Mercantilism

Mercantilism is a notoriously difficult concept to define. It first appeared in print in Marquis de Mirabeau's "Philosophie Rurale" in 1763 as système mercantile. In France during the eighteenth century the concept was used to describe an economic policy regime characterized by state intervention to protect domestic merchants and manufacturers. The main creator of the concept of mercantilism, however, was Adam Smith. In An Inquiry into the Wealth of Nations (1776) Smith characterized the core of the mercantile system—"the commercial system"—as the popular folly of confusing wealth with money. According to Smith, mercantilist writers such as Thomas Mun, Edward Misselden, Josuah Child, and others proposed the principle that a country must export more than it imported, which would lead to a net-inflow of bullion. This was the central argument of the so-called "positive balance of trade theory." Further, according to Smith, the early-seventeenth-century merchant and writer Thomas Mun (1571–1641) was the main architect of this theory. Smith argued that the theory of the positive balance of trade was only a thin veil covering the special interest of the mercantile and trade class, which opted for protection from the state. This view of mercantilism as a policy of rent seeking developed by special interests has in recent times been further elaborated by economists inspired by positive and public choice theory, especially Robert E. Ekelund and Robert D. Tollisson, who have defined the policy regime of mercantilism as "a rent seeking society."

HISTORY OF MERCANTILIST THEORY

Since Adam Smith, the concept of mercantilism has been used to designate a system of economic policy as well as an epoch in the development of economic doctrines during the seventeenth and eighteenth centuries. The view that that mercantilism was built upon an "almost romantic value which our ancestors set upon the possessions of the precious metals" (Jones 1859, p. 312) and thus could be described as a mere fallacy was carried further by the classical school of political economists in Britain. However, from the middle of the nineteenth century the German historical school offered an alternative interpretation of mercantilism, according to which their doctrines were the rational expression of state building during the early modern period. For German historical economist such as Gustav Schmoller, mercantilism was the policy of unity and centralization pursued especially by the Prussian government during the seventeenth and eighteenth centuries. Earlier German historicists such as Wilhelm Roscher and Friedrich List (1789–1846) argued that the core of mercantilism consisted of dirigist (the term for state regulative policies) ideas propounding the active role of the state in economic modernization and growth. During the twentieth century this view of mercantilism was even more enforced by the Swedish economic historian Eli Heckscher, who in "Mercantilism" (1931) attempted to present mercantilism as a system of both economic thought and economic policy. He agreed with Smith that the balance of trade theory was at the core of the mercantilist doctrine. However, Heckscher also regarded mercantilism as a system of economic policy—as state making, as the historical economists had emphasized. In pursuing the goal of national power the mercantilists developed a number of nationalist economic policy tools, including tariffs. Hence, the British Navigation Acts, as well as the establishment of national standards of weights and measurements and a national monetary system, could be viewed as the outcome of the same mercantilist policies.

Heckscher's work provoked heated debate about mercantilism in the 1950s and 1960s. In 1939 A. V. Judges had vigorously rejected the notion of a particular mercantilist doctrine or system. Mercantilism had neither a common theoretical core nor any priests to defend the gospel, he stated. Another economic historian, D. C. Coleman, outrightly denounced the usefulness of mercantilism as a description of both economic policy and economic theory; it was "a red herring of historiography" (Coleman 1969, p. 117). Mercantilism was not a unified school of economic thinking and doctrine.

Although it is correct that mercantilism was not a finished system or coherent doctrine, and mainly appeared in pamphlets which dealt with economic and political issues of the day, this does not imply that economists writing during the seventeenth and early eighteenth centuries did not have some common aims and views and shared concepts to make intelligible the complex world of economic phenomena. Moreover, Smith and his followers helped to cement a view of the mercantilist writers that made them seem more old-fashioned than they actually were. Thus, to a large extent, writers of this branch can be regarded as forerunners to Smith and the liberal school, not their opposition. They were not totally devoted to dirigisme, and their demand-and-supply analysis has formed the nucleus of modern theorizing ever since. The mercantilist literature between 1620 and 1750—mainly by the British but with contributions from Spain, Italy, and other countries—mainly dealt with the issue of how to achieve national wealth and power. In the bulk of this literature these two goals were looked upon as identical.

MONEY VS. WEALTH

From Adam Smith in 1776 to Jacob Viner in the 1930s, the view that the early mercantilist writers had confused money with wealth has been repeated over and over again. However, recent scholars agree that this explication is not correct. It is quite clear that a majority of writers beginning with Thomas Mun insisted that to have an abundance of money in the country very important for economic progress and the wealth of the nation. Mun, as well as many others during this period, feared that without a steady inflow of money originating from a favorable balance of trade, trade and industry would stagnate, prices would fall, and so on. To counter this shortage of bullion in circulation, a steady inflow of money through a net trade surplus was necessary, they believed. Nor would it cause inflation, since a positive net inflow was necessary in order to cope with increased levels of trade activity. But this did not at all imply that money was identical to wealth. Rather, some would argue that a net inflow of money was a barometer that signaled whether a nation had won or lost its trade competition with other countries. Others would say that an increased money supply would help to speed up intercourse in the marketplace and stimulate growth and development. Thus, a net inflow of money could be a means to procure wealth, but wealth itself was always the result of production and consumption.

PROTECTIONISM

Instead, what makes it legitimate to speak of a specific "mercantile system" was its proponents' constant and stubborn preoccupation with the question how a nation could become rich and thus also achieve greater national power and glory. The mercantilists' main recipe for growth was state dirigisme and protection—that is, the introduction of duties and bounties to stimulate domestic industry and the export sector, and to discourage importation of manufactured goods. In the sense that mercantilism was an ideology for economic protection in order to achieve domestic growth, it is not applicable only to the period before Adam Smith. The nineteenth century saw the rise of a strong reaction towards the gospel of free trade propounded by British classical political economists. In both Germany and the United States a dominant protectionist school emerged as protectionism also found root elsewhere, including in Britain. Among the most prominent protectionists were the Americans Alexander Hamilton (1757–1804) and Henry Carey (1793–1879) and the German economist writer Friedrich List. Although quite different in style and ideas, they shared the view that an agricultural economy was always inferior to an industrial economy. Moreover, especially List and Carey stressed that the "cosmopolitanism" in much of English economics during the time was false, and concealed the fact that free trade was a tool for preserving Englandís superiority as an industrial nation. It is usually acknowledged that the first "national economist" was Hamilton, who in 1790 presented a "Report on Manufactures" in which he made a number of arguments for the protection of an infant industry which have been commonplace ever since.

Certainly, mercantilist ideas can also be found in modern forms of protectionism that have appeared since the nineteenth century. For example, Heckscherís synthesis was aimed at advocacy in favor of liberal and free-trade ideas against the protectionism and economic nationalism that characterized the interwar period. Despite Heckscherís insistence that mercantilism was a false ideology—free trade was better for economic growth, at least in the long run—mercantilism was hailed as a form of popular economics of common sense. As such, it still exists to some degree, but it has reappeared most clearly during periods of economic problems, such as the 1920s and 1930s.

POSTWAR NEOMERCANTILISM

After World War II, mercantilist ideas recurred in the form of neomercantilism and strategic-trade theory. From the end of the 1970s, strategic-trade theorists such as Lester Thurow, James Brander, Barbara Spencer, and Paul Krugman sought to replace the theory of comparative advantages set forth in the beginning of the nineteenth century by Robert Torrens and David Ricardo with something that Michael E. Porter prefers to call "competitive advantage." Their argument is that the pattern of international trade cannot be explained on the basis of comparative advantage or with the help of the simple Heckscher-Ohlin theorem. Instead, the flow of international trade is a consequence of scale and scope, economic muscle, and increasing returns to scale. The Brander-Spencer model and pleas for "strategic trade policy" were based on the fact that a country, which through early investment has gained control of an export market for a particular good, tends to keep its leading position. In cases where competition is not perfect, sunk investments (investments already made) lead to barriers of entries—at least in industries with high value-added content—which in its turn serves as a competitive advantage. The political implications of this were straightforward: governmental support can bring about a competitive advantage in an industry that would benefit its nation in the long term. Certainly, this was another way to defend the infant-industry argument, with clear implications for trade policy. An example often used by strategic-trade policy theorists is the fierce competition between the aircraft manufacturers Boeing in the United States and Airbus in Europe, co-owned by a number of private and public entities in Europe. Without a doubt, active governmental support in terms of provisions of credit, subsidies, etc., is of great importance in the international division of labor.

Without doubt, the nineteenth-century dismantling of the old dirigist economic regime of the seventeenth and eighteenth centuries played an important role in economic growth, the expansion of world trade, and the industrial revolutions that occurred in the Western Hemisphere, especially after 1850. Especially during the period 1850 to 1880, Western Europe experienced a period of almost unrestricted free trade, during which many domestic restrictions on industry and free enterprise and trade were lifted. Much the same is true of the twentieth century: the lifting of many restrictions by the General Agreement on Tariffs and Trade (GATT) and other institutions since 1945 has been an important driving force in the enormous expansion of world trade in the last half-century.

Against this background, it seems odd that protectionism—mercantilism in its modern form—remains attractive. The different versions of modern strategic-trade theory, the emphasis on national innovation systems, and the renaissance of the theory of increasing returns of scale applied to international economics are a clear sign of this. Indeed, there is ample evidence, historical and logical, that Adam Smith's model of free trade and international division of labor is much superior to the mercantilists' plea for economic nationalism and protection. Why, then, does protectionism persist?

What seems to be the best solution for all is not automatically and necessarily perceived so by every individual actor (nation). In the short-term (or even middle-term) an actor may recognize that some protection would benefit him. The main reason for this is that markets are not always perfect or clear. In the real world there exist such things as asymmetrical information and rent-seeking and special interests that opt for protection. We cannot expect that all nations will act as true altruists or keepers of the common good. To a large extent, it is such factors that explain the longevity of protectionism and the attractiveness of its policies in the modern world.

However, we have also to acknowledge the uncomfortable fact that most industrialized and wealthy countries, at some point during their development, have used protectionism as a means to achieve growth and economic modernization. We cannot know whether they would have been better off not using such methods. However, the stubborn persistence of ideas such as the infant-industry argument seems to suggest that it may contain a grain of truth. Hence, the argument pursued by Hamilton and List that latecomers to the industrial race gain from the protection of their nascent industries has remained vital. In the twentieth century this argument has appealed especially to developing countries. Radical economists with mercantilist arguments often have challenged free-trade liberalism and the theory of comparative advantages during the nineteenth and twentieth centuries. During the last decade mercantilist critiques have been advanced to explain development and underdevelopment as a consequence of economic globalization. According to this view the seventeenth-century mercantilist had a clear picture of the importance of a process which the modern developmental economists Raul Prebisch and Gunnar Myrdal stressed during the 1950s and 1960s: that in international trade there is an unequal advantage for the parties involved, depending on what they import or export. It could be argued that the mercantilists were aware that a higher productive potential in the form of "modern" industry provides a more developed country with a technological monopoly that can be used for producing higher incomes or even achieving better terms of trade. As long as such views are expressed, there will be a place for mercantilist and protectionist views.

SEE ALSO Colbert, John-Baptiste;Hanseatic League (Hansa or Hanse);Navigation Acts.

BIBLIOGRAPHY

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Beer, Max. Early British Economics. London: Allen and Unwin, 1938.

Brander, J., and Spencer, B. "Tariffs and the Extraction of Foreign Monopoly Rents Under Potential Entry." Canadian Journal of Economics 14, no. 3 (1981): 371–389.

Coleman, D. C. (ed.) Revisions in Mercantalism. London: Methuen and Co., 1969.

Ekelund, Robert B. and Tollison, Robert, Politicised Economics. College Station, TX: A&M University Press, 1997.

Gould, J. D. "The Trade Crisis of the Early 1620s and English Economic Thought." Journal of Economic History no. 15 (1955): 121–133.

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Jones, Richard. "Primitive Political Economy of England," in Literary Remains Consisting of Lectures and Tracts on Political Economy. [1859]. New York: Augustus M. Kelley, 1964.

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Magnusson, Lars. Mercantilism: The Shaping of Economic Language. London and New York: Routledge, 1994.

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Perrotta, Cosimo. "Is the Mercantilist Theory of the Favourable Balance of Trade Really Erroneous?" History of Political Economy 23, no. 2 (1991): 301–336

Porter, Michael E. Competitive Advantage. New York: Free Press, 1985.

Porter, Michael. On Competition. Cambridge, MA: Harvard University Press, 1998.

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Lars Magnusson