Mercantilism

Mercantilism

Overview

Mercantilism is the economic
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 doctrine in which government control of foreign trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...

 is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European
Western Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...

 economic policy and discourse from the 16th to late-18th centuries. Mercantilism was a cause of frequent European wars in that time and motivated colonial expansion.
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Encyclopedia

Mercantilism is the economic
Economics
Economics is the social science that analyzes the production, distribution, and consumption of goods and services. The term economics comes from the Ancient Greek from + , hence "rules of the house"...

 doctrine in which government control of foreign trade
International trade
International trade is the exchange of capital, goods, and services across international borders or territories. In most countries, such trade represents a significant share of gross domestic product...

 is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European
Western Europe
Western Europe is a loose term for the collection of countries in the western most region of the European continents, though this definition is context-dependent and carries cultural and political connotations. One definition describes Western Europe as a geographic entity—the region lying in the...

 economic policy and discourse from the 16th to late-18th centuries. Mercantilism was a cause of frequent European wars in that time and motivated colonial expansion. Mercantilist theory varied in sophistication from one writer to another and evolved over time. Favors for powerful interests were often defended with mercantilist reasoning.

Mercantilist policies have included:
  • High tariffs, especially on manufactured goods;
  • Monopolizing markets with staple ports;
  • Exclusive trade with colonies;
  • Forbidding trade to be carried in foreign ships;
  • Export subsidies;
  • Banning all export of gold and silver
    Precious metal
    A precious metal is a rare, naturally occurring metallic chemical element of high economic value.Chemically, the precious metals are less reactive than most elements, have high lustre, are softer or more ductile, and have higher melting points than other metals...

    ;
  • Promoting manufacturing with research or direct subsidies
    Industrial policy
    The Industrial Policy plan of a nation, sometimes shortened IP, "denotes a nation's declared, official, total strategic effort to influence sectoral development and, thus, national industry portfolio." These interventionist measures comprise "policies that stimulate specific activities and promote...

    ;
  • Limiting wages;
  • Maximizing the use of domestic resources;
  • Restricting domestic consumption with non-tariff barriers to trade
    Non-tariff barriers to trade
    Non-tariff barriers to trade are trade barriers that restrict imports but are not in the usual form of a tariff. Some common examples of NTB's are anti-dumping measures and countervailing duties, which, although they are called "non-tariff" barriers, have the effect of tariffs once they are...

    .


Jean-Baptiste Colbert
Jean-Baptiste Colbert
Jean-Baptiste Colbert was a French politician who served as the Minister of Finances of France from 1665 to 1683 under the rule of King Louis XIV. His relentless hard work and thrift made him an esteemed minister. He achieved a reputation for his work of improving the state of French manufacturing...

's work in seventeenth century France exemplified classical mercantilism. In the English-speaking world its ideas were criticized by Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 with the publication of The Wealth of Nations
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...

 in 1776 and later David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

 with his explanation of comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

, but policy changes did not follow in either's lifetime, even in Britain. Mercantilism reached its low-water mark in the last half of the nineteenth century as the British Empire embraced free-trade and used its power as the financial center
Financial Centre
A financial centre is a global city that is a company and business hub, as well as being home to many world famous banks and/or stock exchanges....

 of the world to promote the same.

Neomercantilism is distinguished from traditional mercantilism by its adoption of the ideas and methods of neoclassical economics
Neoclassical economics
Neoclassical economics is a term variously used for approaches to economics focusing on the determination of prices, outputs, and income distributions in markets through supply and demand, often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits...

.

Mercantilism in its simplest form was naive bullionism
Bullionism
Bullionism is an economic theory that defines wealth by the amount of precious metals owned. Bullionism is an early or primitive form of mercantilism...

, but mercantilist writers emphasized the circulation of money and rejected hoarding. Their emphasis on monetary metals accords with current ideas regarding the money supply, such as the stimulative effect of a growing money supply
Stimulus (economic)
In economics, stimulus refers to attempts to use monetary or fiscal policy to stimulate the economy. Recently "stimulus" has become particularly associated with Keynesian economics and the theory that government spending projects can generate economic growth in a recession...

. Specie concerns have since been rendered moot by fiat money
Fiat money
Fiat money is money that has value only because of government regulation or law. The term derives from the Latin fiat, meaning "let it be done", as such money is established by government decree. Where fiat money is used as currency, the term fiat currency is used.Fiat money originated in 11th...

 and floating exchange rate
Floating exchange rate
A floating exchange rate or fluctuating exchange rate is a type of exchange rate regime wherein a currency's value is allowed to fluctuate according to the foreign exchange market. A currency that uses a floating exchange rate is known as a floating currency....

s. In time, the heavy emphasis on money was supplanted by industrial policy
Industrial policy
The Industrial Policy plan of a nation, sometimes shortened IP, "denotes a nation's declared, official, total strategic effort to influence sectoral development and, thus, national industry portfolio." These interventionist measures comprise "policies that stimulate specific activities and promote...

, accompanied by a shift in focus from the capacity to carry on wars to promoting general prosperity. Mature neomercantilist theory recommends selective high tariffs for "infant" industries
Infant industry
In economics, an infant industry is a new industry, which in its early stages is unable to compete with established competitors abroad.Governments are sometimes urged to support the development of infant industries, usually through subsidies or tariffs...

 or to promote the mutual growth of countries through national industrial specialization. Currently, advocacy of mercantilist methods for maintaining high wages in advanced economies are popular among workers in those economies, but such ideas are rejected by most policymakers and economists.

Influence


Mercantilism was the dominant school of thought in Europe throughout the late Renaissance
Renaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...

 and early modern period
Early modern period
In history, the early modern period of modern history follows the late Middle Ages. Although the chronological limits of the period are open to debate, the timeframe spans the period after the late portion of the Middle Ages through the beginning of the Age of Revolutions...

 (from the 15th-18th century). Mercantilism encouraged the many intra-European war
War
War is a state of organized, armed, and often prolonged conflict carried on between states, nations, or other parties typified by extreme aggression, social disruption, and usually high mortality. War should be understood as an actual, intentional and widespread armed conflict between political...

s of the period and arguably fueled European expansion and imperialism
Imperialism
Imperialism, as defined by Dictionary of Human Geography, is "the creation and/or maintenance of an unequal economic, cultural, and territorial relationships, usually between states and often in the form of an empire, based on domination and subordination." The imperialism of the last 500 years,...

 — both in Europe and throughout the rest of the world — until the 19th century or early 20th century.

Arguments have been made for the historical promotion of mercantilism in Europe since recorded history, with authors noting the trade policies of Athens
Athens
Athens , is the capital and largest city of Greece. Athens dominates the Attica region and is one of the world's oldest cities, as its recorded history spans around 3,400 years. Classical Athens was a powerful city-state...

 and its Delian League
Delian League
The Delian League, founded in circa 477 BC, was an association of Greek city-states, members numbering between 150 to 173, under the leadership of Athens, whose purpose was to continue fighting the Persian Empire after the Greek victory in the Battle of Plataea at the end of the Greco–Persian Wars...

 specifically mention control of value of trade in bullion as necessary for the promotion of the Greek polis
Polis
Polis , plural poleis , literally means city in Greek. It could also mean citizenship and body of citizens. In modern historiography "polis" is normally used to indicate the ancient Greek city-states, like Classical Athens and its contemporaries, so polis is often translated as "city-state."The...

. Additionally, the noted competition of medieval monarchs for control of the market town
Market town
Market town or market right is a legal term, originating in the medieval period, for a European settlement that has the right to host markets, distinguishing it from a village and city...

 trade and of the spice trade
Spice trade
Civilizations of Asia were involved in spice trade from the ancient times, and the Greco-Roman world soon followed by trading along the Incense route and the Roman-India routes...

, as well as the copious documentation of Venice
Venice
Venice is a city in northern Italy which is renowned for the beauty of its setting, its architecture and its artworks. It is the capital of the Veneto region...

, Genoa
Genoa
Genoa |Ligurian]] Zena ; Latin and, archaically, English Genua) is a city and an important seaport in northern Italy, the capital of the Province of Genoa and of the region of Liguria....

, and Pisa
Pisa
Pisa is a city in Tuscany, Central Italy, on the right bank of the mouth of the River Arno on the Tyrrhenian Sea. It is the capital city of the Province of Pisa...

 regarding control of the Mediterranean
Mediterranean Sea
The Mediterranean Sea is a sea connected to the Atlantic Ocean surrounded by the Mediterranean region and almost completely enclosed by land: on the north by Anatolia and Europe, on the south by North Africa, and on the east by the Levant...

 trade of bullion clearly points to an early understanding of mercantilistic principles. However, as a codified school, mercantilism's real birth is marked by the Empiricism
Empiricism
Empiricism is a theory of knowledge that asserts that knowledge comes only or primarily via sensory experience. One of several views of epistemology, the study of human knowledge, along with rationalism, idealism and historicism, empiricism emphasizes the role of experience and evidence,...

 of the Renaissance
Renaissance
The Renaissance was a cultural movement that spanned roughly the 14th to the 17th century, beginning in Italy in the Late Middle Ages and later spreading to the rest of Europe. The term is also used more loosely to refer to the historical era, but since the changes of the Renaissance were not...

, which first began to quantify large-scale trade accurately.

England
England
England is a country that is part of the United Kingdom. It shares land borders with Scotland to the north and Wales to the west; the Irish Sea is to the north west, the Celtic Sea to the south west, with the North Sea to the east and the English Channel to the south separating it from continental...

 began the first large-scale and integrative approach to mercantilism during the Elizabethan Era
Elizabethan era
The Elizabethan era was the epoch in English history of Queen Elizabeth I's reign . Historians often depict it as the golden age in English history...

 (1558–1603). An early statement on national balance of trade appeared in Discourse of the Common Weal of this Realm of England, 1549: "We must always take heed that we buy no more from strangers than we sell them, for so should we impoverish ourselves and enrich them." The period featured various but often disjointed efforts by the court of Queen Elizabeth
Elizabeth I of England
Elizabeth I was queen regnant of England and Ireland from 17 November 1558 until her death. Sometimes called The Virgin Queen, Gloriana, or Good Queen Bess, Elizabeth was the fifth and last monarch of the Tudor dynasty...

 to develop a naval and merchant fleet capable of challenging the Spanish stranglehold on trade and of expanding the growth of bullion at home. Queen Elizabeth promoted the Trade and Navigation Acts in Parliament and issued Orders in Council to her Admiralty
Admiralty
The Admiralty was formerly the authority in the Kingdom of England, and later in the United Kingdom, responsible for the command of the Royal Navy...

 for the protection and promotion of English shipping. A systematic and coherent explanation of balance of trade was made public through Thomas Mun
Thomas Mun
Thomas Mun was an English writer on economics who has been called the last of the early mercantilists. He was among the first to recognize the exportation of service, or invisible items, as valuable trade, and made early statements strongly in support of capitalism.Mun began his career by engaging...

's c.1630 "England's treasure by forraign trade, or, The balance of our forraign trade is the rule of our treasure"

These efforts organized national resources sufficiently in the defense of England against the far larger and more powerful Spanish Empire
Spanish Empire
The Spanish Empire comprised territories and colonies administered directly by Spain in Europe, in America, Africa, Asia and Oceania. It originated during the Age of Exploration and was therefore one of the first global empires. At the time of Habsburgs, Spain reached the peak of its world power....

, and in turn paved the foundation for establishing a global empire in the 19th century. The authors noted most for establishing the English mercantilist system include Gerard de Malynes
Gerard de Malynes
Gerard de Malynes was an independent merchant in foreign trade, an English commissioner in the Spanish Netherlands, a government advisor on trade matters, assay master of the mint, and commissioner of mint affairs.-Books:...

 and Thomas Mun
Thomas Mun
Thomas Mun was an English writer on economics who has been called the last of the early mercantilists. He was among the first to recognize the exportation of service, or invisible items, as valuable trade, and made early statements strongly in support of capitalism.Mun began his career by engaging...

, who first articulated the Elizabethan System, which in turn was then developed further by Josiah Child
Josiah Child
Sir Josiah Child of Wanstead, 1st Baronet , English merchant, economist proponent of mercantilism and governor of the East India Company, was born in London, the second son of Richard Child, a London merchant of old family.-Family:...

. Numerous French authors helped cement French policy around mercantilism in the 17th century. This French mercantilism was best articulated by Jean-Baptiste Colbert
Jean-Baptiste Colbert
Jean-Baptiste Colbert was a French politician who served as the Minister of Finances of France from 1665 to 1683 under the rule of King Louis XIV. His relentless hard work and thrift made him an esteemed minister. He achieved a reputation for his work of improving the state of French manufacturing...

 (in office, 1665–1683), though policy liberalised greatly under Napoleon.

In Europe, academic belief in mercantilism began to fade in the late 18th century, especially in England, in light of the arguments of Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 and the classical economists
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

. The repeal of the Corn Laws
Corn Laws
The Corn Laws were trade barriers designed to protect cereal producers in the United Kingdom of Great Britain and Ireland against competition from less expensive foreign imports between 1815 and 1846. The barriers were introduced by the Importation Act 1815 and repealed by the Importation Act 1846...

 by Robert Peel
Robert Peel
Sir Robert Peel, 2nd Baronet was a British Conservative statesman who served as Prime Minister of the United Kingdom from 10 December 1834 to 8 April 1835, and again from 30 August 1841 to 29 June 1846...

 symbolised the emergence of free trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 as an alternative system. Mercantilism never returned to popularity among economists as the principle Comparative Advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

 shows the gains from international trade. However, during the Great Recession countries raised tariffs in an attempt to protect their industries, sharply reducing world trade.

Theory


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
German language
German is a West Germanic language, related to and classified alongside English and Dutch. With an estimated 90 – 98 million native speakers, German is one of the world's major languages and is the most widely-spoken first language in the European Union....

 in the early 19th century.

The bulk of what is commonly called "mercantilist literature" appeared in the 1620s in Great Britain. Smith saw English merchant Thomas Mun
Thomas Mun
Thomas Mun was an English writer on economics who has been called the last of the early mercantilists. He was among the first to recognize the exportation of service, or invisible items, as valuable trade, and made early statements strongly in support of capitalism.Mun began his career by engaging...

 (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 or manifesto of the movement. Perhaps the last major mercantilist work was James Steuart
James Denham-Steuart
Sir James Steuart, 3rd Baronet of Goodtrees and eventually 7th Baronet of Coltness; late in life Sir James Steuart Denham, also called Sir James Denham Steuart was a prominent Jacobite, who wrote one of the first noteworthy books in English about economics...

’s Principles of Political Economy published in 1767.

"Mercantilist literature" also extended beyond England. For example, Italy, France, and Spain produced noted writers of mercantilist themes including Italy's Giovanni Botero
Giovanni Botero
Giovanni Botero was an Italian thinker, priest, poet, and diplomat, best known for his work Della ragion di Stato . In this work, he argued against the amoral political philosophy associated with Niccolò Machiavelli's The Prince, not only because it lacked a Christian foundation but also because...

 (1544–1617) and Antonio Serra
Antonio Serra
Antonio Serra was a late 16th century Italian philosopher and economist in the Mercantilist tradition.Little is known about his life. He was born in Cosenza in the late 16th century. When working in Naples, he applied himself to solving the enormous social and economic problems created by the...

 (1580-?); France's, Jean Bodin
Jean Bodin
Jean Bodin was a French jurist and political philosopher, member of the Parlement of Paris and professor of law in Toulouse. He is best known for his theory of sovereignty; he was also an influential writer on demonology....

, Colbert
Jean-Baptiste Colbert
Jean-Baptiste Colbert was a French politician who served as the Minister of Finances of France from 1665 to 1683 under the rule of King Louis XIV. His relentless hard work and thrift made him an esteemed minister. He achieved a reputation for his work of improving the state of French manufacturing...

 and other physiocrats
Physiocrats
Physiocracy is an economic theory developed by the Physiocrats, a group of economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development." Their theories originated in France and were most popular during the second half of the 18th...

 precursors; and the Spanish School of Salamanca
School of Salamanca
The School of Salamanca is the renaissance of thought in diverse intellectual areas by Spanish and Portuguese theologians, rooted in the intellectual and pedagogical work of Francisco de Vitoria...

 writers Francisco de Vitoria
Francisco de Vitoria
Francisco de Vitoria, OP was a Spanish Renaissance Roman Catholic philosopher, theologian and jurist, founder of the tradition in philosophy known as the School of Salamanca, noted especially for his contributions to the theory of just war and international law...

 (1480 or 1483–1546), Domingo de Soto
Domingo de Soto
Domingo de Soto was a Dominican priest and Scholastic theologian born in Segovia, Spain, and died in Salamanca at the age of 66...

 (1494–1560), Martin de Azpilcueta
Martín de Azpilcueta
Martín de Azpilcueta , or Doctor Navarrus, was an important Spanish canonist and theologian in his time, and an early economist, the first to develop monetarist theory.-Life:...

 (1491–1586), and Luis de Molina (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 19th century. However, many British writers, including Mun and Misselden
Edward Misselden
Edward Misselden was an English merchant, and leading member of the writers in the Mercantilist group of economic thought. He argued that international movements of specie and fluctuations in the exchange rate depended upon the international trade flows and not the manipulations of the bankers,...

, 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, in 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 materials.
  • 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 possible.
  • That where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.
  • 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 and silver.
  • 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
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 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 mercantilism. 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 patent
Letters patent
Letters patent are a type of legal instrument in the form of a published written order issued by a monarch or president, generally granting an office, right, monopoly, title, or status to a person or corporation...

 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
Import quota
An import quota is a type of protectionist trade restriction that sets a physical limit on the quantity of a good that can be imported into a country in a given period of time....

 and price ceilings were black markets
Underground economy
A black market or underground economy is a market in goods or services which operates outside the formal one supported by established state power. Typically the totality of such activity is referred to with the definite article as a complement to the official economies, by market for such goods and...

. One notion mercantilists widely agreed upon was the need for economic oppression
Economic oppression
The term economic oppression, sometimes misunderstood in the sense of economic sanction, embargo or economic boycott, has a different meaning and significance, and its meaning as well as its significance has been changing over a period of time, and its contextual application...

 of the working population; laborers and farmers were to live at the "margins of subsistence". The goal was to maximize production, with no concern for consumption
Consumption (economics)
Consumption is a common concept in economics, and gives rise to derived concepts such as consumer debt. Generally, consumption is defined in part by comparison to production. But the precise definition can vary because different schools of economists define production quite differently...

. 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.

Infinite growth


The mercantilists saw a large population as a form of wealth which made possible the development of bigger market
Market
A market is one of many varieties of systems, institutions, procedures, social relations and infrastructures whereby parties engage in exchange. While parties may exchange goods and services by barter, most markets rely on sellers offering their goods or services in exchange for money from buyers...

s and armies
Army
An army An army An army (from Latin arma "arms, weapons" via Old French armée, "armed" (feminine), in the broadest sense, is the land-based military of a nation or state. It may also include other branches of the military such as the air force via means of aviation corps...

. The opposing doctrine of physiocracy predicted that mankind would outgrow its resources.

Origins


Scholars debate over why mercantilism dominated economic ideology for 250 years. One group, represented by Jacob Viner
Jacob Viner
Jacob Viner was a Canadian economist and is considered with Frank Knight and Henry Simons one of the "inspiring" mentors of the early Chicago School of Economics in the 1930s: he was one of the leading figures of the Chicago faculty.- Biography :Viner was born in 1892 in Montreal, Quebec to...

, argues that mercantilism was simply a straightforward, common-sense system whose logical fallacies
Formal fallacy
In philosophy, a formal fallacy is a pattern of reasoning that is always wrong. This is due to a flaw in the logical structure of the argument which renders the argument invalid...

 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.

Monetarism offers a third explanation for mercantilism. 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.

A fourth explanation lies in the increasing professionalisation and technification of the wars of the era, which turned the maintenance of adequate reserve funds (in the prospect of war) into a more and more expensive and eventually competitive business.

Mercantilism developed at a time when the European economy was in transition. Isolated feudal
Feudalism
Feudalism was a set of legal and military customs in medieval Europe that flourished between the 9th and 15th centuries, which, broadly defined, was a system for ordering society around relationships derived from the holding of land in exchange for service or labour.Although derived from the...

 estates were being replaced by centralized nation-state
Nation-state
The nation state is a state that self-identifies as deriving its political legitimacy from serving as a sovereign entity for a nation as a sovereign territorial unit. The state is a political and geopolitical entity; the nation is a cultural and/or ethnic entity...

s 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
Double-entry bookkeeping system
A double-entry bookkeeping system is a set of rules for recording financial information in a financial accounting system in which every transaction or event changes at least two different nominal ledger accounts....

 and 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
Scholasticism
Scholasticism is a method of critical thought which dominated teaching by the academics of medieval universities in Europe from about 1100–1500, and a program of employing that method in articulating and defending orthodoxy in an increasingly pluralistic context...

 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
Microeconomics
Microeconomics is a branch of economics that studies the behavior of how the individual modern household and firms make decisions to allocate limited resources. Typically, it applies to markets where goods or services are being bought and sold...

 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
Niccolò Machiavelli
Niccolò di Bernardo dei Machiavelli was an Italian historian, philosopher, humanist, and writer based in Florence during the Renaissance. He is one of the main founders of modern political science. He was a diplomat, political philosopher, playwright, and a civil servant of the Florentine Republic...

 realpolitik
Realpolitik
Realpolitik refers to politics or diplomacy based primarily on power and on practical and material factors and considerations, rather than ideological notions or moralistic or ethical premises...

 and the primacy of the raison d'état
National interest
The national interest, often referred to by the French expression raison d'État , is a country's goals and ambitions whether economic, military, or cultural. The concept is an important one in international relations where pursuit of the national interest is the foundation of the realist...

in international relations
International relations
International relations is the study of relationships between countries, including the roles of states, inter-governmental organizations , international nongovernmental organizations , non-governmental organizations and multinational corporations...

. The 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 Hobbes
Thomas Hobbes
Thomas Hobbes of Malmesbury , in some older texts Thomas Hobbs of Malmsbury, was an English philosopher, best known today for his work on political philosophy...

. The dark view of human nature also fit well with the Puritan
Puritan
The Puritans were a significant grouping of English Protestants in the 16th and 17th centuries. Puritanism in this sense was founded by some Marian exiles from the clergy shortly after the accession of Elizabeth I of England in 1558, as an activist movement within the Church of England...

 view of the world, and some of the most stridently mercantilist legislation, such as the Navigation Acts
Navigation Acts
The English Navigation Acts were a series of laws that restricted the use of foreign shipping for trade between England and its colonies, a process which had started in 1651. Their goal was to force colonial development into lines favorable to England, and stop direct colonial trade with the...

, were enacted by the government of Oliver Cromwell
Oliver Cromwell
Oliver Cromwell was an English military and political leader who overthrew the English monarchy and temporarily turned England into a republican Commonwealth, and served as Lord Protector of England, Scotland, and Ireland....

.

Policies


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.

France


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
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...

 and some parts of Flanders
Flanders
Flanders is the community of the Flemings but also one of the institutions in Belgium, and a geographical region located in parts of present-day Belgium, France and the Netherlands. "Flanders" can also refer to the northern part of Belgium that contains Brussels, Bruges, Ghent and Antwerp...

. 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 Colbert
Jean-Baptiste Colbert
Jean-Baptiste Colbert was a French politician who served as the Minister of Finances of France from 1665 to 1683 under the rule of King Louis XIV. His relentless hard work and thrift made him an esteemed minister. He achieved a reputation for his work of improving the state of French manufacturing...

, finance minister for 22 years in the 17th century, to the extent that French mercantilism is sometimes called Colbertism
Colbertism
Colbertism is an economic and political doctrine of the seventeenth century, created by Jean-Baptiste Colbert, the French minister of finance under Louis XIV...

. 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 thousand 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. Due to its popularity at the time Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

's Wealth of Nations was banned due to its criticism of government control present in Mercantilism.

Great Britain


In England, mercantilism reached its peak during the Long Parliament
Long Parliament
The Long Parliament was made on 3 November 1640, following the Bishops' Wars. It received its name from the fact that through an Act of Parliament, it could only be dissolved with the agreement of the members, and those members did not agree to its dissolution until after the English Civil War and...

 government (1640–1660). Mercantilist policies were also embraced throughout much of the Tudor
Tudor period
The Tudor period usually refers to the period between 1485 and 1603, specifically in relation to the history of England. This coincides with the rule of the Tudor dynasty in England whose first monarch was Henry VII...

 and Stuart
House of Stuart
The House of Stuart is a European royal house. Founded by Robert II of Scotland, the Stewarts first became monarchs of the Kingdom of Scotland during the late 14th century, and subsequently held the position of the Kings of Great Britain and Ireland...

 periods, with Robert Walpole
Robert Walpole
Robert Walpole, 1st Earl of Orford, KG, KB, PC , known before 1742 as Sir Robert Walpole, was a British statesman who is generally regarded as having been the first Prime Minister of Great Britain....

 being another major proponent. In Britain, government control over the domestic economy was far less extensive than on the Continent
Continental Europe
Continental Europe, also referred to as mainland Europe or simply the Continent, is the continent of Europe, explicitly excluding European islands....

, limited by common law
Common law
Common law is law developed by judges through decisions of courts and similar tribunals rather than through legislative statutes or executive branch action...

 and the steadily increasing power of Parliament. Government-controlled monopolies were common, especially before the English Civil War
English Civil War
The English Civil War was a series of armed conflicts and political machinations between Parliamentarians and Royalists...

, but were often controversial.

With respect to its colonies, British mercantilism meant that the government and the merchants became partners with the goal of increasing political power and private wealth, to the exclusion of other empires. The government protected its merchants--and kept others out--by trade barriers, regulations, and subsidies to domestic industries in order to maximize exports from and minimize imports to the realm. The government had to fight smuggling--which became a favorite American technique in the 18th century to circumvent the restrictions on trading with the French, Spanish or Dutch. The goal of mercantilism was to run trade surpluses, so that gold and silver would pour into London. The government took its share through duties and taxes, with the remainder going to merchants in Britain. The government spent much of its revenue on a superb Royal Navy, which not only protected the British colonies but threatened the colonies of the other empires, and sometimes seized them. Thus the British Navy captured New Amsterdam
New Amsterdam
New Amsterdam was a 17th-century Dutch colonial settlement that served as the capital of New Netherland. It later became New York City....

 (New York) in 1664. The colonies were captive markets for British industry, and the goal was to enrich the mother country.

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 (such as forbidding trade with other empires and controls over smuggling) were a major irritant leading to the American Revolution
American Revolution
The American Revolution was the political upheaval during the last half of the 18th century in which thirteen colonies in North America joined together to break free from the British Empire, combining to become the United States of America...

.

Over all, however, mercantilist policies had a positive impact 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 Fens
The Fens
The Fens, also known as the , are a naturally marshy region in eastern England. Most of the fens were drained several centuries ago, resulting in a flat, damp, low-lying agricultural region....

.


Other countries


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
Thirty Years' War
The Thirty Years' War was fought primarily in what is now Germany, and at various points involved most countries in Europe. It was one of the most destructive conflicts in European history....

 (1618–1648), with Christina of Sweden
Christina of Sweden
Christina , later adopted the name Christina Alexandra, was Queen regnant of Swedes, Goths and Vandals, Grand Princess of Finland, and Duchess of Ingria, Estonia, Livonia and Karelia, from 1633 to 1654. She was the only surviving legitimate child of King Gustav II Adolph and his wife Maria Eleonora...

, Jacob Kettler of Courland
Jacob Kettler
Jacob Kettler was a Baltic German Duke of the Duchy of Courland and Semigallia . Under his rule, the duchy was brought to its greatest peak in wealth and engaged in colonization.- Life :...

, Christian IV of Denmark
Christian IV of Denmark
Christian IV was the king of Denmark-Norway from 1588 until his death. With a reign of more than 59 years, he is the longest-reigning monarch of Denmark, and he is frequently remembered as one of the most popular, ambitious and proactive Danish kings, having initiated many reforms and projects...

 being notable proponents. The Habsburg Holy Roman Emperor
Holy Roman Emperor
The Holy Roman Emperor is a term used by historians to denote a medieval ruler who, as German King, had also received the title of "Emperor of the Romans" from the Pope...

s 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
Philip V of Spain
Philip V was King of Spain from 15 November 1700 to 15 January 1724, when he abdicated in favor of his son Louis, and from 6 September 1724, when he assumed the throne again upon his son's death, to his death.Before his reign, Philip occupied an exalted place in the royal family of France as a...

 with some success. Russia
Russia
Russia or , officially known as both Russia and the Russian Federation , is a country in northern Eurasia. It is a federal semi-presidential republic, comprising 83 federal subjects...

 under Peter I
Peter I of Russia
Peter the Great, Peter I or Pyotr Alexeyevich Romanov Dates indicated by the letters "O.S." are Old Style. All other dates in this article are New Style. ruled the Tsardom of Russia and later the Russian Empire from until his death, jointly ruling before 1696 with his half-brother, Ivan V...

 (Peter the Great) attempted to pursue mercantilism, but had little success because of Russia's lack of a large merchant class or an industrial base.

Wars and imperialism


Mercantilism was economic warfare and was well suited to an era of military warfare. 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 Anglo-Dutch Wars
Anglo-Dutch Wars
The Anglo–Dutch Wars were a series of wars fought between the English and the Dutch in the 17th and 18th centuries for control over the seas and trade routes. The first war took place during the English Interregnum, and was fought between the Commonwealth of England and the Dutch Republic...

 and the Franco-Dutch War
Franco-Dutch War
The Franco-Dutch War, often called simply the Dutch War was a war fought by France, Sweden, the Bishopric of Münster, the Archbishopric of Cologne and England against the United Netherlands, which were later joined by the Austrian Habsburg lands, Brandenburg and Spain to form a quadruple alliance...

s, can be linked directly to mercantilist theories. Most wars had other causes but they reinforced mercantilism by clearly defining the enemy, and justified damage to the enemy's economy.

Mercantilism fueled the imperialism
Imperialism
Imperialism, as defined by Dictionary of Human Geography, is "the creation and/or maintenance of an unequal economic, cultural, and territorial relationships, usually between states and often in the form of an empire, based on domination and subordination." The imperialism of the last 500 years,...

 of this era, as many nations expended significant effort to build new colonies that would be sources of gold (as in Mexico) or sugar (as in the West Indies), as well as becoming exclusive markets. European power spread around the globe, often under the aegis of companies with government-guaranteed monopolies in a certain defined geographical regions, such as the Dutch East India Company
Dutch East India Company
The Dutch East India Company was a chartered company established in 1602, when the States-General of the Netherlands granted it a 21-year monopoly to carry out colonial activities in Asia...

 or the British Hudson's Bay Company
Hudson's Bay Company
The Hudson's Bay Company , abbreviated HBC, or "The Bay" is the oldest commercial corporation in North America and one of the oldest in the world. A fur trading business for much of its existence, today Hudson's Bay Company owns and operates retail stores throughout Canada...

 (operating in present-day Canada).

Criticisms


Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 and David Hume
David Hume
David Hume was a Scottish philosopher, historian, economist, and essayist, known especially for his philosophical empiricism and skepticism. He was one of the most important figures in the history of Western philosophy and the Scottish Enlightenment...

 were the founding fathers of anti-mercantilist thought. A number of scholars found important flaws with mercantilism long before Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...

 developed an ideology that could fully replace it. Critics like Hume, Dudley North, and John Locke
John Locke
John Locke FRS , widely known as the Father of Liberalism, was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers. Considered one of the first of the British empiricists, following the tradition of Francis Bacon, he is equally important to social...

 undermined much of mercantilism, and it steadily lost favor during the 18th century.

In 1690, John Locke argued that prices vary in proportion to the quantity of money. Locke's Second Treatise
Two Treatises of Government
The Two Treatises of Government is a work of political philosophy published anonymously in 1689 by John Locke...

also points towards the heart of the anti-mercantilist critique: that the wealth of the world is not fixed, but is created by human labor (represented embryonically by Locke's labor theory of value
Labor theory of value
The labor theories of value are heterodox economic theories of value which argue that the value of a commodity is related to the labor needed to produce or obtain that commodity. The concept is most often associated with Marxian economics...

). Mercantilists failed to understand the notions of absolute advantage
Absolute advantage
In economics, principle of absolute advantage refers to the ability of a party to produce more of a good or service than competitors, using the same amount of resources...

 and comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

 (although this idea was only fully fleshed out in 1817 by David Ricardo
David Ricardo
David Ricardo was an English political economist, often credited with systematising economics, and was one of the most influential of the classical economists, along with Thomas Malthus, Adam Smith, and John Stuart Mill. He was also a member of Parliament, businessman, financier and speculator,...

) 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 states would end up better off if they traded. This is an example of the reciprocal benefits of trade due to a comparative advantage
Comparative advantage
In economics, the law of comparative advantage says that two countries will both gain from trade if, in the absence of trade, they have different relative costs for producing the same goods...

. 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 Josiah Child and Charles Davenant
Charles Davenant
Charles Davenant , English economist, eldest son of Sir William Davenant, the poet, was born in London.-Overview:He was educated at Cheam grammar school and Balliol College, Oxford, but left the university without taking a degree...

, 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
Jacob Viner
Jacob Viner was a Canadian economist and is considered with Frank Knight and Henry Simons one of the "inspiring" mentors of the early Chicago School of Economics in the 1930s: he was one of the leading figures of the Chicago faculty.- Biography :Viner was born in 1892 in Montreal, Quebec to...

 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
The Wealth of Nations
An Inquiry into the Nature and Causes of the Wealth of Nations, generally referred to by its shortened title The Wealth of Nations, is the magnum opus of the Scottish economist and moral philosopher Adam Smith...

in 1776. This book outlines the basics of what is today known as classical economics
Classical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....

. 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
Group decision making
Group decision making is a situation faced when individuals are brought together in a group to solve problems. According to the idea of synergy, decisions made collectively tend to be more effective than decisions made by a single individual...

.

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 trade
Free trade
Under a free trade policy, prices emerge from supply and demand, and are the sole determinant of resource allocation. 'Free' trade differs from other forms of trade policy where the allocation of goods and services among trading countries are determined by price strategies that may differ from...

 and Smith's laissez-faire
Laissez-faire
In economics, laissez-faire describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies....

 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
French Revolution
The French Revolution , sometimes distinguished as the 'Great French Revolution' , was a period of radical social and political upheaval in France and Europe. The absolute monarchy that had ruled France for centuries collapsed in three years...

. In Germany mercantilism remained an important ideology in the 19th and early 20th centuries, when the historical school of economics
Historical school of economics
The Historical school of economics was an approach to academic economics and to public administration that emerged in 19th century in Germany, and held sway there until well into the 20th century....

 was paramount.

Legacy


In spite of Adam Smith's repudiation of mercantilism, prominent figures continued to favor it: in the U.S., the likes of Alexander Hamilton
Alexander Hamilton
Alexander Hamilton was a Founding Father, soldier, economist, political philosopher, one of America's first constitutional lawyers and the first United States Secretary of the Treasury...

, Henry Clay
Henry Clay
Henry Clay, Sr. , was a lawyer, politician and skilled orator who represented Kentucky separately in both the Senate and in the House of Representatives...

, Henry Charles Carey
Henry Charles Carey
Henry Charles Carey , a leading 19th century economist of the American School of capitalism. He is now best known for the book The Harmony of Interests, to compare and contrast what he called the "British System" of laissez faire free trade capitalism with the "American System" of developmental...

, and Abraham Lincoln
Abraham Lincoln
Abraham Lincoln was the 16th President of the United States, serving from March 1861 until his assassination in April 1865. He successfully led his country through a great constitutional, military and moral crisis – the American Civil War – preserving the Union, while ending slavery, and...

; and in Britain Thomas Malthus
Thomas Malthus
The Reverend Thomas Robert Malthus FRS was an English scholar, influential in political economy and demography. Malthus popularized the economic theory of rent....

. When Britain passed its Corn Laws
Corn Laws
The Corn Laws were trade barriers designed to protect cereal producers in the United Kingdom of Great Britain and Ireland against competition from less expensive foreign imports between 1815 and 1846. The barriers were introduced by the Importation Act 1815 and repealed by the Importation Act 1846...

 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
Robert Peel
Sir Robert Peel, 2nd Baronet was a British Conservative statesman who served as Prime Minister of the United Kingdom from 10 December 1834 to 8 April 1835, and again from 30 August 1841 to 29 June 1846...

.

Adam Smith rejected the mercantilist focus on production, arguing that consumption was the only way to grow an economy. John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...

 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
Paper Money
Paper Money is the second album by the band Montrose. It was released in 1974 and was the band's last album to feature Sammy Hagar as lead vocalist.-History:...

, an increase for bullion was one of the few ways to increase the money supply
Money supply
In economics, the money supply or money stock, is the total amount of money available in an economy at a specific time. There are several ways to define "money," but standard measures usually include currency in circulation and demand deposits .Money supply data are recorded and published, usually...

. 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 in the economy as necessity, as did mercantilism.

, the word "mercantilism" remains a pejorative term, often used to attack various forms of protectionism
Protectionism
Protectionism is the economic policy of restraining trade between states through methods such as tariffs on imported goods, restrictive quotas, and a variety of other government regulations designed to allow "fair competition" between imports and goods and services produced domestically.This...

. The similarities between Keynesianism, and its successor ideas, with mercantilism have sometimes led critics to call them neo-mercantilism. Indeed, Paul Samuelson
Paul Samuelson
Paul Anthony Samuelson was an American economist, and the first American to win the Nobel Memorial Prize in Economic Sciences. The Swedish Royal Academies stated, when awarding the prize, that he "has done more than any other contemporary economist to raise the level of scientific analysis in...

, writing within a Keynesian framework, defended mercantilism, writing: "With employment less than full and Net National Product suboptimal, all the debunked mercantilist arguments turn out to be valid."

Some other systems that do copy several mercantilist policies, such as Japan's economic system
Economy of Japan
The economy of Japan, a free market economy, is the third largest in the world after the United States and the People's Republic of China, and ahead of Germany at 4th...

, are also sometimes called neo-mercantilist. In an essay appearing in the 14 May 2007 issue of Newsweek
Newsweek
Newsweek is an American weekly news magazine published in New York City. It is distributed throughout the United States and internationally. It is the second-largest news weekly magazine in the U.S., having trailed Time in circulation and advertising revenue for most of its existence...

, business
Business
A business is an organization engaged in the trade of goods, services, or both to consumers. Businesses are predominant in capitalist economies, where most of them are privately owned and administered to earn profit to increase the wealth of their owners. Businesses may also be not-for-profit...

 columnist Robert J. Samuelson
Robert J. Samuelson
Robert Jacob Samuelson is a contributing editor of Newsweek and The Washington Post where he has written about business and economic issues since 1977. His columns appear in both publications. His articles also appear in the Los Angeles Times, The Boston Globe, and other influential newspapers...

 argued that China was pursuing an essentially mercantilist trade policy that threatened to undermine the post-World War II
World War II
World War II, or the Second World War , was a global conflict lasting from 1939 to 1945, involving most of the world's nations—including all of the great powers—eventually forming two opposing military alliances: the Allies and the Axis...

 international economic structure.

Murray Rothbard
Murray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...

, representing the Austrian School
Austrian School
The Austrian School of economics is a heterodox school of economic thought. It advocates methodological individualism in interpreting economic developments , the theory that money is non-neutral, the theory that the capital structure of economies consists of heterogeneous goods that have...

 of economics, describes it this way:
In one area economists rejected Smith well before Keynes: in the use of data. Mercantilists, who were generally merchants or government officials, gathered vast amounts of trade data and used it extensively in their research and writing. William Petty
William Petty
Sir William Petty FRS was an English economist, scientist and philosopher. He first became prominent serving Oliver Cromwell and Commonwealth in Ireland. He developed efficient methods to survey the land that was to be confiscated and given to Cromwell's soldiers...

, a strong mercantilist, is generally credited with being the first to use empirical
Empirical
The word empirical denotes information gained by means of observation or experimentation. Empirical data are data produced by an experiment or observation....

 analysis to study the economy. Smith rejected this, arguing that deductive reasoning
Deductive reasoning
Deductive reasoning, also called deductive logic, is reasoning which constructs or evaluates deductive arguments. Deductive arguments are attempts to show that a conclusion necessarily follows from a set of premises or hypothesis...

 from base principles was the proper method to discover economic truths. Today, many schools of economics accept that both methods are important.

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
Navigation Acts
The English Navigation Acts were a series of laws that restricted the use of foreign shipping for trade between England and its colonies, a process which had started in 1651. Their goal was to force colonial development into lines favorable to England, and stop direct colonial trade with the...

 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 infant industries
Infant industry argument
The Infant industry argument is an economic rationale for trade protectionism. The core of the argument is that nascent industries often do not have the economies of scale that their older competitors from other countries may have, and thus need to be protected until they can attain similar...

, while causing short-term harm, can be beneficial in the long term.

Nonetheless, the publication of The Wealth of Nations in 1776 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 withdrawn.

Reverse-mercantilism


Reverse-mercantilism is an economic system which strives to increase corporate wealth and monopoly by subsidizing some corporate entities while regulating, taxing and controlling borders (blocking outsourcing and creating tariffs) for all competitors.

External links