Mercantilism

The Origins of Mercantilism

The sixteenth century saw the growth in influence and importance of merchants in the European states, who were engaged in long-distance trade with newly acquired colonies. Simultaneously, there was the consolidation of power in the nation-state, replacing the more fractured feudal system, and the introduction of large-scale professional armies both to protect the state from external attack and to aid expansion abroad. To fund these professional armies, governments required an inflow of gold and silver, which increasingly came from taxes levied on the activities of merchants. The merchant classes, in return for these taxes, induced the government to pursue policies that were beneficial to their activities, protecting their markets in the domestic economy from foreign competition through tariffs, providing subsidies to industries, banning the emigration of skilled workers, using the army and navy to protect investments abroad and to open up new colonies, and so on. Mercantilist policies are, therefore, as its name suggests, those favored by the merchant classes of the time.

The Liberal and Economic Nationalist Responses

Adam Smith's seminal 1776 treatise The Wealth of Nations aimed at repudiating mercantilist principles. He argued that trade in general is not the zero-sum game envisaged by mercantilists in which a gain for one country is necessarily a loss for another, but can be a positive-sum game by which both parties gain. He also criticized the capture of government policy by merchants, arguing that this did not benefit the general population as a whole who would generally benefit from the availability of cheaper imported goods.

Adam Smith's liberal economics in turn came under criticism from the school of economic nationalism, particularly associated with the German Friedrich List and Alexander Hamilton of the United States, who were concerned with the need for nations to industrialize, both to improve their standard of living and to ensure that they were militarily secure. To this end, List and Hamilton advocated the use of [Page 560]tariffs and subsidies to nurture infant industries until they were able to compete with foreign produced goods.

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