Identifying and Critically Discussing the Core Ideas of Mercantilism

Identifying and Critically Discussing the Core Ideas of Mercantilism

Farid Adilov

Globalisation, Poverty & Development, Newcastle University, UK

Mercantilism could be considered as a set of policies and practices which is mainly designed to accumulate gold and silver. Mercantilism expressed the economic interest of state and regarded economic wealth as a rational means to gain political power (Magnusson, 2003:48). Mercantilists argue that a nation must export more that it imported and preferred maximizing trade.

The essay will first attempt to briefly explain what mercantilism is and its key characteristics, then it will move on to the core ideas regarding state, state power, state intervention in the economy, foreign trade, trade competition, accumulation of gold and silver that developed by mercantilists and will critically discuss and provide the arguments where relevant. The last part of the essay will discuss mercantilism and its relevance for today.

Definition and various approaches to mercantilism

Definition of mercantilism has also been a matter of controversy. Some scholars claim that mercantilism began to appear at the end of 14th and the beginning of the 15th century.

However, others, such as Cannan attempted to make a distinction between mercantilism and ‘Bullionism’, which existed during the large part of the Middle Ages (Cannan, 1929:7). He argues that throughout the Middle Ages each country attempted to prevent gold and silver bullion from being exported which was not mercantilism and it has nothing specially to do with merchants.

Moreover, Hunt (2002:20) argues that ‘bullionism’ is the earliest form of mercantilism, originated in the period during which Europe was experiencing the shortage of gold and silver. Therefore, ‘bullionist policies designed to attract a flow of gold and silver into a country and to keep them there by prohibiting their export’ (Hunt, 2002:20).

I think the difference between bullionism and mercantilism is not significant enough for the two to be considered totally different.

Some scholars have various approaches to the mercantilism. According to Heckscher, mercantilism is one of the stages in the history of economic policy, and it contains a number of economic measures which were designed to secure the political unification and natural power (Roll, 1923:64).

Galbraith (1987:31) asserts that ‘mercantilism was anything but a system, it was primarily the product of the minds of statesmen, civil servants and of the financial and business leaders of the day’. Roll argues that ‘mercantilism is the appearance in a number of countries of a set of theories’ which explained the practices of state officials for a considerable time (Roll, 1923:63).

According to Schwartz (2010: 12) ‘mercantilism is usually described as an externally oriented policy by which states tried to create inflows of bullion’. He argues that mercantilism’s external policy was also a means to an internal end- the creation of a homogeneous, monetized internal economy, dominated by a central authority capable of defining property rights. This homogeneous and monetized economy provided the stable internal resources that states needed.

Magnusson (2003: 46) argues that the concept of ‘mercantilism’ designates either a system of economic policy or an epoch in the development of economic doctrine of the seventeenth and eighteenth centuries, or before the publication of Wealth of Nations by Adam Smith in 1776.

During that time most of the mercantilist writers were the businessmen, merchants and government officials and they mainly wrote about the practical issues concerning trade, shipping, tariffs, interest rates and protection of industries and monetary policies (Magnusson, 2003:46).

The concept in France was used so as to describe an economic policy regime characterized by direct state intervention which intended to protect domestic merchants and manufacturers.

However, Magnusson (2003:46) argues that the main creator of the mercantile system was Adam Smith and according to Adam Smith ‘commercial system’ is the core of the mercantile system. It seems that Magnusson, Heckscher and Galbraith regard the mercantilism as a system and stages in economic development.

However, Roll argues that it is the practices of state officials and state behaviour which individuals influence the system. Schwartz agrees with Heckscher and has more emphasis on foreign trade than domestic affairs.

Viner (1948) argues that there is a distinction between ‘pure’ mercantilism which can acquire its full development only in absolute monarchy and the mercantilism of countries where the commercial classes are influential and the state has to serve and settle private economic interests.

From these definitions and approaches, we could argue and summarize that mercantilism is a set of policies and practices designed to secure state power, support state intervention in the economy, and serve the group of people who play actively in this policy.

The role of state, state power and intervention

State has an important part in the mercantilist system. Most mercantilists feared too much freedom, therefore they relied on the state to plan and regulate the economic field. There were a number of policies designed to promote the interests of the nation-state. Various types of regulations of the domestic and international economy could be provided as an example of it.

Merchants saw in the ‘state’ the helping hand necessary to aid and protect them (Wilson, 1958:19). It is understandable that during trading to far countries required the aid of government and therefore mercantile community sought the help of the state. For example, sailing through European and Asiatic waters, merchant ships need convoy or armed protection against pirates or enemies.

Legal monopolies in the form of franchise and patents were common under mercantilism (Ekelund and Hebert, 1990:49). A franchise granted exclusive trading rights to a particular merchant or organisation, such as East India Company. Moreover, franchises also received a huge amount of subsidies from the king (Ekelund and Hebert, 1990:49).

From this point of view, we could argue that mercantilism was an alliance of power between monarch and merchant-capitalist. Both of them depended on each other – monarch hinged on the merchant’s economic activity to build his/her treasury, while merchant needed the protection of his/her economic interest which could be provided by the monarch.

Ekelund and Hebert (1990:49) argue that using political process to secure the monopoly gains is a form of rent seeking, where ‘rent’ refers to the profits that are attributable to the existence of monopoly. Moreover, according to Smith, mercantile system implied a massive conspiracy to get control over manufactures and merchants to cheat the public and consumers (Magnusson, 2003: 47).

This could be explained as a policy of rent-seeking. For example, some economists, such as Robert Ekelund, Robert Tollison defined the mercantilism as ‘a rent-seeking society’ (Magnusson, 2003: 47). They explained that rent-seeking was real but most often hidden, agenda behind the mercantilist doctrines.

It has been also claimed that mercantilists believed in an identity, which social classes fighting to obtain and preserve their political power. State regulation could be an essential condition for enlarging the markets for a time, but ‘universal beneficence of intervention was by no means unknown’ (Roll, 1923:66).

State power, both in economic and political perspectives, takes an important part in mercantilist policy. Great flow of silver and gold assisted fasten the attention of merchant and governments on those metals, as well as on policies that would increase the amounts in their possession or under their control (Galbraith, 1987:36).

Merchants provided the state with the economic resources that sustained its internal and external power. For example, Galbraith (1987:36) argues that sometimes either in conflict with each other and in cooperation, merchants helped to create the power of the state and to strengthen it.

However, it appears that influence and wealth of the merchants should be considered as contributing factors as nation building has a separate dynamic of power. Yet, Galbraith (1987:36) argues that ‘no one seriously questions the influence of the merchants in the new national states and their interest served by both internal order and external protection, these as opposed to the old feudal rivalries and conflicts’.

Heckscher (1955:347) argues that as an economic policy, mercantilism designed to increase the power of the state and all economic activities taken by them helping this policy. Pursuing the goal of state power, the mercantilists developed a number of national economic policy tools, including tariffs (Magnusson, 2003: 48).

For instance, the British Navigation Act of 1651, the establishment of national standards of weights and measurements, the national monetary system could be provided as an example as the result of the same mercantilist policies. Attempts were made directly to influence the supply of certain commodities and services that were regarded as essential to the power of the state, for example, ships, sailors, naval stores, and indispensable raw materials (Heckscher,1955:348).

It seems that mercantilism would increase state power through state control. Furthermore, mercantilists thought that the state power could be obtained by the general increase in the total national income. This also could be implemented by the state through taxation. Therefore, they developed protectionism and monetary policy (Heckscher,1955:348).

Moreover, Viner (1948) argues that in the seventeenth and eighteenth centuries ‘power’ meant not only to attack or occupy, and prestige and influence that was obtained by their possession, but also as an instrument to maintain national security against external attack.

It should be noted that mercantilists would increase state power by giving states control. For mercantilists power and plenty which were fundamentally harmonious were regarded as coexisting ends of national policy.

However, according to the Viner (1948), this does not mean that they were not wary of that economic sacrifice should be made in order to assume national security or victory in an aggressive war. He argues that ‘such economic sacrifices in the short run would bring economic, as well as political gains in the long run’.

It can also be argued that along with the economic side, promotion of the state power is also considered the ruling principle of mercantilism. For example, William Cunningham, an English economic historian, argues that English mercantilism sought power rather than plenty and valued plenty as a tool or support of power (Viner, 1948).

Having analyzed state and state power, it is obvious that state is a ‘helping tool’ as it provides the merchants with security and prevents an external attack against merchants. Moreover, state and merchants have common interest as they both benefit each other.

State intervention was an essential part of the mercantilist doctrine. Government officials accepted mercantilist notions and designed their policies accordingly because they consider it as a means of strengthening absolutist states against both remnants of medieval particularism at home and the rivals in abroad (Roll, 1923:64).

Therefore, a strong state will enable to protect them against the claims of their rivals and trading interest, break down the many medieval barriers to commercial expansion. For example, main policies that put forward by mercantilist identified the merchant’s profit with the national good (e.g. the strengthening of the power of the realm) (Roll, 1923:65).

Trade competition

Mercantilists had negative attitude toward competition. Therefore mercantilists did not like competition because it meant that they could no longer control prices and products.

They preferred monopolistic control because it allowed them to regulate prices and products. One of their policies designed to increase the value of exports minimizes that of imports was the creation of trade monopolies and all the western European countries (except Holland) applied extensive regulations to the business of exporting and importing (Hunt, 2002:21).

Merchants were influenced by state and there was a strong belief in state intervention in the economy. There was no competitive market and price competition. From this point of view, I would argue that mercantilism is not a market economy, not a command economy as it is not centrally planned. It is much more an interdependent relationship between state and merchant.

Monopoly of trade, prohibition of competitive production and sale of goods in the colonies of New World served the merchant interest. Accumulation of silver and gold should be the primary goal of personal and public policy. ‘It is always better to sell goods to others than to buy goods from others, for the former brings a certain advantage and the latter inevitable damage’ (Galbraith, 1987:39).

It is easy to understand the mercantilist insistence for the accumulation of gold and silver as a matter of state policy. If we look at the history, in those times wars were common. Therefore, precious metals were important for sustaining soldiers on military activities for the states. Galbraith (1987: 40) argues that references to gold and silver for the war appear frequently in statements of mercantilist policy and mercantilism had strong roots in national defense and aggression.

Mercantile system or mercantilism defined also as a state control or protectionism, and support the positive balance of trade, an asset of measures designed to encourage exports and another set to discourage imports. In another word, to encourage the export of manufactures and the provision of imported raw materials and discourage import of manufactures and the loss of domestically produced raw materials.

Wilson (1958:4) argues that in practice this government interference did not benefit the nation as a whole; it only benefited a section of it at the expense of other sections. For instance, linen export bounty enriched the exporters but damaged the consumers and spinners. It seems that, the interest of the consumer is almost sacrificed to that of the producer and production not consumption is considered the ultimate end and object of industry and commerce in mercantile system.

Mercantilists argue that a country must export more than it imported and it would lead to an inflow of bullion. This goal can be achieved through the active policy and make the state or commonwealth richer. They believe that favorable balance of trade-and thus specie accumulation could continue over long and indefinite periods (Ekelund and Hebert, 1990: 47).

Mercantilists argue that inflow of bullion means a relative increase in prices; however, it will correct itself through the export and import mechanism. Moreover, Magnusson (2003:50) argues that it can be false to interpret all ‘mercantilists’ as protectionists because during the seventeenth-century‘ protectionism’ itself was not a definite concept and a few argued that duties should be introduced so as to protect home industries from foreign competition.

Cannan (1929:7) asserted that mercantilism proper arose around the beginning of the 17th century and merchants were interested in an expansion of export trade during that time. Therefore, they protested the prohibition of the exportation of coin and bullion.

Looking back, we could witness that silver was produced in the West and desired in the East and its continuous export from West to East was profitable. Therefore, East India merchants argued that the elimination of the prohibition of export would help to secure the import-export balance (Cannan, 1929:7).

It is understandable that all they want was a ‘favorable balance of trade’, which based on the export of goods exceeding in value the import of goods. Thus, it seems that if the exported goods are more than imported one, then balance must be imported in precious metal.

Mercantile capitalism prepared the ground for modern industrial capitalism but the power of the state and state intervention in economic matters made serious hindrances to the development of capitalist markets. We now know that monopoly, protection, and the state regulation, in general, did not remain indispensable qualities of capitalism once it reached its full flower (Roll, 1923:66).

Adam Smith began his critique of mercantilism by an attack on the popular notion ‘that wealth consists in money or in gold and silver’ (Roll, 1923:66). However, we could see that treasure (i.e. money) is the earliest form of wealth and the formation of treasure implies a great advance in the process of private exchange and circulation.

It is essentially different from the accumulation of wealth, and it becomes possible only when the production and circulation of wealth have become separate processes connected by money and mediated by a special class of merchants.

Money

High regard for money was common to all mercantilists and they looked upon the economic process from the point of view of the primitive stage which capitalism had reached – its commercial phase – and it leads to identifying money and capital (Roll, 1923:67).

However, their high regard for money led them to reject the defences of usury which had been put forward by the precursors of commercialism (Roll, 1923:69).

Mercantilists did not consider wealth in the concrete material sense, the term wealth was used in the sense of capital, and their theory of money was a part of their one-sided view of economic activity (Roll, 1923:69).

For mercantilists, trade depended on plenty of money: where money was scarce, trade was sluggish, where it is abundant, trade boomed (Roll, 1923:69). It seems that mercantilists believed that money was productive. It is understandable that money is a means of power. The more money you have, the more power you gain. However, during the process of obtaining money and capital, their interest clashed with the people who provide it.

Thomas Mun argues that imports and home consumption of imported goods should be kept down; exports and re-exports should be encouraged. He argues that a high price may be charged for the goods in which England has something like a monopoly, while for others prices should be low enough in order to compete with the rivals (Roll, 1923: 80).

However, we should know that prices should be not put so high, because it will affect sales. Moreover, selling cheaply in order to stop competitors and then charge disproportionate prices seems unwisely.

Roll (1923:80) argues that ‘price-policy should be so devised as to keep out competitors as long as possible’. Thomas Mun argues that the balance of trade is the determinant of foreign exchange rates and exchange with any particular country depends on the balance of trade with that country (Roll, 1923:82).

Mercantilism expressed the economic interest of the state and considered wealth as a rational means to obtain political power. For example, according to the Schmoller, mercantilism expressed the economic interests of the whole states and the core of mercantilism intends active role of state in economic modernization and growth (Magnusson, 2003: 48).

According to Jahann Joacvhim Becher, a German representative of mercantilist, ‘that is always better to sell goods to others than to buy goods from others, for the former brings a certain advantage and the latter inevitable damage’ (Roll, 1923:68).

Hunt (2002:22) argues that attempts, such as the English Navigation Acts of 1651 and 1660 were made to promote the use of British ships for import and export trade.  I would argue that these actions and regulations were designed to increase the flow of money into the country and decrease the outflow.

From the foreign trade, mercantilist wanted to create a surplus of wealth and they knew it can only be if a profit was made in selling. Therefore, this idea is based on what one gains, others lose which leads the zero-sum game. Viner (1948) argues that since the quantity of money and quantity of wealth in the world could be taken as constant, and a country could gain only at the expense of other countries. Therefore, according to the mercantilists, wealth like power was only a relative matter, a matter of proportions between countries.

So, ‘a loss inflicted on a rival country was as good as an absolute gain for one’s own country’ (Viner, 1948). It means that worse condition happening in your neighboring country, such as war, famine, and harvest failure could be considered as an economic advantage to your country.

Ekelund and Hebert (1990:42) argue that mercantilism applied to the international and institutional environment that accompanied the rise of the nation-state. Money and its accumulation were the main concerns of the growing nation-states of the mercantile era (Ekelund and Hebert, 1990:42).

International trade developed and followed the age of discovery and colonization, gold bullion was the unit of international account. Gold acquisition through trade and trade restrictions were the main ideas of mercantilism, and money was equated to wealth (Ekelund and Hebert, 1990:45).

It seems that mercantilists believe that wealth could be augmented through trade and production. Therefore, they preferred raw-material imports to promote domestic employment and industry and then it would allow them to encourage final-product exports.

Relevance for today

Subramanian (2011) argues that China is running large trade surpluses and accumulating reserves not in the form of dollars, but in silver. He further moves on that there is a difference between two episodes of Chinese mercantilism which in the early 1800s, China was a mercantilist and closed, however, today China is mercantilist but highly open. The idea demonstrates the reality if we look at the economic policy of China- it exports a lot, more than it imports.

Araujo and Cardenal (2013) argue that China has become the world’s leading exporter and also surpassed the U.S. as the world’s biggest trading nation in 2012. However, according to Subramanian (2011), Chinese openness does not absolve Chinese mercantilism or eliminate its economic policy that attempts to remedy its economic problems by worsening the economic problems of other countries.

He believes that Chinese mercantilism will pass because China has attempted to internationalize its currency system (renminbi). However, it seems that if China wants to succeed in renminbi internationalization it should take away fundamentally from China’s financial depression and the undervalued exchange rate which justifies Chinese mercantilism.

Araujo and Cardenal (2013) argue that Chinese rich financial resources allow the country to be a game-changing force in the world, such as threatens to wipe out the competitive edge of Western firms, kills jobs in Europe and America, and blunt criticism of human rights abuses in China.

Moreover, I also argue that today control over oil and gas pipelines also has become a new way of mercantilist policy. For example, the Nabucco gas pipeline was designed to diversify the natural gas suppliers and provide various routes for Europe. The project was intended to deliver Caspian energy to Europe bypassing Russia which will reduce the European dependence on Russian energy.

However, Russia did not allow the implementation of this project by imposing different sanctions to those countries that will provide their gas. Another example could be given that the Chinese government controls pipelines from Turkmenistan to China and from South Sudan to the Red Sea.

In addition, Aizenman and Lee (2008) gave Central African Region as an example for China’s impact on the other developing countries by showing their pragmatic mercantilist policy which involves both economic and diplomatic devices.

They add that the main strategy of China is not to help or boost totally the position of the Central African Region in the global division of labour because African countries are considered as a good market for their own interest from a commodity supplier and a modest consumer’s market.

I will explain two main mercantilist activities which we can see in today’s economic policy. These are the state intervention in the economy and protectionism.

For example, government support through hidden subsidies and cheap financing gives Chinese state-owned firms an advantage over competitors. According to Araujo and Cardenal (2013), since 2008, West’s economic decline has allowed them to obtain broad access to Western markets to hunt for technology, explore the situation which was not previously available to them.

Another example is that Trump campaigned on a strongly protectionist platform, pledging to protect U.S. firms from unfair overseas competition and threatening tariffs on goods from China and Mexico (Elliott and Wearden, 2017).

However, I argue that some reasons such as globalization, different tax rates between countries and innovation have made it difficult to follow the mercantilism policy in today’s world. Today we have competitive markets and companies might move to other countries due to high taxes.

In addition, it is very challenging to control the economy administratively due to globalization of world economy. So, if we consider mercantilism as an instrument to keep money within borders of country then it means that country might become less attractive for companies and innovation.

Innovation is another massive issue to consider which I think makes mercantilist policies very ineffective nowadays. For example, if some high tech products invented in another country you cannot ignore it by imposing tariffs and barriers in order to prevent gold or money to left home country to buy such products. By doing so, that country might fell behind and become uncompetitive.

Conclusion

In conclusion, this essay discussed the core ideas of mercantilism. The essay explained that there are various definitions and approaches to mercantilism.

It is an economic policy or should it be considered as a stage in economic development which is designed to secure state power and serve the people who partake in this policy.

The essay discussed that state and state power are essential instruments for mercantilism as it provides guarantee and security for merchants. It also noted that mercantilists had a negative attitude toward competition and mercantilism could be regarded as a command economy, not market economy.

Mercantilists have high regard for money and they believe that money was productive. The essay discussed that this point of mercantilist view seems understandable as money can be considered as a means of power.

The essay also discussed that some mercantilist policies, such as state intervention in the economy and protectionism are still relevant for today and conducted by some countries, such as the U.S., China and Russia. However, the essay argues that it is difficult to follow fully the mercantilist policy in today’s world for some reasons. These are globalization, different tax rates between countries and innovation that have made it unable to follow.

References

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Elliott, L. and Wearden. G. (18 January 2017). ‘Xi Jinping signals China will champion free trade if Trump builds barriers’. [Online] The Guardian. Available at: https://www.theguardian.com/business/2017/jan/17/china-xi-jinping-china-free-trade-trump-globalisation-wef-davos [Accessed 09 April 2018].

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Beritahu Temanmu
InternasionalisGroup

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