HIST363: Global Perspectives on Industrialization

 

Adam Smith

Mercantilist ideas did not decline until the coming of the Industrial Revolution and of laissez-faire. Henry VIII, Elizabeth I, and Oliver Cromwell conformed their policies to mercantilism. Belief in mercantilism, however, began to fade in the late eighteenth century, as the arguments of Adam Smith and the other classical economists won favor in the British Empire (among such advocates as Richard Cobden) and to a lesser degree in the rest of Europe (with the notable exception of Germany where the Historical school of economics was favored throughout the nineteenth and early twentieth century).

Adam Smith and David Hume are considered to be the founding fathers of anti-mercantilist thought. However, a number of scholars found important flaws with mercantilism long before Adam Smith developed an ideology that could fully replace it.

Critics like Dudley North, John Locke, and David Hume undermined much of mercantilism, and it steadily lost favor during the eighteenth century. Mercantilists failed to understand the notions of absolute advantage and comparative advantage - although this idea was only fully fleshed out in 1817 by David Ricardo - and the benefits of trade.

For instance, Portugal was a far more efficient producer of wine than England, while in England it was relatively cheaper to produce cloth. Thus if Portugal specialized in wine and England in cloth, both states would end up better off if they traded. This is an example of absolute advantage. In modern economic theory, trade is not a zero-sum game of cutthroat competition, as both sides can benefit, it is an iterated prisoner's dilemma. By imposing mercantilist import restrictions and tariffs instead, both nations ended up poorer.

David Hume famously noted the impossibility of the mercantilists' goal of a constant positive balance of trade. As bullion flowed into one country, the supply would increase and the value of bullion in that state would steadily decline relative to other goods. Conversely, in the state exporting bullion, its value would slowly rise. Eventually it would no longer be cost-effective to export goods from the high-price country to the low-price country, and the balance of trade would reverse itself. Mercantilists fundamentally misunderstood this, long arguing that an increase in the money supply simply meant that everyone gets richer.

The importance placed on bullion was also a central target, even if many mercantilists had themselves begun to de-emphasize the importance of gold and silver. Adam Smith noted that bullion was just the same as any other commodity, and there was no reason to give it special treatment.

The first school to completely reject mercantilism was the physiocrats, who developed their theories in France. Their theories also had several important problems, and the replacement of mercantilism did not come until Adam Smith's The Wealth of Nations in 1776. This book outlines the basics of what is today known as classical economics. Smith spends a considerable portion of the book rebutting the arguments of the mercantilists, although often these are simplified or exaggerated versions of mercantilist thought. Valid points Smith made include the fact that trade can benefit both parties; that specialization can improve efficiency and growth through economies of scale; and that the close relationship between government and industry benefits them but not necessarily the general population.

The Austrian School of economics, always an opponent of mercantilism, describes it this way:

Mercantilism, which reached its height in the Europe of the seventeenth and eighteenth centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. Thus, mercantilism held exports should be encouraged by the government and imports discouraged.

Scholars are divided on why mercantilism was the dominant economic ideology for two and a half centuries. One group, represented by Jacob Viner, argued that mercantilism was simply a straightforward, common-sense system whose logical fallacies could not be discovered by the people of the time, as they simply lacked the required analytical tools.

The second school, supported by scholars such as Robert Ekelund, have contended that mercantilism was not a mistake, but rather the best possible system for those who developed it. This school argued that mercantilist policies were developed and enforced by rent-seeking merchants and governments. Merchants benefited greatly from the enforced monopolies, bans on foreign competition, and poverty of the workers. Governments benefited from the high tariffs and payments from the merchants. Whereas later economic ideas were often developed by academics and philosophers, almost all mercantilist writers were merchants or government officials.

Scholars are also divided over the cause of mercantilism's end. Those who believe the theory was simply an error hold that its replacement was inevitable as soon as Smith's more accurate ideas were unveiled. Those who feel that mercantilism was rent seeking, hold that it ended only when major power shifts occurred.

In Britain, mercantilism faded as the Parliament gained the monarch's power to grant monopolies. While the wealthy capitalists who controlled the House of Commons benefited from these monopolies, Parliament found it difficult to implement them because of the high cost of group decision making.

Mercantilist regulations were steadily removed over the course of the eighteenth century in Britain, and during the nineteenth century the British government fully embraced free trade and Smith's laissez-faire economics. By 1860, England had removed the last vestiges of the mercantile era. Industrial regulations, monopolies, and tariffs were abolished, and emigration and machinery exports were freed.

In continental Europe, the process was somewhat different. In France, economic control remained in the hands of the royal family and mercantilism continued until the French Revolution. In Germany mercantilism remained an important ideology in the nineteenth and early twentieth centuries, when the historical school of economics was paramount.