Mercantilism

The various ideas about economic policy that flourished in the early Modern period are often referred to as mercantilism. These ideas were based on Bullionism, the long-since discredited theory that precious metals equated to wealth.

The ideas behind Mercantilism were that 1.) European countries are in direct competition, 2.) Whichever country has the most wealth wins that competition, and 3.) that gold and silver bullion were synonymous with wealth. The key corollary to this precept, which would define international relations for centuries, was that the key for a country to gain more precious metals was for that country to have a favourable balance of trade. Each had to export more goods and services than it imported, unless of course it could just produce a lot of its own precious metals. England established colonies in the western hemisphere, for example, in part so that they could have an internal source of lumber, rather than the Baltic area. Mercantilism fueled colonialism under the belief that a large empire was the key to wealth.

A key element of Mercantilism was that exporting raw or unfinished materials was bad for the nation as greater wealth would be produced if the manufacturing work was done within the nation. Thus for instance England banned the export of unfinished cloth to the Netherlands. Also viewed as harmful was reliance on foreign trade. To deal with this England passed the Navigation Acts which forbade any ship that was not English, or carrying goods produced in its own nation from entering English ports.

Mercantilism also fueled the intense violence of the seventeenth and eighteenth centuries in Europe. Since the level of world trade was viewed as fixed it was the belief that the only way to increase a nation's trade was to take it from another. A number of wars can be linked directly to Mercantilist theories such as the Anglo-Dutch Wars and the Franco-Dutch Wars.

One key complaint of American revolutionaries in the late 18th century was the British use of tariffs. It logically follows Mercantilist theory that if one wants as much gold as possible in one's empire, it wouldn't do for one's colonies to give gold to others for those others' goods. Thus, trade restrictions limited commerce with outside powers, forcing colonists to buy finished goods only from their ruling power, and keeping prices higher than Adam Smith would have viewed efficient. The presence of a small Caribbean island (St Eustace) owned by the Dutch, who had supported the idea of free trade since the days of Grotius played a major role in the revolution that followed. The island was open to all and had no tariffs at all. Its governor decided to salute the Andrea Dorea, a ship under the flag of the Continental Congress.

Adam Smith's Invisible Hand, and Liberal theory of economics gradually put an end to the dominance of Mercantilism. Liberalism and Mercantilism were fundamentally at odds on one key issue. Mercantilism stated that all the world's people must compete for the world's limited wealth. Adam Smith believed that wealth and trade was a Non-Zero Sum Game, which essentially means that because needs are different, two parties involved in a transaction could each actually gain, because the exchanged items were more valuable to their new owners. Bullionism dictated that gold was gold. Period. Smith felt that gold was really nothing more than yellow rock that was valuable only because there wasn't much of it. Most economists now agree with Smith.

Elements of Mercantilist theory have still remained in economic discourse throughout the years, despite the general demise of Mercantilism on the whole. One still cannot dispute that there is a limited amount of gold in the world, and more importantly today, a limited amount of oil. A key element of Japan's World War II expansionism, for example, was the need to bring more natural resources under the control of natural resources such as mineral, timber, oil and rubber, which were deficient on Japanese homeland. Latin America's Cold-War Populism, and import substitution economic schemes, along with past and present Marxist theories, are based on the belief that the colonial economic structures still remain in place, with raw goods exporters at odds with what equates to finished goods exporters. ( McDonald's, for example, is in its own way a sort of a finished good. )

The noted economist John Maynard Keynes also saw a great deal of good in Mercantilism. While Adam Smith rejected the idea of bullion being more than just another commodity Keynes saw an inflow of gold and silver as being beneficial. His argument was that greater the gold reserves would lead to increased borrowing and lower rates of interest that would both stimulate growth and aid government borrowing. The essential idea of Mercantilism that government intervention in the economy was a necessity was also adopted by Keynes. Keynes theories were embraced by a number of political parties and came into force under Franklin Roosevelt's New Deal program in the states and also under Britain's Labour government after the Second World War.

Mercantilist theory also influences the notion that trade surpluses are automatically good and the trade deficits are automatically bad. Some economists argue that Japanese trade policy in the 1970's and 1980's was in large part based on Mercantilist concepts and that these policies are one of the causes of Japanese economic stagnation in the 1990's.