CHANAKYA NATIONAL LAW UNIVERSITY

Final draft of project of History

On

“MERCANTALISM”

Submitted to : Submitted by:

DR.PRIYADARSHINI SANKALP YASHVARDHAN
Faculty OF HISTORY ROLL NO.: 1969

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 DECLARATION BY THE CANDIDATE

I, hereby declare that the work reported in the B.A LLB. (Hons.) Project titled
“MERCANTALISM” submitted at CHANAKYA NATIONAL LAW UNIVERSITY,
Patna is an authentic record of my work carried under the supervision of Mrs. DR.
PRIYADARSHINI . I have not submitted this work elsewhere for any other degree or
diploma. I am fully responsible for the content of my project report.

(Signature of the candidate)

SANKALP YASH VARDHAN

B.A.LLB (Hons)
2nd YEAR
3rd SEMESTER
CNLU, PATNA

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 ACKNOWLEDGMENT

I would like to show my gratitude towards my guide Professor, DR.PRIYADARSHINI

faculty of HISTORY, under whose guidance, I structured my project.

I owe the present accomplishment of my project to our CNLU librarian, who helped me
immensely with the materials throughout the project and without whom I couldn’t have
completed it in the present way.

I would also like to extend my gratitude to my friend and all those unseen hands that helped
me out at every stage of my project.

THANK YOU

SANKALP YASH VARDHAN

SEMESTER 3rd

CNLU, Patna

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 TABLE OF CONTENT

1. Introduction..................................................................
2. Main Principles Of The policy Of Mercantilism. What was the nature Of
State Involvement With Mercantilism In Britain, France, Netherland
And Prussia………………………………………………………………………………………
3. EFFECTS OF MARCANTALIM…………………………………..
4. Conclusion and suggestion.......................................... ………
5. Bibliography…………………………………………………

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INTRODUCTION
Mercantilism, economic theory and practice common in Europe from the 16th to the 18th
century that promoted governmental regulation of a nation’s economy for the purpose of
augmenting state power at the expense of rival national powers. It was the economic
counterpart of political absolutism. Its 17th-century publicists—most notably Thomas Mun in
England, Jean-Baptiste Colbert in France, and Antonio Serra in Italy—never, however, used
the term themselves; it was given currency by the Scottish economist Adam Smith in
his Wealth of Nations (1776).country. Manufacturing was forbidden in colonies, and all
commerce between colony and mother country was held to be a monopoly of the mother
country.A strong nation, according to the theory, was to have a large population, for a large
population would provide a supply of labour, a market, and soldiers. Human wants were to be
minimized, especially for imported luxury goods, for they drained off precious
foreign exchange. Sumptuary laws (affecting food and drugs) were to be passed to make sure
that wants were held low. Thrift, saving, and even parsimony were regarded as virtues, for
only by these means could capital be created. In effect, mercantilism provided the favourable
climate for the early development of capitalism, with its promises of profit.Later,
mercantilism was severely criticized. Advocates of laissez-faire argued that there was really
no difference between domestic and foreign trade and that all trade was beneficial both to the
trader and to the public. They also maintained that the amount of money or treasure that a
state needed would be automatically adjusted and that money, like any other commodity,
could exist in excess. They denied the idea that a nation could grow rich only at the expense
of another and argued that trade was in reality a two-way street. Laissez-faire, like
mercantilism, was challenged by other economic ideas. Facts Matter. Support the truth and
unlock all of Britannica’s content. Mercantilism was the first important coherent international
political economy perspective. As an approach to IPE, mercantilism grew out of
developments related to the growth and power of nation-states on the European continent
beginning around the seventeenth century. Mercantilist ideas have evolved over the centuries
in response to the development of other theories of international political economy, namely
liberalism and structuralism, and as the international political economy itself has changed.
This chapter looks at classical mercantilism in its historical context, then examines the
evolution and development of a number of concepts and ideas associated with the concept
including economic nationalism, neomercantilism, realism, and statism. In the past the term
mercantilism accounted for the desire of states to generate trade surpluses to increase their
wealth. To the extent that wealth enhanced a state's military power by producing or
purchasing weapons, it also enhanced national security. Mercantilism is also the name given
to a historical period when the major European powers colonized much of the "new world".
As it did earlier, today neomercantilism accounts for the compulsion of states to use the
economy to generate wealth but also to adopt a variety of protectionist trade, investment, and
other policies to sustain that wealth and condition the behavior of other states.
Neomercantilism remains a potent force in the world today often manifested in protectionist
policies some states adopt to counter the benign neomercantilist policies of other nations.
Given the compulsion of nation-states to think or act on the basis of the national interest,
policy makers will continue to be guided by the sounds of mercantilism.

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 Adam Smith, paste medallion by James Tassie, 1787; in the Scottish National
Portrait Gallery, Edinburgh.Courtesy of the Scottish National Portrait Gallery,
Edinburgh

Main Principles Of The policy Of Mercantilism. What was the nature Of State
Involvement With Mercantilism In Britain, France, Netherland And Prussia
The term "mercantilism" applied to both a type of economic system and a period in the
history of the political economy. It developed during the decay of Feudalism to unify and
increase the power and especially the monetary wealth of a nation by a strict governmental
regulation of the entire national economy. This was undertaken through policies designed to
secure an accumulation of bullion, a favourable balance of trade, the development of
agriculture and manufactures and the establishment of foreign trading monopolies. Between
1500 and 1800 AD, European nations practiced a highly monopolized and controlled form of
trade. Colonial governments in France, Great Britain, Spain and Sweden were its most
notable practitioners. It was the economic counterpart of political absolutism seeking to
secure a nation’s political and economic supremacy in it’s rivalry with other states.

When Adam Smith reviewed and reviled "the mercantile system," he dealt chiefly with its
monetary attitude and its protectionist policy. When Schmoller wrote about The Mercantile

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System and Its Historical Significance in 1884, he declared that its "innermost kernel is
nothing but state-making ... the total transformation of society and its organization, as well as
of the state and its institutions, in the replacing of a local and territorial economic policy by
that of the state." To Schmoller's English contemporary, Cunningham, mercantilism was a
"system of power," a policy pursued "so that the power of England relatively to other nations
might be promoted." These three writers thus examined four different aspects-money,
protection, unification, and power. However each concentrated on one or two items which
seemed important to him. Heckscher in his book “Mercantilism” embraces all four and adds a
fifth, for through the welter of discussion and the smoke of controversy he is able to perceive
the emergence of a "fairly uniform conception of general social phenomena in the field of
economics" and a "mercantilist conception of society."By the beginning of the 16th century,
Mercantilist theorists believed that the amount of wealth in the world was static. A nation
could increase its wealth and power in two ways. First, it could obtain as much gold and
silver as possible. Second, it could establish a favourable balance of trade. A nation’s
ultimate goal under mercantilism was to become self-sufficient. It was the role of the
protected corporation to bring in as much of that wealth to the home country as possible. A
country’s wealth was measured by the amount of precious metals and coinage received from
trade (a system known as Bullionism). The underlying principles of mercantilism was the
need to encourage exports over imports as a means for obtaining a favourable balance of
foreign trade that would yield such metals; the value of a large population as a key to self-
sufficiency and state power; and the belief that the crown or state should exercise a dominant
role in assisting and directing the national and international economies to these ends. These
monopolistic corporations were to be controlled by the government and act as an arm of
government interests. In return, the government would use regulations, subsidies and, if
needed, military force to protect the corporation from domestic and foreign competition. The
most famous and powerful mercantilist corporations were the British and Dutch East India
Companies.

ELI .F Heckscher in his book “Mercantilism” writes that mercantilism is not a compact,
consistent “ism” characterized by adherence to a single, precisely defined economic theorem.
Rather it is "only an instrumental concept which, if aptly chosen, should enable us to
understand a particular historical period more clearly than we otherwise might" Its content is
that "phase in the history of economic policy" which lies between the end of the Middle Ages
and the dawn of the age of laissez faire. During that period mercantilism was the normal
approach to "a common European problem.”

Mercantilism went hand in hand with colonization, for colonies played a vital role in this new
economic practice. Aside from providing silver and gold, colonies provided materials that
could not be found in the home country. In addition to playing the role of supplier, the
colonies also provided a market. The home country could sell its goods to its colonies.

During the seventeenth century, adherents of absolutism also found much to embrace in
mercantilism. In England, during the age of Tudor and Stuart absolutism rulers found it
logical to accept the premise that the monarch should not only control the political and social
hierarchy but should enjoy control over the economy as well. Oliver Cromwell, after

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destroying Stuart pretensions in the Civil War embraced both mercantilist warfare and the
Navigation Acts in his commercial struggle with the Dutch. The period of mercantilism in
England extended from roughly 1500 to 1750 and reached its peak during the Long
Parliament government.

From the end of the 15th century to the first half to the 17th century the emphasis was on
balance of trade and commerce and the regulation of domestic industries. Moreover in this
period accumulation of bullions and manufacturing activities were also promoted. To
encourage the export of English products Henry VII signed two important treaties-Malcus
Intercurses and Magnus intercurses with Flanders one of the chief manufacturing centres of
Europe. This enabled English merchants to sell their products without paying duties. At the
same time the Tudor government tried to control the entry of foreigners into specifics craft to
prevent the decline in the quality of manufactured products. An English author of the time,
Thomas Munn wrote about the new economic idea of mercantilism: “Although a Kingdom
may be enriched by gifts received, or by purchases taken from some other Nations . . . these
are things uncertain and of small consideration when they happen. The ordinary means
therefore to increase our wealth and treasure is by Foreign Trade, wherein we must ever
observe this rule: to sell more to strangers yearly than we consume of theirs in value.”The
mercantilists who wrote before 1600 believed a favourable balance would enable England to
accumulate bullion for war purposes. For this reason Hales regarded the export industries as
most valuable to the nation, saying: "I would have them most preferred and cherished that
bring in most commodity and treasure to the country," commodity and treasure being
synonyms here.

To regulate domestic industries The Statute of Artificers was implemented in 1563

under Queen Elizabeth I which sought to fix prices, impose maximum wages, restrict
workers' freedom of movement and regulate training. Though in Britain, government control
over the domestic economy was far less extensive than on the Continent, limited by common
law and the steadily increasing power of Parliament. On the same lines of general
mercantilist ideas, bullion regulations were also enforced. In 1581, Parliamentary law
forbade the export of any coins or bullions. The Tudor laws also insisted that English goods
should be shipped only on English vessels. Such measured contributed to the strength of
England by developing a powerful navy. At the same time a lot of importance was given to
monopolistic institutions. A group of merchants founded the East India Company in 1600 as
a joint-stock company designed to take advantage of the new trading opportunities with Asia.
A royal charter from Queen Elizabeth I granted the company a 15-year exclusive monopoly
to all trade beyond the Cape of Good Hope, as well as customs concessions and permission to
export specie. Christopher Hill in “The Century of Revolution” states that government-
controlled monopolies were common, especially before the English Civil War, but were often
controversial.

The emphasis of English mercantilism changed with the economic development of the
country. It shifted from bullionism to strict internal supervision to the spheres of foreign trade
and colony. During Oliver Cromwell’s time mercantilist policies were followed with great
vigour. In 1651 the first Navigation Act was implemented to establish English supremacy

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over the neighbouring waters. The second and the third Navigation acts led to a naval war
that destroyed the commercial supremacy of the Netherlands. . 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.It was
under the guidance of Sir George Downing, also known as the architect of English mercantile
system that trade between English and the colonies was strongly enclosed protected and
channelized in the English shipping.

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
woollen goods from Spain and some parts of Flanders. The next year, a number of
restrictions were imposed on the export of bullion. French Mercantilism can be summed in
the views of Montchretien in his work “Treatise on political economy” at the beginning of the
seventeenth century: “we must have money, and if we have none from our own production,
then we must have from foreigners”. To carry this out he recommended encouraging national
trade by preventing foreign merchants from exporting bullion out of France, regulating the
economic professions, carrying trade workshops and promoting production through privileges
and concessions. Later on Richielieu and Colbert, ministers of absolutist rulers Louis XIII
and Louis XIV respectively worked out these policies.

Richielieu adopted a strict line of mercantilism in his policy towards commerce and
manufacture. He believed that royal edicts were the best method of stimulating growth.
Unlike his colleague Sully, who laid emphasis on the development of agricullture, Richielieu
concentrated on commerce which he considered the new generator of wealth. His desire for
French colonies didn’t come to pass as his energies were taken up dealing with the opposition
within the court.

Louis XIV's minister of finances, Jean-Baptiste Colbert started a mercantile system which
used protectionism and state-sponsored manufacturing to promote the production of luxury
goods over the rest of the economy. The state established new industries (the royal tapestry
works at Beauvais, French quarries for marble), took over established industries
(the Gobelins tapestry works), protected inventors, invited workmen from foreign countries
(Venetian glass and Flemish cloth manufacturing), and prohibited French workmen from
emigrating. To maintain the character of French goods in foreign markets, Colbert had the
quality and measure of each article fixed by law, and severely punished breaches of the
regulations..It was in under him, that mercantilism found perhaps its greatest supporter in
Jean-Baptiste Colbert .He had studied the previous theorists of a foreign-trade-driven
economy and was in a unique position of authority to execute their ideas. He was also a
devout monarchist and wanted an economic strategy to protect the French crown from a
rising Dutch mercantile class.

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In England, mercantilist regulations were essentially policy regulations while in France,
mercantilism implied minute and detailed regulation of the industry. The code of Commerce
was drawn up and included every aspect of the industry. It also formed the basis of French
Commercial Law. In this field, monopolies were also granted to the well connected
merchants as had happened in the case of England. Colbert increased the size of the French
navy on the premise that his country would have to take control of trade routes in order to
increase its wealth. Even though his practices were ultimately unsuccessful, his ideas became
extremely popular until Adam Smith and free market economics.

On one hand, where France and England provide the best examples of mercantilist policies,
Netherlands on the other was "less affected by mercantilist tendencies than most other
countries". According to Eli F. Heckscher "they did not really follow mercantilist practice";
and their development was "an antithesis of mercantilism”. H.Kellenbenz also questions
whether Holland ever engaged in any form of mercantilism. Netherlands, which had become
the financial centre of Europe by being its most efficient trader, had little interest in seeing
trade restricted and adopted few mercantilist policies. However Braudel points out that Dutch
advocacy of free trade was only skin-deep. All her economic activities required the creation
of monopolies, which was an important element of mercantilism. He further substantiates his
argument by saying that the Dutch behaved no differently from other colonial powers in their
overseas trade.

The reason mercantilism in Netherland took a slightly different character can be explained in
the work which was first published in 16622 titled “The interest of Holland”. It is considered
a standard account of Dutch economy and their political occupation. The authors emphasized
freedom from persecution, taxation, monopoly, regulation and dynastic rule .They considered
the merchant community a dynamic factor in the economy and saw the presence of a strong
centralized power as a major threat.

The Dutch had a well balanced economic system and had developed as brokers, exchangers
and ship owners. Unlike other states, which had agricultural economies, Dutch were
practitioners of arts and commerce. Though they had excelled in shipbuilding, trade and
financial institutions, bullion accumulation was not emphasized. Dutch mercantilists
advocated freedom of the seas and emphasized on monopoly trading. In 1602, the States
General (the Dutch governing body) initiated and helped finance the formation of the Dutch
United East India Company, which was granted exclusive monopoly rights to engage in trade
with Asia. However, the Dutch commercial power was destroyed in the seventeenth century
Britain and France, which by now had adopted strict mercantilist policies.

As Prussia was divided into small states, each state tried to adopt its own peculiar type of
mercantilism. However, it was only Brandenburg Prussia which developed an effective
mercantilist system. The scale of mercantilist activities were not as wide in Prussia as they
were in France Or England yet Prussian mercantilism contributed to its economic recovery
after a prolonged period of war. The Prussian political economy in the middle of the 18th

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century is labelled ‘Friederician Mercantilism’ after Frederick II (1740-1786). Prussia
under Frederick the Great had perhaps the most rigidly controlled economy in Europe. His
energy and zeal were harnessed in an effort to establish, within his monarchy, a viable textile
industry of woollen and silk manufacture. To achieve these ends he was as ready to mobilize
the reserves in his treasury as he was willing to bend the framework of his state to help a
group of fledgling producers get started. The King exempted potential entrepreneurs from the
burdens of taxation and provided them with various subsidies. At the same time he prohibited
the export of raw wool and raised the import duties on all woollen goods. Though the growth
of the Brandenburg woollen industry showed signs of promise, especially in the 1720's, it fell
far short of royal expectations. The disillusionment prompted the ruler to set up the Berlin
Lagerhaus, a kind of state manufacturing establishment which was to serve as a pace-setter in
the trade.

Frederick William I's mercantilist credo was equally well reflected in his promotional
activities on behalf of an indigenous silk industry. To boost that trade he at first pressed for
an extension in the cultivation of the mulberry tree. He then tried to strengthen the infant silk
manufacture proper by surrounding it with a protective tariff and by putting various subsidies
at its disposal. Finally, in his hope to assure the progress of a basically risky venture in a
rather precarious environment, he resorted to what was then the customary strategy of
granting monopoly privileges. He believed that industry, at least in its initial stages, could be
nurtured like an army. Specifically, he believed that a policy of incentive and deterrents
would insure industrial success.

Prussian mercantilism was neither original nor universal. The ideas of mercantilism in
Prussia can also be seen in the writings of a school of scholars called Cameralists.
“Cameralism” dealt with the economic welfare of the state and assumed a form of treaty on
taxation. Its teaching imbued diverse activities related to economy and state revenue.
Although many writers borrowed their ideas directly or indirectly from the English and
French Mercantilists, the Austrians adopted them according to their need. As Prussia was not
in a position to develop a navy or colonies, there was little emphasis on foreign trade. The
Prussian industry was protected by high tariffs and prohibitions were imposed against
imports.

To conclude, the seventeenth century defined the age of mercantilism, in terms of both
economic thought and commercial policy. Mercantilist economic thought held that the gains
from international trade arose solely from exporting and that the nature of these gains made
international trade equivalent to a zero-sum game. Mercantilist commercial policy entailed
extensive government regulation of international trade to ensure that these gains accrued to
one's own country, a pursuit that even carried European states into military conflict with one
another. Mercantilism was not a gospel of states that were satisfied merely to defend
themselves and keep what they had already; it was a weapon for aggression, for acquisition,
for securing more political power and economic benefit. As Fay has pointed out, England
fought its rivals for access to the New World and the high seas in the sixteenth century and
for an overseas empire, conceived as a source of raw materials and a market for manufactured
goods in the eighteenth century

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EFFECTS OF MARCANTALIM
 Mercantilism led to the creation of monopolistic trading companies, such as the East
India Company and the French East India Company.
 Restrictions on where finished goods could be purchased led in many cases to
burdensome high prices for those goods.
 Commercial rivalry tended to result in military rivalry as well, notably during
the Anglo-Dutch Wars.
 Colonists seeking to get around the trade restrictions mandated by mercantilism
resorted to widespread smuggling.
 The constraints of mercantilism were a cause of friction between Britain and its
American colonies and were arguably among the elements that led to the American
Revolution.

Criticisms And Conclusions

Adam Smith and David Hume were the founding fathers of anti-mercantilist thought. A
number of scholars found important flaws with mercantilism long before Smith developed an
ideology that could fully replace it. Critics like Hume, Dudley North and John Locke
undermined much of mercantilism and it steadily lost favor during the 18th century.In 1690,
Locke argued that prices vary in proportion to the quantity of money. Locke's Second
Treatise 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). Mercantilists failed to understand the notions of absolute advantage and
comparative advantage (although this idea was only fully fleshed out in 1817 by David
Ricardo) and the benefits of trade.

For instance, imagine that Portugal was a more efficient producer of wine than England, yet
in England, cloth could be produced more efficiently than it could in Portugal. 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 (whether due to comparative or
absolute advantage). In modern economic theory, trade is not a zero-sum game of cutthroat
competition, because both sides can benefit from it. Much of Adam Smith's The Wealth of
Nations is an attack on mercantilism.Hume famously noted the impossibility of the
mercantilists' goal of a constant positive balance of trade.[citation needed] 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

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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.
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 that
at the core of the mercantile system was the "popular folly of confusing wealth with money",
that bullion was just the same as any other commodity, and that there was no reason to give it
special treatment.[18] 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, who in 1699 wrote, "Gold and Silver are
indeed the Measures 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."[49] The critique that mercantilism was a form of rent seeking has
also seen criticism, as scholars such Jacob Viner in the 1930s pointed 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 in 1776. This book outlines the basics of what is today known as classical
economics. Smith spent 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 amounted to 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.Mercantilist regulations were steadily removed over the course of the 18th century in
Britain, and during the 19th century, the British government fully embraced free trade and
Smith's laissez-faire 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. In Germany, mercantilism remained an important
ideology in the 19th and early 20th centuries, when the historical school of economics was
paramount.

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 Bibliography

Articles

1 -Prussian Mercantilism and the Rise of the Krefeld Silk Industry: Variations
upon an Eighteenth-Century Theme by Herbert Kisch

2-Heckscher on Mercantilism by Herbert Heaton

3- The Liberal Elements in English Mercantilism by William D. Grampp

4-Heckscher, Mercantilism by B. F. Haley

Book

1-Cambridge Economic History of Europe edited by E.E rich and C.H.Wilson

14