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The Mercantilists

Rembrandt's painting

For Europe, the 17th century was "the most horrible century", engulfed by interminable national, religious and civil wars, made memorable for their particularly savage brutality.  From ashes and smoke,  the national state was formed and enshrined in the Reformation-inspired contractual "natural law" philosophy of Grotius, Hobbes and Pufendorf

With the rise of the State,  the 17th Century marked the ascendancy of two classes of peoples needed by the State: bureaucrats to run it and merchants to finance it.   It was from the assorted pamphlets, studies and treatises of these groups of practitioners  that  Mercantilism developed.   In England and Holland, the bulk of the economic writing was done by  merchants drawn from their rising bourgeois communities -- thus the term "Mercantilism".  In France and Germany, where the bourgeoisie was smaller, economic arguments were articulated  largely by state officials -- thus French Mercantilism is better known as "Colbertisme" (named after Jean-Baptiste Colbert, French minister of finance) and German Mercantilism as "Cameralism" (after the German term for the royal chamber). 

This difference in background between English-Dutch and French-German Mercantilists did not imply much difference in their economic doctrine.  Both groups recognized the intimate, symbiotic relationship between the wealth of merchants and the power of the State: the flourishing of business meant more revenue and thus power for the State; the power of the State could secure the profitable trading routes and grant the monopolies desired by the merchants.  English Mercantilism is often divided into three phases: the crude "Bullionist" stage lasting roughly from the 1580s  to 1620, the "Traditional" stage lasting from 1620 to about 1700, overlapping with the "Liberal" stage which stretched from the 1680s to the 1750s.  French Colbertisme is said to have lasted between 1660s and 1750s, while German Cameralism had perhaps the longest time span, stretching from 1560s to 1750s and, through the hands of Neo-Cameralists, stretching even beyond 1800.

At the heart of the Mercantilist system is an obsession with the positive feedback between growth and wealth accumulation:  more economic activity meant more wealth (for merchants and the State), more wealth meant more activity.  They recognized two basic preconditions for increasing enterprise:  the existence of profit opportunities and flexible credit facilities.  The Mercantilists proposed that activity rose whenever prices rose (because they believed higher prices meant higher profits) and interest rates fell (thus easier credit).   Both of these things occur, they noted, when the quantity of money in a country is increased.   Money, in the those days, was gold and silver. Thus, in order to increase national output, the early  Mercantilists recommended, every effort, fair or foul, must be made by the State to ensure that, whether bullion or coins, as much gold and silver as possible enters that country and as little as possible leaves the country.

Initially, this was thought to involve direct restrictions on the export of gold, a practice highly recommended by the Bullionist strain of Mercantilists, notably Thomas Milles and Gerald de Malynes.   This brought the protest of the charter companies, notably the Society of Merchant Adventurers and the British East India Company, which traded extensively overseas and needed the gold export restrictions relaxed (cf. Wheeler, 1601).  The influential Malynes (1601, 1621) inveighed thunderously against the companies, blaming them and their allies for the ruin of England.   He protested to the English Court that the Charter companies, by setting an exchange ratio for English currency below its intrinsic worth (which had been so "wisely" decided upon the court) were not only undermining royal authority and Divine justice, but by encouraging the exportation of specie were thus a "cancer" on the Commonwealth.  He recommended even more draconian restrictions on export of specie as a way to fix the problem and "reflate" the economy.  No friend to financiers, Malynes resurrected the old Scholastic arguments against usury, arguing that interest created an unnatural cost of credit and held back enterprise.

Against Malynes's recommendations were arrayed two formidable writers, Thomas Misselden and Thomas Mun -- the former more of a agitator, the latter more of a scholar, but both charter company men.  Misselden and Mun admitted the benefit of specie inflow, but did not blame outflows on "evil financiers" and charter companies maintaining a separate exchange ratio for currency, but rather on the external balance of trade.  Mun, in particular noted that outflows/inflows of gold are determined by the balance of payments, which includes the balance of trade, but also capital transfers.  Their recommendation was that the state can only stem the outflow of gold not by restrictions on gold movements, but rather by encouraging exports and discouraging imports.  This  trade-specie flow mechanism, they argued, could not be disabled by royal dictation but was a   mechanism forced upon the nations of the world by "natural law".  It cannot be stopped, but it can be encouraged in the right direction.  The optimal formula had already been laid out years earlier by Jean Bodin: impose high tariffs and duties on the export of raw materials and the import of finished goods, and low tariffs and duties on the import of raw materials and the export of finished goods.

Another contribution of Mun was the recognition that perhaps rising prices were not all that desirable: they decrease the competitiveness of  exports, thus worsening the balance of trade and lead to gold outflow.  This had not been recognized by Malynes or Misselden, who had argued repeatedly for the benefits of price inflation.   The Mercantilists struggled with, but never actually resolved, the contradiction between the industry-stimulating but export-crippling price rises.

Another concern was the possibility of rising prices and industry might also lead to rising wages that might cut into those profits and thus reduce output.  The Mercantilists did not mince words on this: they recommended that wages should be kept as low as possible. They believed that low real wages actually increased the productivity of laborers (an effect later disputed and reversed by Cantillon and the Ricardians).   To keep wages low, the  Mercantilists applauded policies aimed at increasing population and recommended the use of labor-saving machinery whenever possible.

The watershed in Mercantilist thinking was the work of William Petty (1690).  He began focusing attention on income distribution and the relative values of the contributions of "factors of production", which, for him, was basically labor and land.  It was Petty that initiated the idea that rent on land was a surplus above wage payments.   Petty's exercise anticipated that of Ricardian rent -- indeed, he went so far as to talk about diminishing returns to land on the basis of their distance from the market.  

Wages, for Petty, were determined by what was necessary for the laborer   "Live, Labor and Generate".   Petty used this to initate the "labor theory of value" whereby the relative values of goods were determined by the relative amounts of labor-time involved in producing them.  He justified this equality of relative labor time and relative prices on the basis of arbitrage.  He also used arbitrage reasoning to argue that the interest on capital would be equated with the rent on land (but Petty did not really have a good, independent theory of capital).    Thus, Petty anticipates many of the later Classical Ricardian doctrines.

Mercantilism was given another twist in its "liberal" phase by Sir Dudley North (1691) and Sir Josiah Child (1693), who were perhaps the first to recognize that international trade, far from being a zero-sum game, could be mutually beneficial to both parties.  North was also one of the first to begin talking about "profit" and "capital" as a distinct factor of production,  and recognized that money was only of value when lent out for capital.    The theory of money was also given more careful consideration by John Locke (1692), who formulated the concept of "velocity" and effectively initiated the Quantity Theory of Money.

Mercantilist doctrine maintained itself throughout much of the 18th Century.  The rise of the Enlightenment, however, changed things substantially.    The works of Richard Cantillon, Jacques Turgot and the Physiocrats in France and David Hume and his friend Adam Smith in Great Britain, were often designed to go directly against Mercantilist opinion.  Their new view that the wealth of a nation really arises from circulating income flows and their insistence on the neutrality of money, undermined the Mercantilists's "stock-of-money" concept of wealth.   The Enlightenment economists also introduced the idea of "natural balance" of those flows, which effectively replaced the "growth obsession" of the Mercantilists with the "equilibrium obsession" of the Enlightenment economists.

These new ideas were not immediately successful.  The Physiocrats remained in the shadows of the French court, with the Colbertistes and anti-Physiocrats such as Forbonnais still maintaining their great influence on policy.  Great Britain, on the dawn of its industrial revoltuion, was somewhat more receptive to the new doctrines, although it could still produce remarkable semi-Mercantilists such as Sir James Steuart (1767).   Germany, for the most part, remained immune from the new theories, and safely in the hands of the Neo-Cameralists well into the 19th Century.

The Bullionists

"Traditional" English Mercantilists

The Econometricians

"Liberal" English Mercantilists

French Colbertisme

German Cameralism

Resources on Mercantilism