinkers; that a nation’s wealth is determined by its balance of payments and that a state should be self-producing to the maximum. So even if mercantilism is a term that belongs to history, understanding it provides us with more insights about the economic questions of our time, and perhaps even the future.



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