MERCANTLIST THEORY AND ITS CRITICS

MERCANTILE THEORY- ITS EVOLUTION AND THE HISTORIOGRAPHY OF

MERCANTALISM

The sixteenth century sees the rise of the nation state from the medieval
locality. This creates a change in the social and economic order. The questions
asked no longer pertain to the individual or the locality but instead focus on
the state. Most prominent amongst these questions was the economic
progress of the state. It was in response to this call for state prosperity that
the mercantilist system was formulated.

Spain discovers the Americas in 1492. The motives that encouraged

Europeans to colonization were according to Egerton Wealth and Missionary
zeal. The second died quickly, wealth became the focus. The most abundant
and visible source of wealth was found in Spanish American possessions-
bullion. However the Spanish were unable to use the bullion profitably, and
though Spanish policy tried to control external interference and tried to stifle
the flow of bullion out of the country their efforts were unsuccessful. As
Thomas Mun notes, “gold and silver are so scarce in England that they are
forced to use base copper money.” And then later emphasizes the necessity for
proper use of bullion saying, “Treasure is obtained by a necessity of
commerce.”

Most countries initially trying to compete with Spain look for measures to
raise general prosperity. Not having direct access to bullion they focus on
trade. The idea is to maintain a favorable balance of trade. To ensure that
exports are more than imports, this way less wealth flows out of the country
and more flows and the balance can be paid in bullion.

Thus the economic policy of the time focused on increasing exports. The
manner to do this was to produce one’s own goods through manufacture.
These were to be exported while raw materials were to be imported while at
the same time the reverse processes had to be minimized, that is the export of
raw materials and the imports of manufactures had to be lowered.
The seventeenth century was marked thus by the implementation of a number
of policies that looked to increase the manufactures. Bounties and stimulus
was provided to certain industries that these manufactures looked to
encourage.

It is likely, as had been suggested by Egerton that mercantilist policy that

followed through Europe was a lesson learnt from Spanish wastefulness. Mun
was the first to propogate mercantilist policy through England. The golden
rule was that of favourable balance of trade and as has been described by
Adam Smith, ‘the title of Mun’s book, England’s Treasure in Foreign Trade,
became the fundamental maxim of political economy.” Exports had to be
higher than imports and for this manufactures had to be encouraged. The
focus according to egerton was the producer and not the consumer. (the same
critique was leveled by Smith.

According to Doyle, the commercial measures of the English and the French
state stimulated the rise in productivity. British industry received enormous
stimulus from the exclusive markets in Ireland and the thirteen amercian
colonies. When the time came for takeoff mercantilist restrictions might well
have prevented the launch; however they were, according to Doyle
instrumental in taking England up to this point.

The word mercantilist was used for the first time much later by Adam smith
who was to speak against mercantilism. It was considered by him to be a
system tuned to encourage the interests of traders. As described by Charles
Wilson, for smith the economic crime of the system is the accumulation of
wealth, since they confused wealth with money, thus governments
accumulated gold and silver. Thomas mun had claimed that the flow of money
was governed by the balance of trade and thus the primary objective must be
favourable balance of trade. However soon there was, in Wilson’s words an
erroneous obsession with favourable balance of trade. Soon these errors
spread outwards from England and the obsession for favourable balance grew
through Europe.
CLOUGH

1. THE THEORY OF MERCANTALISM

a. Every group of individuals striving to a set of common ends
constitute society- each society creates its own economic theory to
progress the society- the theory, as it is built for, creates changes
within the society
b. The major factors that affected economic theory in early modern
times include
i. The growing amount of wealth
ii. The increasing usage of money
iii. The expansion of trade
iv. The acquisition of colonies
v. The rise of nation states
c. The dominant economic theory between 1500 and the eighteenth
century was that of mercatlalism. Clough believes that this name was
an error as the theory had little to do with trade and more with state
control of economic affairs. It was the theory and practice of
economic state building and the use of state to enhance the interests
of policy makers.
d. However people soon grew bitter because of excessive state control
and due to red tapism, by the eighteenth century mercantilism had
been exchanged with laissez faire principles, a belief in letting
natural laws govern the economy and a belief in individual rather
than stat prosperity.

THE REACTIONS AGAINST MERCANTALISM

WILSON

1. ATTACK ON MERCANTALISM
I. Emerged during the latter half of the eighteenth century
II. Came from two quarters
 a. From a school of philosophers who believed that it was
an offence against the natural order to interfere with
economic affairs
b. From merchants who believed that the regulations
harmed their own interests
2. Conclusion
I. Mercantilism didn’t come only from the top but from a
variety of positions and was in itself varied in nature
II. The ends too varied from immediate profit of individuals
and pockets of princes to the power of state and the welfare
of the people
III. Moreover the duality of power and wealth, economic and
political power has been emphasized.
IV. One cannot judge mercantilist thought by later ideas.
V. It was however based on materialism and it is possible that
the comparable material progress of the west can be
attriburted to it,
VI. Mercantalist century- 1660- 1760, was in western Europe
the age of economic expansion

DOYLE

1. However mercantilism had a number of critics.

a. Colbert was scarcely dead before a set of French writers critiqued

his policies as the source of ruin and misery that coincided with
Louis II’s last great wars. The critique was largely that
interference in what was the ‘natural law’ of economic life, had led
the state to bring disaster
b. In England writers like Child, North, Davenant denounced
reflationary tariffs against foreign competitors as misconceived
attempts to maintain favorable balance of trade.
c. Half a century later full scale alternatives to mercantilism were
suggested. Mercantilism was the product of the depression of the
seventeenth century when resources seemed limited and when
these were overcome, expansion continued and liberal policies
were favored. Hume took the lead in exposing the hollowness in
orthodoxies of the time. He pointed out that the true wealth of the
nation lay in its peope and its industry and not in its store of
bullion. All restrictions on trade were harmful as trade stimulated
economic activity. Free trade would stimulate higher prices and
higher prices, higher productivity thus resulting in abundance.
d. Physiocrats similarly emphasized the avoidance of protective
tariffs. They highlighted the role of agriculture and its necessity in
the development of a country. Amongst them were gournaye and
quensay and turgot. They created vast propaganda and were
partly successful in implementing their views. However some
critics, most prominently Adam smith realized that an
overemphasis on agriculture while ignoring industry would
simply retard the ongoing path to progress.
e. SMITH- Inquiry into the nature and causes of the wealth of
nations(1776)- had visited france’s physiocrats. According to him
however the true basis for wealth was labor and the division of
labor, i.e specialization in an environement of free trade, thus
every state specialized in what it could produce, using to the best
its resources and acquired the rest from outside. This would occur
naturally according to smith as long as there wasn’t outside
interference. He denounced the controls of mercantilism as this
outside interference which was built on the greed of merchants
and sought profits at the expense of the country. He argued that
british prosperity had been created despite rather than because of
mercantilism. He even emphasized the harm in regulating trade to
and from the colonies saying that the same industries in whose
favour these oppressive measures were conceived would fall
under the burden of the measures. He condemned thud the
apparatus of overseas empires, without even being aware of the
 fact that English control in America was dwindling. In this view
the mother country derived nothing but loss from the
management of colonies. The revolution occurred in the year
Smith’s book was published, 1776 and by the time he died,
American trade was flourishing, seeming to prove his theories
right.
f. Smiths ideas were by no means the first of their kind. Josiah
Tucker had been propounding the same ideas even before the
seven years war through pamphlets saying that a separation
between great Britain and her colonies would ebinifit both sides.
g. Another critic who stated the same ideas was Raynal, whose
History of the two indies(1770) was an essential in his time. The
book had a number of contributions and was in its own way an
irrevocable text of European activity and its disastrous effects
upon the world.

Recent events favored the critics, however other overseas

colonies showed no change. England’s hold over india only grew
stonger.Cndemnation of british subjugation, its miserable and
oppressive system of slavery etc. were seen during the eighteenth
century. Slave trade was criticized severly during this period
raising hopes of the abolition of slave trade in the eighteenth
century
No sooner had the statesman began considering the wisdom of
colonization when malthus’s gloomy forecasts regarding
overpopulation began to renew the fervor in favour of colonies.
Veryone had read smith but were unconvinced that free trade
would bring an end to the world’s problems.
And the success of great britian seemed to vindicate all that
mercantalists had stood for.

CLOUGH
1. SMITHS CRITIQUE OF MERCANTALISM
a. He believed that mercantilism was a conspiracy contrived by a
minority to encourage their own interests.
b. Mercantalism according to him pretended to regulate trade in order
to obtain favourable balance but its real objective was obtaining
monopoly of the home markets for certain manufacturers.
c. Moreover for Smith industry must be keyed to favour the consumer
and any benefit to the producer must be only in so far as it does not
harm the consumer. Mercantalism however it biased towards te
producer and his needs, the ultimate objective is production and not
consumption