Mercantilism

The rise of early-modern states in the form of strong monarchies provided the historical context for economic writers who have been named mercantilists—members of a particular “mercantilism school” of political economy. Among them are writers between the late 16th and mid-18th centuries who published pamphlets and tracts on economic issues, especially regarding international trade, money, finance, and beneficial governance. They were state bureaucrats, merchants, and politicians from all over Europe, from Spain to northern Scandinavia, during the so-called early-modern period. They generally believed that economic wealth and income could be increased through the capture of foreign trade and commerce. Perhaps not all of them agreed that the creation of wealth was a zero-sum game, but many of them came quite close to believing so.

The concept of systéme mercantile was first used in print by the Marquis de Mirabeau in 1763. However, it was Adam Smith, who in his Wealth of Nations in 1776 called it the “mercantile system” and made it famous. Yet, to what extent mercantilism is really a “system” or “school” of economic thinking has been a hotly debated issue ever since. The bulk of what is commonly known as “mercantilist literature” appeared in Great Britain from the 1620s up until the middle of the 18th century. Perhaps the most well-known English mercantilists were Thomas Mun (1571–1641), writing in the 1620s, and James Steuart's (1713–1780) whose Principles of Political Oeconomy (1767) is regarded as perhaps the last major mercantilist [Page 1549]work. Other English economic writers regarded as belonging to the mercantilist school are Josiah Child (1630–1699), Charles Davenant (1656–1714), and Nicholas Barbon (1640–1698). According to the main inventor of the “mercantile system,” Adam Smith, the core of the “commercial” (mercantile) system consisted of the popular folly of confusing wealth with money. Hence, their suggestion that a country must export more than it imports leading to a net inflow of bullion, the “positive balance of trade” theory.

According to Smith, mercantilist theory and practice served as a cloak for a special interest that used the idea of a positive balance of trade to propagate a protective trade policy in general, including duties on imports, tariffs, and bounties. The mercantile system implied a giant conspiracy on the part of master manufacturers and merchants to skin the public and the consumers. From Smith onward, the view of the mercantile system as state dirigisme (particularly export and import protection) to support a special interest with the aid of the ideology of the positive balance of trade developed into its present status as the canonical interpretation of 17th- and 18th-century economic thinking and writing. David Hume had made his specie-flow theory public in 1750, arguing that the favorable-balance theory was an intellectual error (a net inflow of bullion must certainly mean a relative rise in prices, which, through the export and import mechanism, will tend to correct itself). Smith then drew the conclusion that the argument for protection and against free trade in general was based on a mere intellectual mistake.

Undoubtedly, the fixation of a mercantile system—or mercantilism—became an important part of the story that liberal political economy during the 19th century sought to explicate. Up until 1776—according to its stylized version—the thinking as well as the practical policy making of the 17th and 18th centuries was dominated by dirigiste and protectionist ideas. After this intervention by Smith, a new, more scientific version of economics developed that emphasized the role of the “invisible hand” and free trade as a motor of economic growth and prosperity. The overturn of the mercantilist school became part of a wider “Whiggish” interpretation of history, which used Great Britain as an ideal type for depicting the development of free trade and minimal government as a natural force in history. Without doubt, such a simplistic version seldom receives enthusiastic applause today. On the contrary, it is most often argued nowadays that the step from “mercantilists” such as Steuart to the “liberal” Smith was not as big as it was once described. Hence, many scholars—for example, the English writers before 1776—were ready to admit the advantages of market liberalization, free trade, and even the existence of an invisible hand. Indeed, very few of them made the mistake of identifying wealth with gold and silver. Likewise, none of the members of the so-called classical political school in the beginning of the 19th century was a free trader or a libertarian in any modern sense of the world. Many of them admitted to the positive role of state intervention, and some, even, were reluctant to propagate for free trade as long as not all countries were ready to abolish their tariffs and duties.

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