Mercantilism

1. Mercantilism

2. Introduction to Mercantilism • Historical Background of Mercantilism • Main Points of Mercantilism • Early Writers • Mercantilist Thinkers • Conclusion

3. 1. Introduction to Mercantilism WhatisMercantilism? • the theory that a country’s power depended mainly on its wealth to build strong navies and purchase vital trade goods.

4. What is Mercantilism? • Mercantilism hadno systematic, comprehensive, consistent treatise, no leader, commonmethod, or theory. • Each “mercantilist" sought advantage for a specific, trade,merchant, joint-stock company or social group. • "Protectionism" is often seenas a primary characteristic of Mercantilism.

5. What is Mercantilism? • The primary objective of Mercantilism was to increase the power of the nationstate. • One of the important aspects of national power or strength was wealththat was equated with specie. • The states that followed a policy ofmercantilism tended to see trade, colonialism and conquest as the primaryways of increasing wealth.

6. Mercantilism

7. When? • 16th – 18th C • In Poland: 17th C

8. Where? Western Europe, particularly England and France

9. 2. Historical Background of Mercantilism • Generally, Mercantilism is associated with the rise of the “Nation state.” • Feudal institutions were weakened by the increasing use of money and a greaterreliance on exchange within the economy. • The Protestant Reformation weakened the role of the church and consequently thecivil role of the state was expanded • There was a rise of Humanism (the concern for well-being of humans in the short term).

10. The decline of feudalism was influenced by changes in technology • “enclosure movement” and the commercialization of agriculture • Increasing use of money in the economy reduced the role of barter and reciprocity,people wanted to sell or work for money • nailed horse shoe, harness, stirrup, horse collar, heavy plough • three-field system [1 field winter crop, 1 field spring crop, third lying fallow] extendedarea peasant could farm by 1/8, 50% increase in output • rise of mechanical power [water, wind] used in textile and mining • urbanization

11. rise of markets and fairs • gunpowder • improvements in navigation, shipping, transport • moveable type, (standardization, mass production and marketing of books in a varietyof languages) • mechanical clocks, mechanisms, instruments, Increased skills of craftsmen who mademachines

12. The Decline of Feudalism and the Plague • The "Black Death" of 1346-61 • restricted trade • reduction in population • Increased production of wool; need industry and commerce to process and sell wooland textiles. • strengthening of guilds leads to an emphasis on trade

13. Reduction in Population • Population of England fell by about 1.5 million (out of a population of 3.5 to 5 millionin 1346). • Result was more money per person but also more animals, land and goods perperson, prices fell. • Labour shortage pushed wages and earnings up.

14. Less people with increased agricultural production (some problems with harvests andanimals dying, but on average diets improved. • Labour became more mobile, masters on feudal estates had to "hire" labour. This ledto the rise of "free" labour. If you couldn't hire workers, then you rent the land toothers. Small farms with limited labour shifted to pasture and sheep rather thantilling the soil.

15. A B Pays A-C costs C Medieval fiction to circumvent anti-usury laws Same religion Lends at no interest B fails to repay A Insures A in case B fails to repay Pays C interest rate for insurance • Effectively, a “different set of books” to disguise breaching the laws against usury

16. Medieval Breakdown Feudal system imposed many imposts upon merchants/tradesmen/moneylenders; but social change went against feudalism: Growth of specialist manufactures in towns: the guilds Growth of specialist traders between nations: the Mercantilists Revolt against religious strictures against merchants/lending, church hypocrisy Religious revolts: beginnings of Protestantism bound up with growth of merchants/financiers A new ideology/analysis struggled for dominance: Mercantilism 16

17. 1500s • Rise of the nation-state • John Calvin (1509-1564): Prosperity is Piety • Nicolo Machiavelli (1469-1527) and “The Prince” • Separates the church and the state • Denies mankind’s desire for freedom • Charity has no role for the individual

18. 1500s and 1600s • Elizabethan Poor Law of 1601 • Invention of printing with movable type gave rise to economic literature written by lay people • Thomas Wilson (1525-81) wrote Discourse on Usury (1572) • Charles Dumoulin (Latinized as Molinaeus) wrote Treatise on Contracts and Usury (1546) • Denied that interest was forbidden by divine law • Suggested public regulation of lending and interest • Influx of gold and silver from the New World

19. Main Points of Mercantilism • Economics as applied statecraft • Promotion of National wealth and power • Importance of trade surpluses • Trade surplus leads to a net gold inflow, and thereby to greater national wealth and power • Analogy between nations and households • Encourage domestic production and exports, discourage imports

20. 3. Main Points of Mercantilism • Economics as statecraft not analysis • Tendency to see gold and “treasure” as constituting national wealth • Emphasis on balance of trade surpluses • Emphasis on maximizing productivity and output • Trade as a zero sum game • Role of government in encouraging domestic manufacturing and exports while minimizing imports • Link between money supply and prices

21. Two Ways to Increase a Nations Wealth establish a favorable balance of trade, in which it sold more goods than in bought • obtain as much gold and silver as possible

22. Mercantilism Explained Mercantilism = unfair or unbalanced trade • colonies existed for the benefit of the Mother Country • Source of Raw materials = cheap • shipped to M. C. to be turned into finished goods • Finished good shipped to Colony = expensive • profit goes to M. C. • Pass laws forbidding colonies from producing their own goods

23. Triangular Trade • Europeans transported manufactured goods to the west coast of Africa

24. Triangular Trade • Traders then exchanged these goods for captured Africans who were then sold in the Americas

25. Triangular Trade • Merchants then bought sugar, coffee, and tobacco in the West Indies and sailed back to Europe to sell these products.

26. Long Term Results • global trade routes shifted over time • the old silk routes declined • West Asia and the Islamic world were displaced as the centralized location of global trade • the Atlantic and Pacific sea routes become the new focus of global trade

27. Theories of International Trade • It measures the wealth of nation by the size of its accumulated treasures i. e. gold & silver. • Focus is international trade, rather than internal commerce • Nationalism essential: promote nation by gain from trade • Trade imbalance the object: export more than import

28. Theories of International Trade • Wealth (Gold) can be accumulated by encouraging exports and discouraging imports. • This theory aims at creating trade surplus. • Limitations: • Accumulation of wealth takes place at the cost of another trading partner; a win-lose game & a zero-sum game for global wealth (international trade). • Supported only in short run. • Overlooks other resources such as its natural resources, manpower & its skill levels, capital, etc. • Used by colonial powers as a means of exploitation and not development.

29. Recap Feudal ideology significantly anti-capitalist, anti-financier. But Merchants essential “Exotic” commodities from other lands Trade between different fiefs/kingdoms Finance essential Merchant activity Wars Merchants tolerated (but controlled, taxed)

30. 4. Early Writers • Niccolo’ Machiavelli (1469-1527) • Jean Bodin (1530-1596) • Antonio Serra (1580-1650)

31. Niccolo’ Machiavelli (1469-1527) • Author of The Prince, 1512 • Machiavelli's work is associated with the rise of nation state • Morality was necessary as guide to private actions • Politics should be free from ethical or theological influence • general postulate about human nature, self- interest • empirical bent [Bacon sees Machiavelli as predecessor]

32. Jean Bodin (1530-1596) • Contributions to “quantity theory of money” • Accepted mercantilist position on balance of trade, but sawinflow of specie • believed in supreme power of the state and natural law

33. Antonio Serra (1580-1650) • Serra was one of the first writers who constructed a a systematic development of“Mercantilism.” In1613 he published, A Brief Treatise on the Causes which makeGold and SIlver abound in Kingdoms where there are no Mines • Agriculture and trade in manufactured goods most important source of wealth to anation.

34. 5. Mercantilist Thinkers • Josiah Child • Bernard Mandeville • David Hume • Von Hornick • Thomas Mun

35. Josiah Child • Josiah Child was a seventeenth-century mercantilist. • Essentially a defense contractor, Child wrote Circumstance on the Discourse on Trace, which he published anonymously. • His, while not iron-clad, suggested that Britain should lower interest rates since Holland had done so. • His self-interested recommendations did not have much economic foundation.

36. Jean-Baptiste Colbert • Jean-Baptiste Colbert was the French minister of finance from 1661 until 1683. • Mercantilist considerations led Colbert to advocate war as an instrument of economic policy. • He regulated the minute details of industry. • He wanted to increase work, exports, and child labor. • This extreme government control still lives in France today.

37. Bernard Mandeville • Bernard Mandeville, a social satirist, wrote the The Fable of the Bees. • This satire preached the themes of hard work and the beneficial social consequences of private self-interest behaviour. • It linked avaricious behaviour to increased trade.

38. David Hume • David Hume questioned mercantilist assumptions in his essays. • He denied that money and gold were equivalent to wealth. Instead, they had merely instrumental value.

39. David Hume • He thought that accumulating precious metals would result in higher prices. • Hume believed that imports as well as exports were beneficial. • He suggested that trade was not equivalent to warfare, since both to the parties to the transaction benefit.

40. Von Hornick • Von Hornick: Austria Over All, If Only She Will (1684) • Some Mercantilist Programs: - Full use of all land and natural resources for domestic industry - Large working population - Finish raw materials at home, as finished goods have a higher value - Discouragement of imports, and no imports where domestic supply is available - Imports be confined to raw materials to be finished at home

41. Von Hornick - Prohibition of all bullion exports (bullionist position) - Necessary imports be obtained in exchange for domestic goods, not gold or silver - Sell surplus manufactures to foreigners, if possible for gold and silver • Hornick is very influential in Austria

42. Thomas Mun • Thomas Mun: England’s Treasure by Foreign Trade (1664) • Mercantilist Programs - Importance of trade and the social position of the merchant -Bring all unused land into production - Fully utilize natural resources including fisheries - Reduce consumption of imports, particularly luxuries - Export goods with inelastic demand—can charge higher prices

43. Thomas Mun - Customs duties on imports to be consumed domestically -Export in own ships -Encourage distant trade - make England a trans-shipment point - Export of bullion permitted, if for purposes of trade (non-bullionist position) - “Make the most we can of our own”

44. Mercantilism: Conclusion Foreign trade as the source of surplus No analysis of production In practice Added to feudal imposts on commerce Created government-sanctioned monopolies ostensibly to increase national wealth; but often in practice enriched favoured individuals Point of criticism and departure for later Physiocrats & Classical Economists, with emphasis upon “laisser-faire, laisser-passer” 44