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Mercantilism is a system of economic and political doctrines about how to organize and carry out international commerce. Mercantilism generally advocates that governments should regulate international trade in order to gain competitive advantage. While variations and differences in what constitutes mercantilism have existed over the centuries, the essential and commonly accepted characteristic of mercantilism is “the assignment to the state of the central role in shaping economic well-being.” Consequently, mercantilism is a system that justifies—indeed, demands—government regulation and creative state control and, therefore, rejects the free market theories of Adam Smith and David Ricardo. Because mercantilism was (and is) as much a political as economic theory, it has been called the “most comprehensive theory of the modern state.”

The underlying principle of mercantilism is a “net zero sum” concept of international economies. This principle—also referred to as “cash box thinking”— states that the wealth in the world is constant and so the gain of one economic player or country must come about through loss to another. Mercantilism as a concept and policy directly opposes the capitalistic ethic. The latter embraces the “Net Positive Sum” view of international economics that contends that, in markets unhindered by regulations, buyer and seller both gain optimally (net gain in social welfare) through the unhindered movements and interactions of supply and demand mechanisms.

At its most practical level, mercantilism directs governments to regulate in such a way as to increase exports out of the country and to reduce imports into the country, thus increasing the net amount of cash (or gold) that a nation possesses. For mercantilists, government policies should especially compel the importing of low-valued materials and products and the exporting of higher-valued finished goods.

An extensive collection of options are open for a mercantilist government to regulate its trade. Tariffs, quotas, local content requirements, antidumping actions, and administrative barriers and (or nontariff trade restrictions) serve to reduce imports into a country; and the broad range of government actions that we term subsidies as well as other industrial and monetary policies (including currency manipulations) can effectively spur the growth of exports. Today, penalties to individuals and institutions for flaunting a government’s trade policies generally involve economic sanctions of varying degrees of severity.

Various arguments have been leveled against mercantilism, especially by advocates of free trade. Critics point out that mercantilist policies can instigate disastrous trade wars internationally as well as cause severe inflationary pressures within a country. Overall, those opposed to mercantilism stress that government regulations involving international commerce subvert the proper functioning of comparative advantage and thus result in inefficient (or nonoptimal) allocation of resources and long-term reduction of the true wealth of a nation.

History

Mercantilism emerged with the rise of the centrally governed nation-state. It was perceived by sovereigns of the 16th and 17th centuries as an important instrument by which the states can amass wealth and influence among other nations. Important writers of the time who developed the concept of mercantilism include John Hales (Discourse of the Common Weal of This Realm of England, 1581) and Thomas Mun (England’s Treasure by Foreign Trade, 1620).

These and other writers and economic thinkers showed that the ultimate purpose of mercantilism was not simply to increase the wealth of a nation (or nation-state) as an end in itself, but as a means— through increased purchasing power—to the ability to carry out war and conquest and to defend one’s land from the attempted conquest of others. JeanBaptiste Colbert, minister of finance under Louis XIV, famously expressed the notion that the rising state had to control trade in order to amass the means to defend the nation against aggression.

Mercantilist thinkers traditionally emphasized that the ability of princes to employ mercantilism to accumulate gold (and equivalent) has a decisive effect upon the fates of government. In his famous summary of the principle, 17th-century writer Sir Francis Bacon wrote: “The increase in any estate must be upon the foreigner, for whatsoever is somewhere gotten is somewhere lost.” It was generally believed at the time, for example, that if he had been as successful in acquiring the wealth that Philip II of Spain amassed through mercantilist policy, England’s Charles I could have “bought off ” the Parliament and ultimately saved his throne (and his head). Consequently, in these centuries, the most severe punishments—imprisonment, torture, and execution—were commonly ordered upon those who attempted to subvert a government’s mercantilist policies since such “traitors” in effect were acting to weaken the state’s ability to protect itself.

The Habsburgs, who dominated 16th century Europe, were arguably the most successful practitioners of mercantilist principles, and none more so than Philip II of Spain. By the 17th century, France, England, and Holland replaced Spain as dominant European powers. France and England remained rigorous mercantilists; but the Dutch merchants, accumulating wealth through their shipping operations, offered a free trade model of economic prosperity. The wars waged between England (and France) against Holland in this century can be interpreted as a conflict between the “old” (mercantilist) and “new” (free trade) ways of structuring business and international commerce.

By the mid to late 18th century, mercantilism was in a brisk and ever-accelerating retreat. In addition to the continuing stream of evidence as to the advantages of free trade that had come to the fore for over a century and had been noted as early as the 17th century by perceptive observers (such as Samuel Pepys), the continued rigorous exercise of mercantilist practice began having disastrous political consequences as well. The British monarchy suffered mightily when it attempted to institute a mercantilist regime upon its American colonies. By imposing mercantilist regulations that compelled the Americans to export cheap raw materials to England and import more highly valued manufactured products from the mother country, the government of King George III stirred up severe discontent within the colonies and so created conditions ripe for revolution.

It is no coincidence then that the first great theorists of free trade came from the United Kingdom. Adam Smith’s The Wealth of Nations threw down the gauntlet against the centuries-old mercantilist assumptions of the constancy of the world’s wealth and the need to strategize policy from a net zero sum position. In its place, Smith (and a few decades later, his disciple David Ricardo) thrust into the world the revolutionary idea that the true wealth of a country is the sum—not of the amount of gold and silver in its treasury—but of the goods and services available to its people. He further stated that a laissez-faire policy of government—that is, no government regulation at all—assures that all trading nations must optimize true wealth because of the principles of “absolute advantage” (a net-positive sum principle). This new force unleashed by Smith was nothing less than a call to arms of modern capitalism against the traditional and economically inefficient mercantilist system. The decline of monarchism following in the wake of the American and French Revolutions urged further to undermine the legitimacy of mercantilism, which traditionally was seen as an important instrument for augmenting the wealth and security of both king and state, two entities inextricably bound together by “divine right.” By the 19th and 20th centuries, free trade policy, if rarely implemented in its pure form, seriously challenged regulated commerce in political discourse as the most efficient means to accumulate wealth within an increasingly global world.

Neomercantilism

Mercantilism is not merely a relic of the past, of interest only to historians. Indeed, mercantilism never has really died off; it has remained a living force in some form in the political economy of governments. Since the time of Smith and Ricardo, national governments have had to contend with balancing the pros and cons of regulated versus free trade. Political as well as economic arguments play an important role in these decisions. Today, economists and policy makers debate how a modern form of mercantilism ought to be shaped. Countries continue to search for securing that mercantilist ideal: a favorable balance of trade, and a modern form of mercantilism—neomercantilism—has emerged. Neomercantilism advocates the regulation of trade for economic, social, or political objectives. For example, import restrictions might be imposed to protect a crucial industry or an industry in a politically sensitive region against external competition. This policy is especially crucial for protecting fledgling industries that can “upgrade” a country from predominantly low-value (e.g., agricultural) to high-value (advanced technology) production. Also, countries impose trade regulations to advance human rights internationally—such as trade embargoes— against countries to force social agendas (e.g., trade embargoes against South Africa in the 1980s to speed the demise of apartheid).

Then, too, neomercantilism plays the central role in strategic trade policy (also known as “new trade theory”). Strategic trade policy is relevant in industries such as aircraft production where economies of scale come into play and total market demand globally is limited and can support only one or two multinational companies (MNCs) efficiently. In these cases, government regulations of international commerce, such as providing subsidies to an MNC (e.g., Boeing), can be instrumental in that company achieving a first mover advantage. In this way, the MNC achieves sole producer status in international markets thus allowing it to manufacture its products (airplanes) the most efficiently for customers (airlines) worldwide. In this sense, neomercantilism posits government regulation within a new positive sum context.

In response, critics of neomercantilism point to the influential work of Michael Porter. Calling upon Porter’s “Diamond” model of national competitive advantage, they argue that, rather than directly regulating international trade through subsidies to selected industries, and tariffs against certain products, it is far better for governments to focus internally on generally upgrading high-value-added industries by adopting domestic incentives for fostering clustering, skills (education), infrastructure (transportation, communications, capital markets, utilities) and by strategically inducing demand, thus making their industries more competitive internationally and allowing comparative advantage to “kick in.”

Bibliography:

Braudel, The Wheels of Commerce: Civilization and Capitalism, 15th–18th Century (Harper & Row, 1982);
D. Daniels, L. H. Radebaugh, and D. P. Sullivan, International Business: Environments and Operations, 11th ed. (Pearson Prentice Hall, 2007);
J. Friedrich, The Age of the Baroque: 1610–1660 (Harper & Row, 1952);
Hagelstram, “Mercantilism Still Influences Practical Trade Policy at the End of the Twentieth Century,” Journal of World Trade (1991);
W. L. Hill, International Business: Competing in the Global Marketplace, 6th ed. (McGraw-Hill Irwin, 2007);
S. Hunt and J. M. Murray, A History of Business in Medieval Europe: 1200–1550 (Cambridge University Press, 1999);
Porter, The Competitive Advantage of Nations (Free Press, 1991);
Schama, The Embarrassment of Riches: An Interpretation of Dutch Culture in the Golden Age (Vintage Press, 1997);
W. Spiegel, The Growth of Economic Thought (Duke University Press, 1991).

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