The Emergence of Mercantilism

							                 The Emergence of Mercantilism
   At the end of the 15th and the beginning of the 16th century; first in Italian city-states;
    obtained most progress in England and Holland
   “mercantilism” – by Mirabeau in 1763; the loose system of economic ideas that
    seemed to dominate economic discourse from the end of the 15th cent. to almost the
    end of the 18th century
   England, Holland, Spain, France, Germany, Scandinavia, Russia
   Trade – the source of national wealth
   Accumulation of bullion – the objective of trade; had to be accomplished by a
    “favorable balance of trade”
   Exports of a nation were to exceed the imports and the balance taken in gold or silver
   Role of governments – the regulation of trade and economic activities
   Absence of common analytical tools
   Communication among mercantilists was poor or nonexistent
   Mercantilist principles (published by Philip Wilhelm von Hornick in 1684; nine-
    point mercantilist manifesto); rules of national economy:
        1. Every inch of country’s soil be utilized for agriculture, mining, or
            manufacturing
        2. All raw materials found in a country be used in domestic manufacture, since
            finished goods have a higher value than raw materials
        3. A large, working population be encouraged
        4. All export of gold and silver be prohibited and domestic money be kept in
            circulation
        5. All imports of foreign goods be discouraged as much as possible
        6. Where certain imports are indispensable they be obtained at first hand, in
            exchange for other domestic goods instead of gold and silver
        7. As much as possible, imports be confined to raw materials that can be
            finished at home
        8. Opportunities be constantly sought for selling a country’s surplus
            manufacturers to foreigners, so far as necessary, for gold and silver
        9. No importation be allowed if such goods are sufficiently and suitably
            supplied at home
   Italian mercantilists – interested in money, credits, banks
   English mercantilists – domestic manufacture, trade(esp.foreign), specie
    (gold&silver)
   German mercantilists – contradiction between the development of capitalism in
    towns and of feudalism in villages
   In general, mercantilist writers were concerned with a material and objective
    economic end
   Although their overall social goal of “social power” was subjective, their opinions on
    the working of the economic system were a clear reflection of real-world habits of
    thought


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   Eli Heckscher: “There was little mysticism in the arguments of the mercantilists… they did
    not appeal to sentiment, but were obviously anxious to find reasonable grounds for every
    position they adopted”
   Interest in the material fain of the state – the material resources of society were to be
    used to promote the enrichment and well-being of the nation-state
   The single most important concern of mercantile writers appeared to be that the
    nation’s resources be used in such a manner as to make the state as powerful as
    possible both politically and economically
   16th & 17th century – great trading nations
   Exploration, discovery, colonization
   Major topics – international trade, finance, gold and the means to acquire it
   Money and its accumulation
   A flourishing international trade followed the age of discovery and colonization, and
    gold bullion was the unit of international account
   Acquisition of gold through trade and restrictions of many types were essential
    mercantile ideas
   Money was equated to wealth
   Augment wealth by increased national stockpiling of bullion
   Encouraging raw-material imports and final-product exports
   A surplus of exports over imports was desired because the balance had to be
    remitted in gold
   Some writers looked upon trade and bullion acum. as a zero-sum game, where more
    for country A meant less for countries B,C.. Increases in wealth would further the
    overall aim of the nation-state
   Gerard de Malynes & William Stafford – confirmed bullionists, opposed to any
    export of specie;
   Edward Misselden – attacked the extreme bullionist view; advanced the notion that
    governmental policies should be directed to maximizing specie earnings on the basis
    of an overall balance of trade; developed a fairly sophisticated concept of a trade
    balance coached in terms of debits and credit; “The Circle of Commerce” (1623) –
    calculated a balance of trade for England; arranged data for the purpose of
    understanding economic effects and promoting social ends;
   Failure to understand the quantity theory of money (The Navigation Act)
   One of the anomalies in mercantilist literature is the pervasive belief that wealth be
    maximized through specia accumulation resulting from a trade surplus; many
    writers misunderstood the effects of an increase in the domestic money supply
    (monopoloziation), which usually followed a trade surplus; they believed that
    balance of trade could continue over long and indefinite periods;
   David Hume (1711-1776) – pointed to a price-secie flow mechanism that linked the
    quantity of money to prices and alterations in prices to balance-of-trade surpluses
    and deficits; his quantity theory of money was anticipated by John Locke (1632-
    1704); the conclusion of the mechanism is that the mercantile attempt to accumulate
    gold indefinitely is self-defeating; money is a “veil” that hides the real workings of


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    the economic systems and it is of no great consequence whether a nation’s stock of
    money is large or small, after the price level adjusts to the quantity of it;
   Mercantilist writers failed to understand the quantity theory of money (crudely –
    price level, ceteris paribus, is a function of the quantity of money)
   The state to plan and regulate economic life – domestic conditions detailed
    regulations in some sectors of the economy, little or no regulation in others, taxation
    and subsidization of particular industries, restricted entry in many markets.
   The French minister Colbert issued a rule that the fabrics woven in Dijon contain no
    more nor less than 1408 threads; there were penalties for those weavers who strayed
    from this standard; 1666
   Legal monopolies in the form of franchises and patents were common under
    mercantilism; a franchise granted exclusive trading rights to a particular merchant
    or league of merchants; they sometimes received massive subsidies from the king;
   Mercantilism was an alliance of power between the monarch and merchant-
    capitalist; the monarch depended on the merchant’s economic activity to build up his
    or her treasury while the merchant depended on the authority of the monarch to
    protect his or her economic interest;
   The maintenance of low wages and a growing population was a clear element in
    mercantile literature
   Mercantilists believed in backward-bending supply curve of labor – after wages
    reached a certain point, laborers would prefer additional leisure to additional income;
    output would decline, and the ability to accumulate specie through trade would be
    similarly reduced;
   Edgar Furniss and “utility of poverty” – “The position of the Laborer in a System of
    Nationalism” – labor must be kept at the margin of subsistence; “suffering is
    therapeutic”; Because of the generally low moral conditions of the lower class, high
    wages would lead to all sorts of excesses, e.g. drunkenness and debauchery. If wages
    were beyond subsistence, the quest for physical gratification would simply lead to
    vice and moral ruin. Poverty made workers industrious, which meant that they “lived
    better”.
   Arthur Young – “Eastern Tour” – “Everyone but an idiot knows that the lower classes must
    be kept poor or they will never be industrious”
   Unemployment was simply result of indolence.
   Bernard Mandeville – children of the poor and orphans should not be given an
    education at public expense but should be put to work at an early age
   William Stafford (1554-1612) – England – “always sell more”
   Thomas Mun (1571-1641) – England – velocity of money; principle of favorable
    balance of trade
   Antonie de Montchretien (1575-1621) – France – “political economy”; protected the
    interests of the merchant class
   Jean Bodin (1521-1596) – France – a quantity theory of money
   Jean Baptiste Colbert (1619-1683) – France – very high degree of centralization and
    very efficient system of policing


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   Gasparo Scaruffi (1515-1584) – Italy – proposed to introduce a single monetary
    system in Europe
   Bernardo Davanzati (1529-1606) – Italy – only gold and silver to be used as a
    currency in Europe and an exact proportion between gold and silver to be established
    (bimetallism)
   Major theoretical defects in mercantile literature were an inability to grasp the
    cyclical nature of international accounts and the linkage between domestic money
    stock and prices. They failed to integrate the Locke-Hume price-specie flow
    mechanism into their analysis.
   Most important legacy to modern economics – assembling and keeping statistics
    on real-world quantities; empiricism; Mercantilists were among the first economic
    writers to be more concerned with actual experience than with metaphysical
    speculation.




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