Mercantilism Essay

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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:  

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

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