MERCANTILISM

MERCANTILISM

MERCANTILISM

In Wealth of Nations, Smith succeeds in laying bare intellectual framework of economic science while marrying his theoretical discussions to the substantial amount of empirical data. Smith's analysis of benefits that follow from division of labor, fallacies of mercantilism, and destructive effects of almost all restrictions on market forces are comprehensive and accompanied by the mass of illustrations that trace operation of laws of economics. (Landreth 2002)

Nevertheless, Smith has been accorded honor of being founder of economic science largely, it has been suggested, because he was able to build on and coordinate various strains of economic analysis that had appeared before him and map this vast field of enquiry within context of the sea of illustrative material. (Ekelund 1999)

Mercantilism refers to political and economic policies adopted by European powers in sixteenth to eighteenth centuries. However, no coherent theory was developed in this period that encapsulates mercantilist ideas, either by the single writer or by the group of largely like-minded individuals. It is therefore the somewhat hazy term that is used to refer to different things by different scholars. Nonetheless, certain key characteristics can be discerned. (Niehans 1999)

The Origins of Mercantilism

The sixteenth century saw growth in influence and importance of merchants in European states, who were engaged in long-distance trade with newly acquired colonies. Simultaneously, there was consolidation of power in nation-state, replacing more fractured feudal system, and introduction of large-scale professional armies both to protect state from external attack and to aid expansion abroad. To fund these professional armies, governments required an inflow of gold and silver, which increasingly came from taxes levied on activities of merchants.

The merchant classes, in return for these taxes, induced government to pursue policies that were beneficial to their activities, protecting their markets in domestic economy from foreign competition through tariffs, providing subsidies to industries, banning emigration of skilled workers, using army and navy to protect investments abroad and to open up new colonies, and so on. Mercantilist policies are, therefore, as its name suggests, those favored by merchant classes of time. (Ekelund 2001)

The Liberal and Economic Nationalist Responses

Adam Smith's seminal 1776 treatise The Wealth of Nations aimed at repudiating mercantilist principles. He argued that trade in general is not zero-sum game envisaged by mercantilists in which the gain for one country is necessarily the loss for another, but can be the positive-sum game by which both parties gain. He also criticized capture of government policy by merchants, arguing that this did not benefit general population as the whole who would generally benefit from availability of cheaper imported goods. (Letwin 2003)

Adam Smith's liberal economics in turn came under criticism from school of economic nationalism, particularly associated with German Friedrich List and Alexander Hamilton of United States, who were concerned with need for nations to industrialize, both to improve their standard of living and to ensure that they were militarily secure. To this end, List and Hamilton advocated use of tariffs and subsidies to nurture infant industries until they were able to compete with foreign ...