Mercantilism International Trade Theory

Mercantilism, International Trade Theory

When Adam Smith was searching for a name to identify the body of economic ideas generally accepted in the century or two before he wrote, he called it Mercantilism, because of the emphasis placed upon trade. In earlier chapters we have already encountered the outstanding representatives of this general theory of economic life: Mun, Petty, Child, Steuart, Montchretien, and von Hornick.

Briefly stated the Mercantile doctrine identified wealth with money. It therefore emphasized the necessity of a community so conducting its affairs as to acquire an abundance of precious metals. The surest method of doing this, especially for those countries without mines, was to export the utmost quantity of its own manufactures, and to import the absolute minimum from other nations. The excess of exports over imports would be paid for in gold and silver. A favorable balance of trade, that is, when more coin is received than is paid out, was considered the only satisfactory condition of commerce. The establishment and maintenance of such a favorable balance was not alone the responsibility of individual merchants; the government carried a heavy obligation as well. It was agreed that by prohibitions against foreign goods, subsidization of exports, restriction upon the export of precious metals, and the creation of monopolies among the trading companies, the government might assure the nation of a steady influx of gold—as the means of making the state strong and powerful.

While most economists of the period must be classed as Mercantilists, not all of them would subscribe to the above summary of Mercantilist ideas. Many of them were too clear sighted to be trapped by certain obvious errors in the Mercantilist line of reasoning. However, these men were in a sense merely expressing in terms of ideas what was the actual practice of the times. In spite of variations similar conditions gave birth to similar ideas. The growth of commerce and discoveries of the New World led to the rapid development of a common medium of exchange. Feudalism, with its barter and general self-sufficiency, gave way to an economy where buying and selling was important.

The men of the time were impressed with the power of money. Money was always in demand. The more of it one had, the more goods he could control. Money would last. Tomorrow, or the next day, or years hence, money represented the power to acquire goods. The formation of great states, with powerful governments, great armies, luxurious courts, and hosts of officials, required the expenditure of vast sums of money. Dense populations and industry seemed better able to produce revenue-getting conditions than sparsely settled regions dependent upon agriculture. Hence industry and trade received the favors of government, while agriculture was left to seek its own survival. Colonies were sought as markets for goods, while severe laws restricted their economic freedom and made them dependent upon the grudging purchases of the mother country alone for commerce and trade. Duties on imports, barriers to the export of gold, and great trading monopolies were characteristic of every nation. These things were not theories; they were the most important facts of the times. The economists either summarized what was happening and found reasons to justify it, or they took issue with the turn of events and suggested alternatives. Such ideas compose the theory of Mercantilism. Whatever one may think of its practicability as an economic system, the theories of Mercantilism were truly
representative of the times.

One of the early exponents of Mercantilism was Edward Misselden, a merchant of the first part of the 17th century. His two pamphlets, Free Trade, or The Means to Make Trade Flourish (1622) and The Circle of Commerce (1623) were written not as detached expositions of prevalent theory, but as tracts designed to secure favorable action on several proposals sponsored by the author. He wanted above all to curtail the activities of the East India Company, which he claimed was draining the country of its specie. Because the Company had a governmental concession to export large quantities of bullion on each voyage provided a similar amount was returned in six months, Misselden was led to believe that in being taken from the country economic depressions were the inevitable result.

In later years Misselden became a business associate of the East India Company and consequently discontinued his attacks upon that Company's privileges in his later work, The Circle of Trade. While recognizing the importance of rates of exchange as indices of the various market conditions for money, he did not believe that the balance of trade was dependent upon favorable exchange rates. He believed rather that one had first to determine whether a favorable or unfavorable balance existed between one nation and another. Once determined, it was the business of government to take proper measures to secure a favorable balance.
Thomas Mun (1571-1641), perhaps the ablest exponent of Mercantilism, began his explanation of that doctrine while endeavoring to justify the practices of the East India Company, of which he was a director, against such attacks as those of Misselden. A Discourse of Trade from England into the East Indies (1621), Mun's first work, was not his best. It was a polemic against attacks on his Company, with an abundance of charges and counter charges and a minimum of considered thought. It was in his England's Treasure by Forraign Trade, or The Balance of Our Forraign Trade Is the Rule of Our Treasure, written about 1830 but published posthumously by his son in 1864, that Mun gave his most lucid explanation of the mercantile philosophy and presented a comprehensive plan to increase the wealth and treasure of England. The merchant, according to Mun, .was a most important figure in the community since he was responsible for enriching the kingdom, for providing the king with revenue and maintaining his treasure. Although an academic education was not necessary for the merchant, he should be well versed in language and skilled in ship building and navigation. Mun accepted in principle the mercantile idea of a favorable balance of trade.

The ordinary means therefore to increase our wealth and treasure is by Forraign Trade, wherein we must observe this rule; to sell more to strangers yearly than wee consume of theirs in value . . . because that part of our stock which is not returned to us in wares must necessarily be brought home in treasure.

How clearly dependent the nation's welfare was upon foreign trade in Mun's opinion was indicated in the closing pages of his book.

So much Treasure only will be brought in or carried out of a commonwealth as the Forraign Trade doth over or under ballance in value. . . . Behold then the true form and worth of forraign Trade, which is the great Revenue of the King, The honor of the Kingdom, The noble profession of the merchant, The School of our Arts, The supply of our wants, The Employment of our poor, The Improvement of our Lands, The Nurcery of our Mariners, The walls of the Kingdoms, the means of our Treasure, The Sinnews of wars, The terror of our Enemies.

In addition to his elaborate praise of foreign trade, Mun made some practical suggestions as to how a favorable balance was to be maintained. The third chapter of England's Treasure by Forraign Trade was devoted to cataloguing the devices which might be used for this purpose. He advised England to cultivate waste lands, refrain from exclusive consumption of imported goods, set prices on exports as high as the traffic would bear, sell scarce necessities dear and plentiful goods cheap, ship only in English bottoms, be conserving in the domestic use of natural resources, compete with the Dutch in exploiting the fisheries off the English coasts, develop the carrying trade by creating facilities for storing and transshipment of goods, encourage the purchase of materials at their source of supply rather than through middle men, allow the export of money itself when used as stock, remove taxes on imports of raw materials used in manufacturing of later exports, and, finally, to make domestic goods serve the needs of the population. Such a program of industry and frugality seemed almost infallible as a guide to national wealth and power.

Thomas Mun was not uncritical of the system he so well described. For example, his proposal for the export of bullion was not readily accepted by his contemporaries. To them no bullion should leave the country save in payment of debts. Mun saw beyond the immediate present. He believed that the use of bullion to foster a carrying trade established by Englishmen abroad was a legitimate excuse for shipping gold out of the country, since a prosperous trade would in time return more bullion to the country than was taken out. The analogy Mun used to drive home his point has become famous: A farmer viewed only at seed time when he scatters his seed over the ground seems wasteful; but when his harvest is considered, the worth of his action becomes apparent. Thus Mun at this early date pleaded the cause of all foreign investors. The economic history of England amply proved his point.

On other aspects of mercantile theory and practices Mun was in advance of the men of his own time. He did not fall completely into the fallacy of thinking that wealth and money were identical. It was what money could buy that was important. Furthermore he denied the idea that in order to secure a favorable balance of trade it was essential for each merchant to have a favorable balance. The sum total of exports and imports for a given period was the important consideration. It was a hundred years or more before this last consideration led to a complete reappraisal of the idea of foreign trade.

There was great similarity between Mun's exposition of Mercantilism and that presented by Philipp von Hornick, an Austrian whose works appeared a half century later. His Oesterreich Vber Alles, Wann Es Nur Will (Austria above all others, if it wants to be) was published in 1684. A greater interest in national self-sufficiency and power pervaded his work. The very emphasis upon the supremacy of Austria which appeared in the title gives a clue to the viewpoint expressed inthe book.

There are of course a great many writers who m one way or another accepted the idea of a favorable balance of trade being essential to national strength. These men are frequently noted for the new lines of thought they opened up and have consequently been discussed in other chapters. Sir William Petty emphasized the monetary aspect of foreign trade; Sir Josiah Child, who venerated Dutch industry and Dutch moral character, saw economic success as dependent upon low interest rates; Sir James Steuart, whose excellent Inquiry into the Principles of Political Economy, had the misfortune of supporting a moderate mercantilism just nine years before The Wealth of Nations by Adam Smith appeared, nevertheless contributed greatly to latter theories of value and population.