The most important economic rationale for mercantilism in the sixteenth century was the consolidation of the regional power centers of the feudal era by large, competitive nation-states. Other contributing factors were the establishment of colonies outside Europe; the growth of European commerce and industry relative to agriculture; the increase in the volume and breadth of trade; and the increase in the use of metallic monetary systems, particularly gold and silver, relative to barter transactions.
During the mercantilist period, military conflict between nation-states was both more frequent and more extensive than at any other time in history. The armies and navies of the main protagonists were no longer temporary forces raised to address a specific threat or objective, but were full-time professional forces. Most of the mercantilist policies were the outgrowth of the relationship between the governments of the nation-states and their mercantile classes. In exchange for paying levies and taxes to support the armies of the nation-states, the mercantile classes induced governments to enact policies that would protect their business interests against foreign competition.
These policies took many forms. Domestically, governments would provide capital to new industries, exempt new industries from guild rules and taxes, establish monopolies over local and colonial markets, and grant titles and pensions to successful producers. In trade policy the government assisted local industry by imposing tariffs, quotas, and prohibitions on imports of goods that competed with local manufacturers.
Governments also prohibited the export of tools and capital equipment and the emigration of skilled labor that would allow foreign countries, and even the colonies of the home country, to compete in the production of manufactured goods. Shipping was particularly important during the mercantile period. With the growth of colonies and the shipment of gold from the New World into Spain and Portugal, control of the oceans was considered vital to national power.
Because ships could be used for merchant or military purposes, the governments of the era developed strong merchant marines. In France, Jean-Baptiste Colbert, the minister of finance under Louis XIV from to , increased port duties on foreign vessels entering French ports and provided bounties to French shipbuilders.
In England, the Navigation Act of prohibited foreign vessels from engaging in coastal trade in England and required that all goods imported from the continent of Europe be carried on either an English vessel or a vessel registered in the country of origin of the goods. Finally, all trade between England and its colonies had to be carried in either English or colonial vessels. The Staple Act of extended the Navigation Act by requiring that all colonial exports to Europe be landed through an English port before being re-exported to Europe.
Navigation policies by France, England, and other powers were directed primarily against the Dutch, who dominated commercial marine activity in the sixteenth and seventeenth centuries. During the mercantilist era it was often suggested, if not actually believed, that the principal benefit of foreign trade was the importation of gold and silver.
According to this view the benefits to one nation were matched by costs to the other nations that exported gold and silver, and there were no net gains from trade. For nations almost constantly on the verge of war, draining one another of valuable gold and silver was thought to be almost as desirable as the direct benefits of trade.
Adam Smith refuted the idea that the wealth of a nation is measured by the size of the treasury in his famous treatise The Wealth of Nations , a book considered to be the foundation of modern economic theory.
Smith made a number of important criticisms of mercantilist doctrine. First, he demonstrated that trade, when freely initiated, benefits both parties. Second, he argued that specialization in production allows for economies of scale, which improves efficiency and growth.
Finally, Smith argued that the collusive relationship between government and industry was harmful to the general population. While the mercantilist policies were designed to benefit the government and the commercial class, the doctrines of laissez-faire, or free markets, which originated with Smith, interpreted economic welfare in a far wider sense of encompassing the entire population.
While the publication of The Wealth of Nations is generally considered to mark the end of the mercantilist era, the laissez-faire doctrines of free-market economics also reflect a general disenchantment with the imperialist policies of nation-states. The Napoleonic Wars in Europe and the Revolutionary War in the United States heralded the end of the period of military confrontation in Europe and the mercantilist policies that supported it.
Despite these policies and the wars with which they were associated, the mercantilist period was one of generally rapid growth, particularly in England. This is partly because the governments were not very effective at enforcing the policies they espoused.
While the government could prohibit imports, for example, it lacked the resources to stop the smuggling that the prohibition would create. Others, however, are also building factories to make and sell cloth. They all have to compete for the money of the buyers whose self- interest is to buy cloth at the best price.
Buyers bid up the price of the cloth when the supply of cloth is low and their demand for it is high. But when there is an oversupply, the buyers can pick and choose and refuse to purchase high-priced cloth.
The factory owners then have to reduce their prices to attract more buyers. Economists call this the "law of supply and demand. Additional innovative divisions of labor, maybe brought on by new machinery, motivate others to invest in more factories. But they must compete to hire more workers. The "law of supply and demand" applies here, too, and wages go up. Higher wages lengthen the lives of workers and their children. The population grows, which increases the supply of workers.
Wages then stop rising. But, soon another division of labor wave occurs, producing more economic growth and the need for even more workers. Wages go up again. The cycle repeats itself. Families now can afford to buy demand more cloth and lots of other products. The factory owners make more profits.
Everybody wins and society as a whole improves. The cloth factory owner never intended to improve society; he just wanted to make money for himself. But his self-interest, as if "led by an invisible hand," resulted in the betterment of all. As Adam Smith himself put it, "By pursuing his own interest he frequently promotes that of the society more effectively than when he really intends to promote it.
Thus, remarkably for the time, Smith advocated the education of all youth. He believed there was little difference in intelligence between the poor and the rich. Only the social conditions of the poor held them in ignorance, he concluded. He called for a "little school" in every district, supported by public taxes and small parent fees.
Smith wrote that paying taxes was "a badge, not of slavery, but of liberty. Taxpayers, he argued, should pay "in proportion to the revenue which they respectively enjoy under the protection of the state.
Smith believed in taxing property, profits, business transactions, and wages. But these taxes should be as low as possible to meet the public needs of the country. He also thought they should not be arbitrary, uncertain, or unclear in the law. Nor should they require home inspections that intruded into the private lives of individuals. Smith criticized a large public debt, which, he observed, resulted mainly from wars.
He believed that the mercantilists encouraged wars so that they could lend money at high interest to the government and exploit conquered lands.
Smith viewed wars as "waste and extravagance," producing a "perpetual" public debt that diverted money away from investment in new enterprises and economic growth.
Public debt, Smith concluded, "has gradually enfeebled every state which has adopted it. For the sake of maintaining a monopoly of trade, he argued, the colonies had cost the British people much more than they had gained.
In the case of the Americans, Smith declared that denying "a great people" the freedom to pursue their own economic destiny was "a manifest violation of the most sacred rights of mankind.
We know Adam Smith today as the father of laissez faire "to leave alone" economics. This is the idea that government should leave the economy alone and not interfere with the "natural course" of free markets and free trade.
But he was mainly thinking about the government granting special economic privileges to powerful manufacturers and merchants. To Smith, these mercantile monopolists and their allies in Parliament were the great enemies of his "free market mechanism.
He did not foresee the development of huge corporate monopolies that suppressed competition without the need for government licenses.
He did not imagine the brutal working and living conditions suffered by masses of men, women, and children. Thus, he never fully addressed the issue of whether government should intervene in the economy to prohibit such things as corporate monopolies and child labor. Adam Smith did not write any other books. He died in , well regarded by all who knew him. Thus began the revolution of modern free market capitalism that dominates world economics today. What economic problems was Smith addressing in his day?
What economic problems face modern society? Empire doesn't want Nation to erect the same kind of tariffs and obstacles that it erected because it wants trade to flow only one way. Since this is an inherently unfair trading relationship, Empire will typically have to use political, military or outsize market pressure to ensure that Nation's markets stay open while Empire keeps its markets closed.
Nation has a capitalist economy. This economy will look much like the one readers are familiar with in most western states. Most goods and services in the marketplace of Nation will be produced by private citizens. Those citizens will own their own capital, the money and resources used to produce goods and services on the market. They will decide what to produce and how much of it based on perceived needs in the marketplace and will set prices based on supply and demand.
The government of Nation will have some role as a market actor. Since this is a market of individuals incentivized by profit, the government will typically have to exercise significant oversight to prevent abuses.
This will involve regulation to prevent predictable or repeat problems. The government will also typically provide desirable goods and services that the free market doesn't tend to efficiently provide on its own. This will classically include education, police and fire protection, and possibly health care. As a high-skill economy, American companies are excellent at producing valuable products and services, but not cheaply.
Even a minimum wage worker in the U. Most workers in the country, given the nation's education and business infrastructure, are extremely expensive. As a developing economy, Vietnamese firms are not as good at producing high-skill products but can produce large volumes of work quite cheaply. Most workers in Vietnam can work for a small fraction of the cost of a U. In a clothing-related trade deal, American companies could import shirts from Vietnam.
This trade deal would allow U. It would allow Vietnamese firms to mass-produce the physical garments, to take advantage of Vietnam's inexpensive labor pool. The result is that both markets increase their total wealth: Vietnam gets a net trade surplus and American consumers get more shirts for less money.
Capitalism and capitalist trade theory is generally considered both more accurate and more stable than mercantilism. Mercantilism has two core problems that have made it an unreliable form of economic theory. First, as noted above, mercantilism relies on inherently unfair trade balances and trade practices.
Mercantile nations depend on being able to erect barriers in their own economies without their trading partners doing the same. In the long run this is an unstable situation, because peer nations rarely willingly concede to economic subservience. For this reason mercantilism has historically been intertwined with trade wars and military adventurism. Second, also as noted above, mercantilism relies on an archaic and inaccurate view of wealth.
This is a school of thought wedded to gold standard philosophy, one in which wealth is measured by currency and is a zero-sum quantity. Modern economics considers currency a measure of wealth rather than a form of it.
It is how nations interact with and trade their productivity, but the real wealth of nations is measured by the goods and services that currency gives access to. This is a fluid sum. As an economy grows through population and technology, it can produce more for all of its participants.
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