What was Mercantilism?
Revisiting an old high school history lesson on an archaic economic policy is boring. I get that – I do.
“Why do we need to care about mercantilism, which isn’t even a ‘thing’ anymore?”.
While I fully sympathize with the sentiment, here’s the sad answer: because mercantilism hasn’t died.
Yes, economists have scoffed at the idea of mercantilism and called it an “economic artifact” but the truth is, the ideology is far from being extinct. It’s ghost lives on.
In a recent article by the Washington Post, Trump has been accused of being “stuck in the 1680’s”, as he is still effecting the so-called ancient relic into practice, with his trade policies resembling those of mercantilism.
Rebranded and repackaged, “neomercantilism” is a dangerously active idea of the 20th century which contains the same ingredients of its patron ‘classic mercantilism’.
As written by columnist Dani Rodrik, “Mercantilism remains alive and well”. And that is why knowing about this theory is so fundamentally important.
You can’t exorcise a ghost you know nothing about.
So, open your notebooks and let’s get started.
CHAPTER 1: WHAT WAS MERCANTILISM?
Mercantilism was a national economic policy that refers to the act of maximizing net exports and limiting imports through means of tariffs.
The driving force behind this approach was the idea that the world holds within it a finite amount of wealth and that to be a financially prosperous country, the best way is to accumulate the largest share of worldly wealth.
It was a “zero-sum” view of the world, which meant that in any transaction, one party would gain and the other would lose.
And that countries had to make financial progress at the expense of other nations.
Mercantilism advocated for the theory that two components could carry a country to prosperity: few imports and more exports, otherwise known as “favorable trade balances”.
This was set in the belief that doing so would create a net inflow of foreign income and increase the value of the country’s wealth.
Mercantilism policies were designed to achieve a current account surplus by controlling the transfer of materials at the borders.
At the heart of mercantilism, lay the concept of “bullionism”, the idea that a country’s prosperity could only be measured in the amount of gold that it had. Precious metals were considered as vital organs of a country’s wealth.
Bullionism thus created a powerful sentiment: if a country did not have access to mines then these metals should be obtained via trade.
To augment the international power that a state held, mercantile policies were enacted to stabilize the influence of a state, at the cost of the rival powers.
The logic of this idea can be simply explained by a domino effect: Countries need strong militaries for protection and expansion; these forces need to be sustained via wealth; gold=wealth; to get gold, you need a surplus in trade; you need to export goods and get gold from other countries.
Although the official term that referred to this policy was coined much later by Adam Smith, the ideology dominated the countries of Europe from the 16th to the 18th century.
It prevailed not only in England, Germany, and Italy but also in Russia, Scotland, and Spain.
This policy required the support of larger countries as it could only sustain in environments where there was a supply of raw materials, labor and a market for exports.
Countries like Britain, created policies to protect traders and the mercantile system provided protections for merchants and producers.
In Britain, for instance, the British used their colonies as the suppliers of raw materials.
These materials were then processed into goods by the British industries and exported back to the colonial market.
The British created restrictive colonial policies that placed limitations on what countries these colonies could trade with, what goods they could produce and also introduced tax duties.
They essentially controlled the economies of the colonies and left the colonists with only one option: buy the goods manufactured by the British.
It was an exploitative system that fed on the backs of the colonies that these powerful countries possessed.
Mercantilism is a concept that opposes the modern theory of free trade entirely.
Free trade advocates that economic conditions are improved through lesser tariffs. Mercantilism, on the other hand, promotes higher tariffs and barriers to entry.
As every country was trying to hold the higher trader surplus, countries rarely respected trade diplomacy and did not stick to trade agreements, placing their tariffs of choice, at will.
It was used as a funding system of military, national and corporate growth.
This system thus heightened tensions between states and created an impetus for warfare.
CHAPTER 2: THE HISTORY OF MERCANTILISM
We’ve already settled that we don’t like history lessons.
But before you yawn from excessive boredom, allow me to provide you with a counteroffer. Do we like traveling? Europe? Time Machines?
If you answered yes to all the three questions then swipe right to this subsection because we’re going to take a short trip through Europe, in the past. Sounds exciting? It is.
Because here’s an idea that shouldn’t come as a surprise: practice differs from theory.
It’s a completely different playing field to look at things from a theoretical viewpoint and to see them in play, in their active state.
That is why, before we delve into the actual policies that are effected when mercantilism is implemented, it is important to take a step back, step into our time machines and see how mercantilism played its role in history.
So buckle up kids, let’s take a small visit to the past. We’ve got a couple of beautiful destinations on our itinerary.
Destination 1: France
If you look to your left, you’ll see the birth of mercantilism in France in the 16th century. France has offered more to History than its Eifel tower.
However, the origin of mercantilism has been one of its less favorable gifts to the world.
Our first visit is to French named Jean-Baptiste Colbert, the minister of finance.
Although mercantilism started in 1539 as a decree that banned the imports of Spanish goods and restrictions on the export of bullion, it reached its peak under Jean-Baptiste Colbert.
His role in the history of mercantilism was so influential that French mercantilism is also known as Colbertism. Colbert supported the economic trade system that would raise the wealth of France through a favorable trade balance. His focus was deployed on implementing domestic policies that would yield positive economic results.
So, if you look at Colbert, you’ll observe him doing the following:
- Implementing perfectionist policies that limit imports and increase exports
- Enacting state regulation of production with detailed outlines on how goods should be produced
- Importing foreign craftsmen and artisans to boost the manufacturing industry
- Reducing internal tariffs and increasing external barriers of trade
Through these methods, Colbert was able to significantly improve the economic health of France, leading the country to become a powerful European entity.
Till free-market economics took the stronghold of the world, Colbert’s ideas remained highly popular.
Destination 2: England
A country of beautiful architecture and attractive kingdoms, Britain also possesses many skeletons in its historical closet. One of which is that of mercantilism.
British mercantilism rose in the 17th century, with the country employing policies that regulated international trade to heighten exports and discourage the number of imports.
Governed by common law and parliamentary power, you’ll notice that England refrained from placing control over the internal domestic economy.
Instead, the government made pacts of mutual interest with merchants to increase private wealth and political power.
This was done by regulations, subsidies to domestic industries and trade barriers to raise exports and limit imports to the region, thereby raising the influx of precious materials such as gold into the state.
The government placed tariffs on imports and gave bounties for exports, to the extent that they even banned the export of certain raw materials completely.
An example of this was the enaction of the Navigation Acts.
These removed foreign merchants from the trading arena. Instead, through these methods, the British ended up controlling the economies of the colonies forcing them to provide raw materials and trade only with the British Kingdom.
Queen Elizabeth promoted the development of naval fleets to shake down the stronghold of Spanish trade, to increase the inflow of gold within the state.
There was also focus placed on the expansion of the slave trade with the colonies.
The colonies were expected to provide materials such as cotton and rum.
In turn, slaves were traded in America and the West Indies for sugar and molasses.
The British government, also insisted on trade to be conducted in forms of bullion (silver and gold), so that they may attain a positive trade balance.
This left the colonies in negative bullion balances, forcing them to rely on paper currency instead, thereby creating a period of inflation and taxes within these states.
CHAPTER 3: MERCANTILIST POLICIES
Alexander Gray said, “Mercantilism had three hundred years to run and so it colored the thoughts and actions of every country in Europe”.
With three centuries and an entire continent under its belt, it’s nearly impossible to visit every country and see every form of mercantilism in its active state.
Although we’ve seen the examples of France and England, let us take a more holistic approach and try to encapsulate mercantilism as a whole, and not in its isolated implementations.
The primary principle of mercantilism is to measure the wealth of a country in terms of precious materials, known as Bullion.
The economic focus is not placed in favor of productivity but rather in the quantity of physical wealth that it has accumulated.
In the 16th and 17th century, there was grave importance given to the gold reserves of a country as that was the measure of the prosperity of a country.
Furthermore, it was favored that there be a positive balance of trade.
This was accomplished by two methods. Firstly, the domestic industry was encouraged and protected. Subsidies were also granted to export industries so they may be able to have a competitive advantage in the global markets.
The governments also deployed focus and research into the productivity of domestic industries. Secondly, exports were maximized at the cost of other nations and imports were minimized.
The efforts to raise the export-to-import ratio were done by using tariffs. Tariffs were raised and non-tariff barriers were erected on imports.
In addition, international natural resources were exploited by the spread of colonies to extract wealth by forcing the colonies to serve raw materials to the parent countries.
Overseas colonies were created to be the sole market for the goods the empire country produced.
By controlling the economies of the colonies, the empire country benefitted from the wealth and resources of the colonies.
As the idea of mercantilism was placed by the motivation that wealth was finite, efforts were made to minimize the wealth of other nations.
At the cost of rival countries, mercantilism created the notion that for one country to have more money, the others must have less.
To prevent other nations from increasing their wealth, the powerful European countries struggled amongst themselves to create exclusive trading relationships with weaker states so that no one else could attain their resources.
Furthermore, foreign shipping was blocked and trade vessels were regulated so that the rival nations could not have a share in the world.
Foreign colonies of other countries were also attacked to capture them so that more territories could be controlled and the market of trade could be expanded.
Mercantilism favored countries with a large labor force so that more finished goods could be produced for exports.
It was defined that finished products had higher values than other materials, hence, efforts were made to reduce the need for the imports of any product other than raw materials.
CHAPTER 3: THE IMPACT OF MERCANTILISM
Mercantilism was an economic idea that was centered on greed and self-interest.
To gain more gold, countries which used this ideology, were motivated by a sense of selfishness, to make themselves more economically stable.
When an entire continent is using such draconian policies, there are dire social and economic implications that affect the world.
To gain more wealth, these nations used exploitative measures to take advantage of weaker states and fostered tense international relations as they remained suspicious of other countries, who were trying to achieve the same economic results.
Hence, spanned over multiple centuries, mercantilism resulted in grave social and economic crimes, that had an impact on the economies and people of the world.
Let us take a closer look at some of these atrocities:
Crime 1: Control of Production and Trade
As we’ve discussed earlier, mercantilist policies were designed to take advantage of the colonial states.
This resulted in social transgressions and was a direct threat to the well-being of the populace of these colonial states.
The policy promoted the placement of trade restrictions and productions which resulted in the weakening of the growth and freedom of the businesses that fostered in the colonial world.
For instance, the Navigation and Trade Acts of the 16th century forced American colonies to be solely independent of manufactured goods that were produced by the British.
The colonies could only export raw materials, and the market of supply was limited to the British Empire.
Goods such as sugar, cotton, iron, and tobacco were only allowed to be sold to Britain which limited the trade market for these colonies.
Furthermore, they were not allowed to produce finished goods of their own which meant a complete reliance on the manufacturing industry of England for finished products.
These goods have come at inflated prices that robbed these colonies of their financial well-being, making them dependent on exuberantly priced goods that they had to pay hefty amounts of gold and silver for.
Furthermore, since these empires wanted to accumulate wealth solely in the form of precious materials, the colonies did not have enough gold reserves to use in their markets.
This caused these colonies to start producing paper currency instead, which rose the rates of inflations and taxes, creating discontent amongst the colonial masses.
Crime 2: Slave Trade
Between the British Empire, it’s colonies and the foreign markets, the trade relations fostered another dangerous result: the slave trade.
In the 17th century, trading ships of manufactured goods were taken from Europe to the west coast of Africa.
These trade ships were then filled with “young and healthy” individuals and were taken to the Americas or the Caribbean where they were sold into slavery.
The conditions with which these people were treated were no less than atrocious and inhumane, with people kept in such poor conditions in these ships that most would die in the journey. On the final leg of this triangular route, the ships then carried tobacco, rum and other expensive back to Europe.
The colonies were demanded by African imperialists to provide rum, cotton and other raw materials.
In turn, slaves were given to America and the West Indies in exchange for sugar and molasses. Mercantilism promoted the slave trade because it created the sentiment that the slave trade was necessary for the rise in economic conditions.
Slaves were treated as property, itemized in itineraries and listed across other transferable goods such as tobacco.
Crime 3: Warfare
As mercantilism fostered the feeling of being suspicious of one’s neighbor, foreign relations weakened and international tensions heightened.
Since wealth needed to be “taken” from others, mercantilism resulted in the eruption of many wars, as nations struggled to attain the economic monopiles that rival nations had.
The Anglo-Dutch Wars and the Franco-Dutch wars were fueled solely by the purpose of mercantilism so that countries “damage the economies” of other nations.
The first Anglo-Dutch War followed the institution of the 1651 Navigation Act, a direct response to an exploitative mercantilist policy.
The Franco-Dutch resulted from the commercial rivalry between the European nations and the war resulted in 120,000 deaths and 100,000 casualties- all motivated by the greed of money.
The American revolution itself is rooted in the social discontent that was caused by Mercantilism.
Mercantilism also became the driving force behind the need of imperialism, to acquire colonies that could provide resources such as gold (Mexico) or sugar (West Indies).
This resulted in the spread of European Powers and the control of regions by monopolistic trading companies such as the East India Company.
CHAPTER 4: CRITICISM
While the practical atrocities that came as a consequence of mercantilism is a deterrent enough, the reason that this policy has been turned into a “historic relic” is also because of the incorrect logical foundations that it has been based on.
The economic policy has received serious criticisms over the years, which lead to it’s eventual ‘demise’.
The following include some of the major incoherencies in the thought of mercantilism, by Adam Smith and David Hume, founders of the anti-mercantilist agenda.
1. Zero-Sum Game:
Mercantilism is based on the understanding that one country’s loss is another countries gain.
Smith argued that trade should be a mutually beneficial feature and a “positive-sum” game, where each country gains wealth and benefits from the act of trading. This essentially formed the basis of the free trade model.
2. Excessive Importance of Precious Materials:
As wealth was measured in forms of gold and silver, the mercantile system has been criticized on this aspect.
It was refuted that “money” itself was not given the importance that it deserved and instead untenable attention was granted to gold as the primary source of wealth.
The mercantilists failed to appreciate the value of exchange as capital.
3. One-Way Trade:
Mercantilist states placed extensive importance on a favorable balance of trade.
However, the notion of all nations being exporters and not importers was illogical and far from infallible.
Critics argued that compared to trade balances, it is more important for a country to develop it’s own resources while accepting that it cannot be completely self-sufficient.
4. Colonies Did Not Exist to Serve the Empire:
The approach was taken by the imperial countries that promoted the exploitation of colonies was inhumane and national wreckage.
It was an unsound economic proposition and resulted in economic distress, warfare, and social tension.
5. Unequal Distribution of Wealth:
Mercantilist policies were designed for advocating state regulation of commerce.
This state intervention was criticized as it only benefited the government and the commercial class and did not care for the interests of the entire populace.
Smith and Hume argued that commerce should be free and without any restrictions as they believed that people could protect their economic interests better than the state.
To assume a conflict of interest between the government and the people of the state was naïve and based on logical fallacies.
CHAPTER 5: MODERN DAY MERCANTILISM
It would be convenient to believe that Mercantilism has died and that this ancient policy could have no relevance to the present.
However, despite the many illogical grounds that it has been constructed on, in the current century, we can still see the ghost of this theory making its hauntings in the world. Perhaps not as static as it existed in the 16th century, but still with the same purpose and values.
In the mid-2000s, China’s economic policy was built around the encouragement of foreign direct investment (FDI) in the country and to be a low-cost manufacturing arena for multinational corporations.
However, by 2006, China took a step back and tried to create a “China Inc.” model instead which was designed to help Chinese firms, even at the expense of foreign investments.
This model was designed to allow China to produce higher-value goods within its state and by enacting policies that discouraged foreign competition. Sounds familiar to something that the British did the in the 1700s? Because it is.
China has been severely criticized for using mercantilist economic policies such as that of “forced localization” that requires domestic production as a mandate for market entry.
China has also indulged in standards and currency manipulation, granted subsidies for state-owned industries and erected unfavorable procurement policies.
However, China does not stand alone in its favor towards mercantilist polices. Donald Trump of the United States has also been accused of using such strategies through his economic policies.
The Trump government have created placed trade tariffs on American allies, fostered the notion that free trade deals are not beneficial and that trade surpluses are all signs of economic prosperity.
While the republican government cloaks these actions under the needs of “national security” and other pretenses – the fact of the matter remains the same.
The United States is employing an economic policy that went out of business in the 18th century.
The consequences of these actions by the superpowers are dire and will lead to increased rates, higher unemployment and create a strong move away from free trade, hurting the economies of other countries as well.
As economist Steve Hank stated,
“Mercantilism was an insidious economic theory that held Europe in its thrall in the 16th, 17th and 18th centuries”.
A financial policy that carried immense weight for over 3 centuries and that resulted in terrible results, is making a brutal comeback.
Carried by the support of the most powerful countries of the world, there is an alarm in what ways this economic ghost is preparing to haunt us.
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