Theoretical Contributions of the Mercantilists

The study of mercantilism by historians of economic theory demonstrates that from about 1660 to 1776 the quantity and quality of economic analysis increased. The improvement in the quality of economic analysis during the later part of the mercantilistic era was so pronounced that the period has been characterized as a transitional time containing the origins of scientific economics.

Possibly the most significant accomplishment of the later mercantilists was the explicit recognition of the possibility of analyzing the economy. This develop­ment represented a transfer to the social sciences of attitudes then prevalent in the physical sciences. It reached its full fruition after the time of Isaac Newton (1642-1727), and its impact is still felt today. The substitution of cause-and-effect analysis for the moral analysis of the scholastics does not represent a clear break with the past, however, because logical analysis was used by some of the scholastics and moralizing still exists in modern economic literature. But the view that the laws of the economy could be discovered by the same methods that revealed the laws of physics was an important step toward subsequent develop­ments in economic theory.

Many mercantilists saw a highly mechanical causality in the economy and believed that if one understood the rules of this causality, one could control the economy. It followed that legislation, if wisely enacted, could positively influence the course of economic events and that economic analysis would indicate what forms of government intervention would effect a given end. Mercantilists realized, however, that government interference must not be haphazard or complicate basic economic truths such as the law of supply and demand. Some of them correctly deduced, for example, that price ceilings set below equilibrium prices lead to excess demand and shortages. The later mercantilists frequently applied the concepts of economic man and the profit motive in stimulating economic activity. Governments, they said, cannot change the basic nature of human beings, particularly their egoistic drives. The politician takes these factors as given and attempts to create a set of laws and institutions that will channel these drives so as to increase the power and prosperity of the nation.

As we will see, many of the later mercantilists became aware of the serious analytical errors of their predecessors. They recognized, for example, that specie is not a measure of the wealth of a nation, that it was not possible for all nations to have a favorable balance of trade, that no one country could maintain a favorable balance of trade over the long run, that trade can be mutually beneficial to nations, and that advantages will accrue to nations that practice specialization and division of labor. An increasing number of writers recommended a reduction in the amount of government intervention. Thus, the literature included state­ments of incipient classical liberalism.

Yet none of the preclassical writers was able to present an integrated view of the operation of a market economy—the manner in which prices are formed and scarce resources are allocated. This failure of the mercantilists to reach the understanding eventually achieved by Adam Smith and subsequent classi­cal economists may be attributable to one important difference between classical and mercantilistic theory. The mercantilists believed there was a basic con­flict between private interests and the public welfare. Therefore, they con­sidered it necessary for government to channel private self-interest into public benefits. Classical economists, on the other hand, found a basic harmony in the system and saw public good as flowing naturally from individual self-interest. Even the later mercantilists who advocated laissez-faire policies lacked suffi­cient insight into the operation of the market to make an adequate argument to support them. Still, the writings of the later mercantilists were used by Smith to develop his analysis.