2 Introduction to Mercantilism Historical Background of MercantilismMain Points of MercantilismEarly WritersMercantilist ThinkersConclusion
3 1. Introduction to Mercantilism What is Mercantilism?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 had no systematic, comprehensive, consistent treatise, no leader, common method, or theory.Each “mercantilist" sought advantage for a specific, trade, merchant, joint-stock company or social group."Protectionism" is often seen as a primary characteristic of Mercantilism.
5 What is Mercantilism?The primary objective of Mercantilism was to increase the power of the nation state.One of the important aspects of national power or strength was wealth that was equated with specie.The states that followed a policy of mercantilism tended to see trade, colonialism and conquest as the primary ways of increasing wealth.
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 greater reliance on exchange within the economy.The Protestant Reformation weakened the role of the church and consequently the civil role of the state was expandedThere 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 agricultureIncreasing use of money in the economy reduced the role of barter and reciprocity, people wanted to sell or work for moneynailed horse shoe, harness, stirrup, horse collar, heavy ploughthree-field system [1 field winter crop, 1 field spring crop, third lying fallow] extended area peasant could farm by 1/8, 50% increase in outputrise of mechanical power [water, wind] used in textile and miningurbanization
11 rise of markets and fairs gunpowderimprovements in navigation, shipping, transportmoveable type, (standardization, mass production and marketing of books in a variety of languages)mechanical clocks, mechanisms, instruments, Increased skills of craftsmen who made machines
12 The Decline of Feudalism and the Plague The "Black Death" ofrestricted tradereduction in populationIncreased production of wool; need industry and commerce to process and sell wool and 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 million in 1346).Result was more money per person but also more animals, land and goods per person, prices fell.Labour shortage pushed wages and earnings up.
14 Less people with increased agricultural production (some problems with harvests and animals dying, but on average diets improved.Labour became more mobile, masters on feudal estates had to "hire" labour. This led to the rise of "free" labour. If you couldn't hire workers, then you rent the land to others. Small farms with limited labour shifted to pasture and sheep rather than tilling the soil.
15 Medieval fiction to circumvent anti-usury laws Same religionBALends at no interestB fails to repay APays A-C costsInsures A in case B fails to repayPays C interest rate for insuranceEffectively, a “different set of books” to disguise breaching the laws against usuryC
16 Medieval BreakdownFeudal system imposed many imposts upon merchants/tradesmen/moneylenders; but social change went against feudalism:Growth of specialist manufactures in towns: the guildsGrowth of specialist traders between nations: the MercantilistsRevolt against religious strictures against merchants/lending, church hypocrisyReligious revolts: beginnings of Protestantism bound up with growth of merchants/financiersA new ideology/analysis struggled for dominance: Mercantilism16
17 1500s Rise of the nation-state John Calvin ( ): Prosperity is PietyNicolo Machiavelli ( ) and “The Prince”Separates the church and the stateDenies mankind’s desire for freedomCharity 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 peopleThomas Wilson ( ) wrote Discourse on Usury (1572)Charles Dumoulin (Latinized as Molinaeus) wrote Treatise on Contracts and Usury (1546)Denied that interest was forbidden by divine lawSuggested public regulation of lending and interestInflux of gold and silver from the New World
19 Main Points of Mercantilism Economics as applied statecraftPromotion of National wealth and powerImportance of trade surplusesTrade surplus leads to a net gold inflow, and thereby to greater national wealth and powerAnalogy between nations and householdsEncourage domestic production and exports, discourage imports
20 3. Main Points of Mercantilism Economics as statecraft not analysisTendency to see gold and “treasure” as constituting national wealthEmphasis on balance of trade surplusesEmphasis on maximizing productivity and outputTrade as a zero sum gameRole of government in encouraging domestic manufacturing and exports while minimizing importsLink between money supply and prices
21 Two Ways to Increase a Nations Wealth obtain as much gold and silver as possibleestablish a favorable balance of trade, in which it sold more goods than in bought
22 Mercantilism Explained colonies existed for the benefit of the Mother CountrySource of Raw materials = cheapshipped to M. C. to be turned into finished goodsFinished good shipped to Colony = expensiveprofit goes to M. C.Pass laws forbidding colonies from producing their own goodsMercantilism = unfair or unbalanced trade
23 Triangular TradeEuropeans transported manufactured goods to the west coast of Africa
24 Triangular TradeTraders then exchanged these goods for captured Africans who were then sold in the Americas
25 Triangular TradeMerchants 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 declinedWest Asia and the Islamic world were displaced as the centralized location of global tradethe 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 commerceNationalism essential: promote nation by gain from tradeTrade 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 RecapFeudal ideology significantly anti-capitalist, anti-financier. ButMerchants essential“Exotic” commodities from other landsTrade between different fiefs/kingdomsFinance essentialMerchant activityWarsMerchants tolerated (but controlled, taxed)
30 4. Early Writers Niccolo’ Machiavelli (1469-1527) Jean Bodin ( )Antonio Serra ( )
31 Niccolo’ Machiavelli (1469-1527) Author of The Prince, 1512Machiavelli's work is associated with the rise of nation stateMorality was necessary as guide to private actionsPolitics should be free from ethical or theological influencegeneral postulate about human nature, self- interestempirical 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 saw inflow of speciebelieved in supreme power of the state and natural law
33 Antonio Serra ( )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 make Gold and SIlver abound in Kingdoms where there are no MinesAgriculture and trade in manufactured goods most important source of wealth to a nation.
34 5. Mercantilist Thinkers Josiah ChildBernard MandevilleDavid HumeVon HornickThomas 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 MandevilleBernard 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 HumeDavid 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 HumeHe 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 silverHornick 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 surplusNo analysis of productionIn practiceAdded to feudal imposts on commerceCreated government-sanctioned monopoliesostensibly to increase national wealth; butoften in practice enriched favoured individualsPoint of criticism and departure for later Physiocrats & Classical Economists, with emphasis upon “laisser-faire, laisser-passer”44
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