The Rise of Mercantilism or Commercial Capitalism (1613-1767)

History Of Mercantilism, European Economic Mercantilism

As trade and commerce gradually increased, many territories and countries lying on the periphery of Europe were explored and colonized in pursuit of additional sources of capital and wealth. This colonization activity was accompanied by a huge influx of precious metals to colonizers, especially gold and its resultant problems of inflation, and it preceded a transitory period or period of early capitalism that lasted for approximately 150 years (1613-1767) commonly known as "mercantilism" or commercial capitalism.

The general premise of economic thought for mercantilism was based on the commonly accepted notion that establishing and maintaining a trade surplus or favorable trade balance was of supreme national importance, especially for the purpose of maintaining a national defense and self-sufficiency. However, since all transactions during trade were conducted using gold and silver, many countries actually experienced a shortage of precious metals, which, of course, was in contradiction to this ideal. Interestingly enough, some countries, such as Spain, felt so serious about capturing a surplus of money and adopting bullionist policy that they eventually imposed a death penalty for gold exportation.

Bullionists made up the first group of mercantilists (1450 to 1613 AD). They aimed to increase stock of bullion and to prohibit its exportation so that a favorable trade balance could be realized. Thomas Mun (1571-1641) was one of the leading English theorists for bullionism and mercantilism for the time. He advocated that a nation should sell more than they consume, establish a favorable trade balance, place a heavy duty on goods imported for home consumption, and he also equated wealth with money.

During the period of mercantilist transformation, an increased role for a modern nation state for the purpose of increased control over economic life through government regulation of prices and interest rates were gradually gaining more favor. France, for instance, became one of the first nation-states (in 1461-83) with Louis XI at the helm; Spain followed it in 1469. During the early Mercantilism Period, merchants began to accept the spirit of the Christian paternalistic ethic which meant that the State had an obligation to serve society by accepting and discharging the responsibility for the general welfare.

With the mercantilism system, workers who still owned and controlled their own means of production carried on most of the production. In this state, capitalists were primarily merchants, and their capital consisted mostly of money and inventories of goods to be sold. Merchant capital consisted of ownership of the means of buying, transporting, and selling. In contrast, industrial capital consisted of ownership of means that were necessary for producing.
During this period, the source of profit and wealth was held to be found in the sphere of exchange through the process of buying and selling, not in production. Hence, mercantilists searched for sources of profits in the exchange process since they could not control the whole production process. In this system, feudal lords still generally controlled production and expropriated surplus, and the result of the exchange between merchants and landlords was a sharing of the surplus. From the merchant's point of view, it was the exchange process and not the process of production that generated profits. Gold was furthermore viewed as having much more value than any other type of good, and thus the accumulation of gold reserves became highly important. If gold or other precious metals were not available from country's own mines, then it was sought for through the process of trade.

The merchant's price equation was equal to the costs of the commodity plus all expenses for handling, storing, and transporting plus an addition of a surplus. This surplus was essentially the merchant's profit.

The early mercantilist' value theory was that the value of commodities was simply their actual market prices. Based on this view, forces of supply and demand determined market value. Also, "use" value (how useful a good is to the consumer in terms of satisfying needs) was the most important factor that determined demand and hence market value.

While the mercantilist asserted that profit originated in the act of exchange, they consequently held that the primary sources that one could go after to make profits were (1) the inflation of the appreciated value of the inventories held in stores, (2) the substantial price differences that resulted from different conditions of production among producers located in different geographic regions, and (3) a large variance in preferences to purchase particular commodities among the various regions. Consequently, merchants virtually perceived the value of commodity in terms of its market price.

Merchants also supported state-created and enforced monopolies because they realized that a short supply of a good might increase the price of the commodity. Unfortunately, for them, however, competition among merchants inevitably led to a reduction in these observed relative price differences and hence to a reduction of profits.

As capitalism advanced, a couple of economic developments evolved, which rendered the mercantilist outlook unsatisfactory, and led to further economic system and ideological change. As already mentioned, in early periods of capitalism or mercantilism, relative prices for goods between countries were substantial and it was therefore relatively easy to exploit price differentials for profit. Based on this particular circumstance, it was fairly easy to comprehend why leading theorists and policy makers felt that profit and wealth was solely determined in the process of exchange. However, once competition increased and prices began to equalize, more emphasis was directed to production costs and control of the laborer as key to profit making. As a result, labor eventually became viewed as a source of profit and determinant of prices, and concepts such as "division of labor" and "productivity" took hold.

The second economic development that contributed to an unsatisfactory outlook for the mercantilist perspective was that as profits from price differences became increasingly more difficult to find, capitalists began to increasingly garner control over the production process. This integration came from two events that were discussed earlier: the putting-out system and dissolution of the guild system. As capitalists increasingly gained control over the production process, merchants gradually faded out of the picture and were converted over to become producer-capitalists.

Two important changes in economic ideas came from all of these developments. First, the idea of the paternalistic view of the state and state regulation was rejected, which also led to a formulation of the idea of "individualism." With time, as commerce increased and the assumption of surplus and increased accumulation of profits became the societal norm, the economic idea of "individualism" that was in fact previously condemned by-older Christian paternalism became more important arid significant. Eventually, capitalists or private business entrepreneurs began to value the independent, self-directing, autonomous, free, and individualistic approach to the market, and they increasingly sought for relief from mercantilist restrictions and regulations which inhibited their quest for profits. Sir Dudley North (1641-1691) was one of those who strongly pushed for this individualistic ethic. He felt that men were motivated by self-interest and should therefore be left alone to compete in a free market. To him, government should only protect people's rights and enforce contracts.

The second significant economic idea that changed was that there was a shift from the view that prices and the forces of supply and demand and utility determined profits. As capitalism bloomed and mercantilism rapidly died, the view that prices were determined by the conditions of production and that profit originated in the production process became well accepted. In time, nearly all producer-capitalists embraced the individualistic and egoistic doctrines engendered by Calvanite protestant ethic.