What was the economic philosophy of mercantilism

History of Mercantilism

Originating in 16th-century Europe, mercantilism began with the emergence of the nation-state. The dominant economic theory was that the global supply of wealth was finite, and it was in the nation’s best interest to accumulate as much as possible. During that time, wealth was measured by a country’s quantity of silver and gold. To accumulate more wealth, European countries, such as Britain and France, would focus on maximizing their exports and minimizing imports, which resulted in a favorable balance of trade.

Inhaltsverzeichnis Show

History of Mercantilism
Mercantilist Ideology
From Mercantilism to the Market Economy
Present-Day Mercantilism
Related Readings
Mercantilism involves
Examples of mercantilism
Modern Mercantilism
Criticisms of Mercantilism
Justification for neo-mercantilism

For countries with a negative trade balance with a mercantilist country, the difference would be paid back in silver or gold. To maintain a favorable trade balance, the early mercantilist countries would enact imperialist policies by setting up colonies in smaller nations.

The aim was to extract raw material to send back to the home country, where it would be refined into manufactured goods. The goods would then be resold to the colonies, allowing early mercantilist nations to accumulate wealth through a positive trade balance.

Mercantilist Ideology

As an economic theory, mercantilism relies on government intervention to regulate international trade and protect domestic industries. Mercantilist policies involve the protection of domestic corporations through regulations and the promotion of trade surpluses. In the context of international trade, a favorable trade balance is achieved through government regulations, such as tariffs and restrictions on imports.

On the domestic side, mercantilist policies support domestic industries by establishing monopolies and allocating capital to encourage growth. Such policies are a form of economic protectionism meant to encourage self-sufficiency and are in direct opposition to the free-market economics of trade and globalization.

From Mercantilism to the Market Economy

By the end of the 18th century, scholars, such as Adam Smith and David Hume, began to evaluate and critique the merits of mercantilist theory. Contrary to established beliefs, the scholars realized that wealth was not finite, but could be created through the productive allocation of labor.

Mercantilist policies also failed to account for the benefits of trade, such as comparative advantage and economies of scale. When countries specialize in the production of goods for which they enjoy a comparative advantage, trade can result in mutually beneficial deals. Such a realization resulted in the emergence of the market economy, where prices and means of production were driven by the forces of supply and demand.

Under a mercantilist system, the restriction of imports meant consumers obtained access to fewer goods at higher prices. Under a system of free trade, consumers benefit from lower prices due to increased competition and greater access to goods from across the world.

Present-Day Mercantilism

Although mercantilism is mostly viewed as an outdated economic theory, there has been an emergence of mercantilist policies in recent times. Present-day mercantilism typically refers to protectionist policies that restrict imports to support domestic industries. It can sometimes be referred to as neomercantilism.

Modern mercantilist policies include tariffs on imports, subsidizing domestic industries, devaluation of currencies, and restrictions on the migration of foreign labor. Mercantilist policies can also explain the recent escalation of tariffs and trade restrictions between the US and China.

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Definition: Mercantilism is an economic theory where the government seeks to regulate the economy and trade in order to promote domestic industry – often at the expense of other countries. Mercantilism is associated with policies which restrict imports, increase stocks of gold and protect domestic industries.

Mercantilism stands in contrast to the theory of free trade – which argues countries economic well-being can be best improved through the reduction of tariffs and fair free trade.

Mercantilism involves

Restrictions on imports – tariff barriers, quotas or non-tariff barriers.
Accumulation of foreign currency reserves, plus gold and silver reserves. (also known as bullionism) In the sixteenth/seventeenth century, it was believed that the accumulation of gold reserves (at the expense of other countries) was the best way to increase the prosperity of a country.
Granting of state monopolies to particular firms especially those associated with trade and shipping.
Subsidies of export industries to give a competitive advantage in global markets.
Government investment in research and development to maximise the efficiency and capacity of the domestic industry.
Allowing copyright/intellectual theft from foreign companies.
Limiting wages and consumption of the working classes to enable greater profits to stay with the merchant class.
Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth.

Examples of mercantilism

England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.
All colonial exports to Europe had to pass through England first and then be re-exported to Europe.
Under the British Empire, India was restricted in buying from domestic industries and were forced to import salt from the UK. Protests against this salt tax led to the ‘Salt tax revolt’ led by Gandhi.
In seventeenth-century France, the state promoted a controlled economy with strict regulations about the economy and labour markets
Rise of protectionist policies following the great depression; countries sought to reduce imports and also reduce the value of the currency by leaving the gold standard.
Some have accused China of mercantilism due to industrial policies which have led to an oversupply of industrial production – combined with a policy of undervaluing the currency.
However, the extent of mercantilist policies are disputed – See – Is China Mercantilist? NBER

Modern Mercantilism

In the modern world, mercantilism is sometimes associated with policies, such as:

Undervaluation of currency. e.g. government buying foreign currency assets to keep the exchange rate undervalued and make exports more competitive. A criticism often levelled at China.
Government subsidy of an industry for unfair advantage. Again China has been accused of offering state-supported subsidies for industry, leading to oversupply of industries such as steel – meaning other countries struggle to compete.
A surge of protectionist sentiment, e.g. US tariffs on Chinese imports, and US policies to ‘Buy American.’
Copyright theft

Criticisms of Mercantilism

Adam Smith’s “The Wealth of Nations” (1776) – argued for benefits of free trade and criticised the inefficiency of monopoly.
Theory of comparative advantage (David Ricardo)
Mercantilism is a philosophy of a zero-sum game – where people benefit at the expense of others. It is not a philosophy for increasing global growth and reducing global problems. Trying to impoverish other countries will harm our own growth and prosperity. By contrast, if we avoid zero-sum game of mercantilism increasing the wealth of other countries can lead to selfish benefits, e.g. growth of Japan and Germany led to increased export markets for UK and US.
Mercantilism which stresses government regulation and monopoly often lead to inefficiency and corruption.
Mercantilism justified Empire building and the poverty of colonies to enrich the Empire country.
Mercantilism leads to tit for tat policies – high tariffs on imports leads to retaliation.
The growth of globalisation and free trade during the post-war period showed possibilities from opening markets and respecting other countries as equal players.
Economies of scale from specialisation possible under free trade.

Justification for neo-mercantilism

Despite many criticisms of mercantilism, there are arguments to support the restriction of free trade in certain circumstances.

Tariffs in response to domestic subsidies. Supporters argue that since China’s steel is effectively subsidised leading to a glut in supply, it is necessary and fair to impose tariffs on imports of Chinese steel to protect domestic producers from unfair competition. US tariffs on imports of steel from China 266%. In Europe, tariffs are 13%.
Protection against dumping. If some countries have an excess supply of goods, they can sell at a very low price to get rid of the surplus. But, this can make domestic firms unprofitable. Protectionism can be justified to protect against this dumping. Examples, include EEC dumping excess agricultural production on world agricultural markets and China’s dumping of steel.
Infant industry argument. For countries seeking to diversify their economy, tariffs may be justified to try and develop new industries. When the industries have developed and benefited from economies of scale, then the tariffs and protectionism can be dropped.

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