Mercantilism

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 [Page 1109]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 governments 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).

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