'Mercantilism' is an economic doctrine that prevailed in much of Europe during the 17th & 18th Centuries. Mercantilism belongs to the 'prehistory' of economics, before it became a field of study.
The doctrines of Mercantilism were articulated by a disparate collection of journalists, government officials, merchants and pamphleteers. Their motivation to write on economic matters was motivated less by an effort to 'understand' how the economy works, and more to contribute to urgent policy discussions of the day. Different countries, of course, face different challenges. Given that they were addressing their national governments on national issues, mercantilist writing tends vary by country. Profession was also a factor. English Mercantilists were frequently private businessmen, who sought to influence government by public pamphleteering for or against some parliamentary act or other, in which they or their company had a vested interest. As such, they operated and communicated somewhat differently from the courtiers and state officials of French Colbertisme or the comprehensive princely guidebooks of German Cameralism. While there are some pan-European features which are common among Mercantilist writers, there was great variety and no two mercantilists really had the same theory. There was no authoritative theoretical system or dogma. Unlike Scholastics, who obsessed with authorities, mercantilist writers rarely cited each other. Their argumentation came mostly from the intuition, observations and life experience of the writer, and the impressions of conversations that abounded in the popular press, coffee shops and palace foyers.
In the 1600s, one of the urgent topics of political discussion, particularly in England and France, was the Dutch puzzle. The United Provinces of the Netherlands was a tiny country which had only come into existence in the 1580s after a revolt against its Spanish Hapsburg rulers. But it had managed to spectacularly transform itself almost overnight from a collection of poor, sleepy fishing villages into probably the wealthiest and most powerful country in the world, with an empire that stretched across the globe, from Nagasaki to New Amsterdam, from the Artic Circle to South Africa, and whose citizens enjoyed probably the highest standard of living yet seen in history.
The sudden and spectacular Dutch prosperity provoked the envy and puzzlement of her neighbors. Common sense, carried over from the first economists, suggested that the prosperity of a nation depended on its natural resources. But the tiny Netherlands had hardly any resources - a small population, very little land, virtually no gold, silver, iron ore, timber or other gifts of nature. Yet the Dutch somehow seemed to end up richer than England, France or Spain, countries which were several times larger, with much vaster resources. Nowhere did this disparity show itself clearly than in wartime. The monarchs of France, Spain, England and elsewhere routinely bankrupted themselves and taxed their subjects to the bone to eke out just enough revenues to raise an army or fleet, whereas the Dutch government never seemed to run out of money, always capable of mobilizing large armies and fleets quickly and almost effortlessly.
Foreign commentators discussed how to emulate (and challenge) the Dutch example. These commentators were precisely those whom we collectively refer to as Mercantilists. Notable Mercantilists of this era include the English writers William Petty, John Locke, Sir Josiah Child and the French ministers Jean-Baptiste Colbert and Jacques Necker.
The Mercantilists concluded that the Dutch achieved their prosperity by maintaining a 'favorable balance of trade' with foreign countries. They noticed that the Dutch exported expensive 'high-value' manufactured goods (notably finished cloth and iron goods like tools, guns, etc.) and only imported cheap 'low-value' primary commodities (raw wool and iron ore, inputs needed for their industries). As a result, the Dutch exported more "value" than they imported. Since foreigners paid more for Dutch goods than what they sold them, that meant that foreign money (gold & silver) was constantly being 'sucked into' the Netherlands. This, the Mercantilists concluded, was why the Dutch were rich. It also explained also why the English, French et al were always cash-strapped - the Dutch were "stealing" their money via the trade balance.
The policy conclusion in the royal courts of England, France, Spain, etc. was that the only way to become prosperous is to 'beat the Dutch' at their own game. The 'Mercantilist' policy formula was quickly devised: Export as much as possible and import as little as possible. Make sure your exports are high-value goods – luxuries, manufactures – which will bring in a lot of money. If you must import, import only essential low-value goods that are absolutely necessary for your industries – that is, only raw materials and other basic necessities you simply cannot find at home.
The Mercantilists expected - or demanded - that the government take an active role in this, and make "protectionism" a central part of government policy. The government was at various times by different authors called upon to forbid or restrict anybody from taking money out of the country by all sorts of controls and laws, impose tariffs and quotas to discourage imports and hand out export subsidies ('bounties') to domestic exporters.
Some Mercantilists went further. The Dutch had a head-start in manufacturing high-value goods, so Mercantilists also recommended that the government actively help out domestic private businessmen set up high-value import-substitution and export-oriented industries. The crown was urged to subsidize these industries, whether directly or indirectly. Infrastructure investment, like roads and ports, to facilitate the export trade, was to be encouraged. In order to minimize "destructive competition" at home, many Mercantilists believed that charter companies had a better chance of succeeding abroad if they were granted a charter with exclusive government-guaranteed monopolies over particular areas of industry and trade. If, even after all this coddling, domestic capitalists still could not afford to set these up profitably, then the Crown should set up and run these industries itself.
Finally, and perhaps most ominously, the State was also called on to use its diplomatic and military muscle whenever it could - not only to promote domestic trade abroad, but, almost as importantly, to hamper the trade of foreign competitors. In this connection, the government should force foreign nations to open their markets for our exports and close their markets to the exports of our competitors. It should force other nations to give us access to their raw materials and valuable resources for cheap, and prevent the sale of those commodities to our competitors. If nations are recalcitrant to comply, or insist on open markets, then make war, conquer and/or colonize them yourself.
In sum, Mercantilists did not believe there were mutual gains from trade, where both exporters and importers benefited. Rather they saw it as a zero-sum game - exporters always win, importers always lose, so export as much as possible, import as little as possible. Trade was to be conceived as a kind of war -- a war of every nation against every other nation -- to see who could export the most and import the least. And the role of the State was to actively help out in this endeavor - legally, financially and militarily.
Mercantilist measures were not usually advocated as a means of promoting domestic trade, industry or employment for their own sake, but rather to ensure a favorable balance of trade. The overriding objective remained to ensure an inflow of cash (gold, silver) from that favorable balance. As such, Mercantilists have been accused (notably by Adam Smith) of a "money fetish", of confusing cash with wealth, of imagining that the prosperity. of a country is measured solely by the amount of gold and silver it had within its borders, and not its real goods or resources.
This is only partially correct. Mercantilists were obsessed with money, yes. But the identification of money and prosperity was not always so simplistic. For Mercantilists, the "prosperity" of a nation was not defined as the well-being of its population, but often just of a narrow elite class, or even, in some literature, as a euphemism for the solvency of the State treasury. Others took a personal analogy, seeing cash as the a store of wealth, and believing wealth accumulation would be hampered if there was insufficient precious metal to store it in.
With the rise of the State, the 17th Century marked the ascendancy of two classes of peoples needed by the State: bureaucrats to run it and merchants to finance it. It was from the assorted pamphlets, studies and treatises of these groups of practitioners that Mercantilism developed. In England and Holland, the bulk of the economic writing was done by merchants drawn from their rising bourgeois communities -- thus the term "Mercantilism". In France and Germany, where the bourgeoisie was smaller, economic arguments were articulated largely by state officials -- thus French Mercantilism is better known as "Colbertisme" (named after Jean-Baptiste Colbert, French minister of finance) while German Mercantilism as "Cameralism" (after the German term for the royal chamber).
This difference in background between English-Dutch and French-German Mercantilists did
not imply much difference in their economic doctrine. Both groups recognized the
intimate, symbiotic relationship between the wealth of merchants and the power of the
State: the flourishing of business meant more revenue and thus power for the State; the
power of the State could secure the profitable trading routes and grant the monopolies
desired by the merchants. English Mercantilism is often divided into three phases:
the crude "Bullionist" stage lasting roughly
from the 1580s to 1620, the "Traditional"
stage lasting from 1620 to about 1700, overlapping with the "Liberal" stage which stretched from the 1680s to the
1750s. French Colbertisme is said to have lasted between 1660s and 1750s, while
German Cameralism had perhaps the longest time span, stretching from 1560s to 1750s and,
through the hands of Neo-Cameralists, stretching even beyond 1800.
At the heart of the Mercantilist system is an obsession with the positive feedback between growth and wealth accumulation: more economic activity meant more wealth (for merchants and the State), more wealth meant more activity. They recognized two basic preconditions for increasing enterprise: the existence of profit opportunities and flexible credit facilities. The Mercantilists proposed that activity rose whenever prices rose (because they believed higher prices meant higher profits) and interest rates fell (thus easier credit). Both of these things occur, they noted, when the quantity of money in a country is increased. Money, in the those days, was gold and silver. Thus, in order to increase national output, the early Mercantilists recommended, every effort, fair or foul, must be made by the State to ensure that, whether bullion or coins, as much gold and silver as possible enters that country and as little as possible leaves the country.
Initially, this was thought to involve direct restrictions on the export of gold, a practice highly recommended by the Bullionist strain of Mercantilists, notably Thomas Milles and Gerald de Malynes. This brought the protest of the charter companies, notably the Society of Merchant Adventurers and the British East India Company, which traded extensively overseas and needed the gold export restrictions relaxed (cf. Wheeler, 1601). The influential ..\profiles\malynes.htm (1601, 1621) inveighed thunderously against the companies, blaming them and their allies for the ruin of England. He protested to the English Court that the Charter companies, by setting an exchange ratio for English currency below its intrinsic worth (which had been so "wisely" decided upon the court) were not only undermining royal authority and Divine justice, but by encouraging the exportation of specie were thus a "cancer" on the Commonwealth. He recommended even more draconian restrictions on export of specie as a way to fix the problem and "reflate" the economy. No friend to financiers, Malynes resurrected the old Scholastic arguments against usury, arguing that interest created an unnatural cost of credit and held back enterprise.
Against Malynes's recommendations were arrayed two formidable writers, Thomas Misselden and Thomas Mun -- the former more of a agitator, the latter more of a scholar, but both charter company men. Misselden and Mun admitted the benefit of specie inflow, but did not blame outflows on "evil financiers" and charter companies maintaining a separate exchange ratio for currency, but rather on the external balance of trade. Mun, in particular noted that outflows/inflows of gold are determined by the balance of payments, which includes the balance of trade, but also capital transfers. Their recommendation was that the state can only stem the outflow of gold not by restrictions on gold movements, but rather by encouraging exports and discouraging imports. This trade-specie flow mechanism, they argued, could not be disabled by royal dictation but was a mechanism forced upon the nations of the world by "natural law". It cannot be stopped, but it can be encouraged in the right direction. The optimal formula had already been laid out years earlier by Jean Bodin: impose high tariffs and duties on the export of raw materials and the import of finished goods, and low tariffs and duties on the import of raw materials and the export of finished goods.
Another contribution of Mun was the recognition that perhaps rising prices were not all that desirable: they decrease the competitiveness of exports, thus worsening the balance of trade and lead to gold outflow. This had not been recognized by Malynes or Misselden, who had argued repeatedly for the benefits of price inflation. The Mercantilists struggled with, but never actually resolved, the contradiction between the industry-stimulating but export-crippling price rises.
Another concern was the possibility of rising prices and industry might also lead to rising wages that might cut into those profits and thus reduce output. The Mercantilists did not mince words on this: they recommended that wages should be kept as low as possible. They believed that low real wages actually increased the productivity of laborers (an effect later disputed and reversed by Cantillon and the Ricardians). To keep wages low, the Mercantilists applauded policies aimed at increasing population and recommended the use of labor-saving machinery whenever possible.
The watershed in Mercantilist thinking was the work of William Petty (1690). He began focusing attention on income distribution and the relative values of the contributions of "factors of production", which, for him, was basically labor and land. It was Petty that initiated the idea that rent on land was a surplus above wage payments. Petty's exercise anticipated that of Ricardian rent -- indeed, he went so far as to talk about diminishing returns to land on the basis of their distance from the market.
Wages, for Petty, were determined by what was necessary for the laborer "Live, Labor and Generate". Petty used this to initate the "labor theory of value" whereby the relative values of goods were determined by the relative amounts of labor-time involved in producing them. He justified this equality of relative labor time and relative prices on the basis of arbitrage. He also used arbitrage reasoning to argue that the interest on capital would be equated with the rent on land (but Petty did not really have a good, independent theory of capital). Thus, Petty anticipates many of the later Classical Ricardian doctrines.
Mercantilism was given another twist in its "liberal" phase spearheaded by Nicholas Barbon (1690). and Sir Dudley North (1691) and followed up (if modestly) by Sir Josiah Child (1693) and Charles Davenant. They were perhaps the first to recognize that international trade, far from being a zero-sum game, could be mutually beneficial to both parties. North was also one of the first to begin talking about "profit" and "capital" as a distinct factor of production, and recognized that money was only of value when lent out for capital. The theory of money was also given more careful consideration by John Locke (1692), who formulated the concept of "velocity" and effectively initiated the Quantity Theory of Money.
Mercantilist doctrine maintained itself throughout much of the 18th Century. The rise of the Enlightenment, however, changed things substantially. The works of Richard Cantillon, Jacques Turgot and the Physiocrats in France and David Hume and his friend Adam Smith in Great Britain, were often designed to go directly against Mercantilist opinion. Their new view that the wealth of a nation really arises from circulating income flows and their insistence on the neutrality of money, undermined the Mercantilists's "stock-of-money" concept of wealth. The Enlightenment economists also introduced the idea of "natural balance" of those flows, which effectively replaced the "growth obsession" of the Mercantilists with the "equilibrium obsession" of the Enlightenment economists.
These new ideas were not immediately successful. The Physiocrats remained in the shadows of the French court, with the Colbertistes and anti-Physiocrats such as Forbonnais still maintaining their great influence on policy. Great Britain, on the dawn of its industrial revolution, was somewhat more receptive to the new doctrines, although it could still produce remarkable Mercantilists such as Sir James Steuart (1767). Germany, for the most part, remained immune from the new theories, and safely in the hands of the Neo-Cameralists well into the 19th Century.
The English Bullionists
"Traditional" Mercantilists: The Companymen
The Government Men
"Liberal" English Mercantilists
German Cameralism(see Cameralism)
Resources on Mercantilism
All rights reserved, Gonçalo L. Fonseca