LECTURE 1

ECONOMIC THOUGHTS: MERCANTILISM

Nigar Hajiyeva
INTRODUCTION

■ Mercantilism emerged in Europe during the late Renaissance, with its roots stretching
into the 16th century
■ Evolved gradually as nations sought to navigate the economic and geopolitical realities
of the time
■ There was a rise of Humanism (the concern for well-being of humans in the short term)
INTRODUCTION

■ Bullionism is an early or primitive form of mercantilism.

■ Bullionism is an economic theory that defines wealth by the
amount of precious metals owned.
■ Governmental control of the use and exchange of precious
metals
INTRODUCTION

■ Following the discovery of the Americas by Christopher Columbus in 1492, Spain

established a vast colonial empire that included rich territories in what is now Latin
America.
■ The influx of precious metals from the Americas into Spain and, subsequently, into the
rest of Europe had profound economic effects
■ bullionism was not confined to a single country but was part of a broader economic
strategy adopted by several competing states in early modern Europe.
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Mercantilism believes that the wealth of a nation could only be

achieved through government controls and regulation of trade
■ wealth accumulation, establishment of favorable trade with
other countries,
■ development of internal resources in the manufacturing and
agriculture sectors.
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Rise of Nation-States:
The emergence of powerful nation-states in Europe required:
■ resources to maintain armies, navies, and bureaucracies.
■ governments had to increase their wealth as a means of funding these endeavors
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Exploration and Colonization:

■ The Age of Discovery, marked by the expeditions of Columbus, Vasco da Gama, and
others, opened up new trade routes and territories.
■ European powers realized the potential for wealth generation through trade and the
exploitation of colonies. (Spain, Portugal, Britain, France, and the Netherlands.)
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Competition for Resources and Markets:

■ As European nations established colonies and trade networks, competition for control
over resources, markets, and strategic trade routes intensified.
■ This competition underscored the need for policies that would ensure a favorable
balance of trade and secure the wealth flowing from colonies to the mother countries.
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Economic Theories and Practices:

■ Early mercantilist writers, such as Thomas Mun in England, advocated for policies that
would increase national wealth by promoting exports over imports and accumulating
precious metals.
■ These ideas reflected a shift from the feudal economy towards more centralized control
of economic activities by the state and the civil role of the state was expanded
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Technological Advancements:
■ Advancements in shipbuilding, and military technology made long-distance trade
■ technological advances allowed European powers to dominate global trade routes and to
enforce mercantilist policies.
Monetary Developments:
■ The flow of gold and silver into Europe played a significant role in shaping mercantilist
thought.
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The basic concepts of mercantilism in terms of trading are:

■ wealth of a nation depends primarily on the possession of
precious metals such as gold and silver.
■ During 16 to 18 century, gold and silver were the currency of
trade between countries.
■ It advocated a positive balance of trade, export over import, and the accumulation of
gold and silver as the basis of a country's wealth and power.
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■ By exporting goods, countries could earn and therefore

maximize the amount of gold and silver.
■ Conversely, importing goods from other countries resulted in an
outflow of gold and silver to those countries.
■ To accumulate these metals, a country needed to achieve a favorable balance of trade
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■ The basic concept of mercantilism in terms of trading is to make

sure that the country's own resources are exported to other
countries in higher volumes or amounts compared to the goods
imported, which are kept to a minimum level.
■ Trading is said to be "balanced" if a country exports more than it
imports.
■ Through this system, resources will increase and there will be a
surplus on gold and silver reserves.
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In the words of the English mercantilist writer

Thomas Mun,"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“
■ Bring all unused land into production
■ Export goods with inelastic demand (charge high
prices)
■ Reduce consumption of imports (luxuries)
■ aimed to turn colonies into suppliers of raw materials and markets
for the mother country’s manufactured goods.
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Government Intervention:
■ encouraging exports and discouraging imports, especially
through the use of tariffs.
■ imposing tariffs on imported goods to make them more expensive and less attractive to
domestic consumers,
■ providing subsidies to domestic industries to make them more competitive abroad
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The Use of Colonies to Achieve a Favorable Trade Balance:

1) The economy of the colonies is always secondary to the
economy of the mother country.
2) The colonies should provide cheap raw materials to the mother
country and market the manufactured goods of the mother
country.
3) In return, the mother country provides military security and
political
administration to the colonies.
4) The overriding goal is national monopoly, meaning that a
nation's colonies should be restricted to trading only with each
other or with the mother country.
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Zero-Sum Game:
■ Underlying mercantilist thought was the belief that international trade was a zero-sum
game, where one nation's gain was necessarily another nation's loss.
■ This view encouraged competitive trade practices and often led to trade wars and
colonial competition among European powers.
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German Mercantilism
■ The Austrian lawyer and scholar
Philipp Wilhelm von Hornick, in his
Austria Over AIl, 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:
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1. According to Wilhelm, every inch of a country's soil be utilized

for agriculture, mining or manufacturing.
2. All raw materials found in a country should be used in domestic
manufacture, since finished goods have a higher value than raw
materials.
3. A large, working population should be encouraged.
4. All export of gold and silver should be prohibited and all
domestic money be kept in circulation.
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5. That all imports of foreign goods should be discouraged as much

as possible.
6. Where certain imports are indispensable they should be obtained
at first hand, in exchange for other domestic goods instead of gold
and silver.
7. As much as possible, imports should be confined to raw
materials that can be finished in the home country.
8. Those opportunities should be constantly sought for selling a
country's surplus manufactures to foreigners, so far as necessary,
for gold and silver.
9. That no importation should be allowed if such goods are
sufficiently and suitably supplied at home.
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Spanish Mercantilism
■ Spanish mercantilism was heavily influenced by the wealth flowing from its colonies in
the Americas. The Spanish Crown imposed strict control over colonial trade,
■ allowing only Spanish ships to carry goods between the colonies and Spain,
■ The focus was on extracting precious metals, such as gold and silver, which were
believed to be the essence of national wealth and power.
■ However, Spain's heavy reliance on this wealth led to inflation and economic
dependency on other European nations for manufactured goods
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Why?
Spanish mercantilism is a classic example of what can happen when a country relies too
heavily on a single source of wealth.
"Price Revolution" occurred during the 16th and 17th centuries, where the influx of
precious metals from the New World led to widespread inflation in Spain.
As the supply of money (gold and silver) increased, its value decreased, causing prices to
rise. This was a classic case of too much money chasing too few goods, which reduced the
purchasing power of money.
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■ China for many years has been successful at distributing their

goods and services to other countries and severely limiting the
imports they take in return. This has allowed China to amass
considerable wealth in foreign currencies.
■ Economists point out, that like European countries who
eventually had to abandon mercantilism, China may be at that
point as well, if they want to continue to develop their wealth.
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Example of Mercantilism:
■ Mercantilist doctrine is by no means dead; Neo-Mercantilists
equate political power with economic power with a balance of
trade surplus.
■ Critics argue that many nations have adopted a neo-mercantilist
approach to boost exports and minimize or limit imports.
■ For example, China has recently been criticized for using the
mercantilist system, deliberately keeping its currency value low
against the U.S. dollar in order to sell more goods to the U.S.
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Three Assumptions of Mercantilism:

1. There is a finite amount of wealth in the world.
2. A nation can only grow rich at the expense of other nations.
3. Therefore, a nation should try to achieve and maintain a
favorable trade balance, exporting more than it imports.
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Criticism:
■ Adam Smith and David Hume were the founding fathers of anti-
mercantilist thought; This practice was strongly attacked by
Adam Smith in his 1776 work "The Wealth of Nations". The
criticisms of mercantilism are given elaborately:
■ Mercantilists viewed the economic system as a "zero-sum
game", in which a gain by one country results in a loss by other.
■ Adam Smith & David Ricardo argued that, trade should be a
positive-sum game, or a situation in which all countries can
benefit.
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■ Mercantilism overemphasized the importance of money and

over-emphasized the importance of gold and silver. So,
Mercantilist ideas about wealth were nonsensical and
untenable.
■ They discouraged imports by imposing heavy and prohibitive
duties on foreign goods and provided every possible ways to
minimize exports.
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■ The mercantilist assumption that the colonies existed for the

benefit of the mother was not a sound economic proposition.
■ Mercantilism was a cause of frequent European wars in that
time and motivated colonial expansion.
■ The mercantilist policies were designed to benefit the
government and the commercial class, rather than the entire
population.
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■ The mercantilism over-emphasized the importance of commerce

and greatly undermined the importance of agriculture and other
branches of human industry.
■ It does not promote free enterprise and free movement of goods
and people.
■ And instead it allowed colonialism and monopoly of businesses
and trade practices.
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■ Objectives were simply to generate wealth for the upper class

and merchant class.
■ The working people were exploited and were even made as
slaves with very low wages.
■ Finally, Smith argued that the unlawful relationship between
government and industry was harmful to the general population.
■ He criticized the mercantilist trade policy of intervening and
monopolizing trade business.
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Conclusion:
■ 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 and Smith's
laissez-faire economics.
■ In France, economic control remained in the hands of the royal
family and mercantilism continued until the French Revolution.
The continued pressure resulted in the implementation of
laissez faire economics in the nineteenth century.
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Wealth
■ Thus the Mercantilists had a high regard for money. If we
consider the circumstances of the day, Mercantilists were
justified in attaching greater importance to gold.
■ According to Keynes, "the Mercantilists understood the
important role of money in the economic system.They studied
the effects of an increase in the quantity of money on the price
level and employment.
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Foreign Trade
■ They believed that all those nations which did not possess their
own gold and silver mines could become rich after getting gold
and silver from foreign countries through trade.
■ However, the mercantilists theory of foreign trade has no validity
in modern times. If every nation exports more, there would be an
end to international trade.
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Commerce and Industry

■ The mercantilists considered commerce and industry as the
most important branches of the national economy.
■ They wanted to increase the national productive efficiency using
regulation of industry and commerce.
■ commerce and trade were the most productive occupations and
agriculture was the least productive.
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Population
■ Mercantilists encouraged a large population to make the nation
militarily strong and to increase its productive capacity.
■ They believed that a cheap and abundant supply of labor would
keep the cost of production low.
■ This would enable a country to sell its commodity at a lower
price in the international market
■ The mercantilists even encouraged immigration because they
would bring wealth and enrich the country.
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Natural resources
■ The mercantilists wanted to utilize all the natural resources to the
maximum extent to produce more, export more, and import less.
Wages and rent
■ The mercantilists discussed the problems of production only. So they did
not give much importance to the problems of distribution, especially to
wages and rent.
Interest
■ A famous mercantilist writer favoured interest taking for the loans on
the ground that lending helped the poor and young merchants. It also led
to the employment of the savings of the widows.
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Taxation
■ The views of the mercantilists on taxation were interesting
because they were more scientific and ahead of their time.
■ The mercantilists favoured a multiple tax system based on the
principle of "each should pay according to the benefits received
from the state“.
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Theory of value
■ According to the mercantilists the normal value of a commodity
depended on the cost of production.
■ Value was thus considered to be different from price.
■ By the end of the mercantilist period, market value was
recognised. Scarcity also determined the value of a commodity.
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Features of a Mercantilist Economy:

1. Import prohibition of certain goods using imposition of high tariffs, government
legislation or very high taxes/import duties.
2. A wide range of government subsidies on export industries to promote the country's
export-based policy.
3. Policies of nationalism.
4. Accumulation of assets in gold and silver, and prohibition of private accumulation, use-
or export of these items.
5. One-way trade with colonies, and importation of gold and raw materials from these
sources.
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Mercantilist policies have included:

■ High tariffs, especially on manufactured goods;
■ Exclusive trade with colonies;
■ Forbidding trade to be carried in foreign ships;
■ Banning all exports of gold and silver;
■ Promoting manufacturing with research or direct subsidies;
■ Limiting wages;
■ Maximizing the use of domestic resources.