Rise and Fall of Mercantilism

Mercantilism was a loosely defined economic system practiced by the colonial powers of Europe during the sixteenth, seventeenth, and eighteenth centuries. Mercantilist writers held many views, but the following views were held by many and served as a transitory economic system after the medieval times until well into the industrial revolution. Mercantilists attempted to deal with economic problems in the real world and set an important precedent of keeping real world economic statistics. Mercantilist policy hinged on the assumption that the accumulation of Gold and Silver (i.e., specie) were to be equated with wealth; that is, with no regard to the cyclical nature of the balance of payments and international accounts between nations. Specie could be acquired by maximizing international trade through exports while minimizing imports, whenever possible. Imports should be bartered for and not paid for with specie. Von Harnick codified these ideas governing a national economy in his nine points described by Ekelund and Hebert (1997):

1. Use all land in the country for agriculture, mining, or manufacturing.
2. Employ all raw materials in the country for domestic manufacturing, because finished goods have a higher value than raw materials.
3. Encourage a large working population.
4. Prohibit all export of gold and silver be prohibited, and keep all domestic money in circulation.
5. Discourage imports of foreign goods.
6. Obtain indispensable imported goods by trading domestic goods rather than with gold and silver.
7. Restrict imports to raw materials for domestic manufacturing.
8. Obtain gold and silver when selling surplus domestic manufacturing to foreign countries.
9. Disallow imports if suitable goods in sufficient supplies can be obtained inside the country.
   

In the interest of promoting Mercantilist ideas, the government, whatever its form, was relied upon to regulate economic life. These regulations frequently appeared in the form of legal monopolies such as franchises and patents. Another form of regulation that was common was a downward pressure on wages and the working classes in order to keep the cost of labor low, and therefore, maximize the profits obtained (especially in the form of specie accumulation) from exportation to other countries. A fundamental misunderstanding of the quantity theory of money, that is, the direct positive correlation between money supply and price levels thwarted the success of Mercantilism as a doctrine.

Mercantilism thrived as a system of rent-seeking and monopolies granted by a central authority. Exclusivity and durability in monopolies are extremely important features. These attributes were virtually assured when a single authority granted the monopoly. However, as the power shifted away from one individual to many individuals, it became more difficult to gain the attention of and influence over those who would grant the monopoly. The shift in monopoly granting authority in the form of patents from the English monarchy to Parliament was a result of increasing competition in the English court systems. Eventually the monarch’s courts became less influential, and therefore, monopolies granted by the monarchy could be overturned by competing courts. The competing common law courts respected Parliament as the highest court in the land and its power as a legislative body. Parliament eventually became the ultimate granter of monopoly privileges that were enforceable in the lower courts. Parliament, as the sole supplier of economic regulation, soon became bogged down in the overhead of group communication and diverse interests when it came to exercising its power to grant monopolies. Soon, fewer and fewer regulations, on which Mercantilism rested, where implemented. Mercantilism as an economic policy on the national level subsequently stalled in England and was undermined in the other colonial powers for similar reasons.

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1997). A history of economic theory and method (4th ed.). New York: McGraw Hill.