Первый слайд презентации: Finance University under the Government of the Russian Federation International Finance Faculty History of economic thought Lecture 2. Mercantilism
Lecturer: Kadysheva Olga Vladimirovna Associate professor Macroeconomics and macroeconomic regulation department Moscow 2013
Mercantilism dominated Western European economic policy from the 16th to late-18th centuries ( the period of colonial expansion, frequent European wars, development of shipping and trade ). The term “ mercantilism ” was coined later by Adam Smith in 1776 in his fundamental work “The Wealth of Nations”. Main idea : money is wealth, accumulation of gold and silver is the key to prosperity, one nation's gain is another's loss => government control of foreign trade is necessary to increase export of manufactured goods that will lead to flow of money into the country and make it rich.
With the rise of the State, the 17th century marked the ascendancy of two classes of peoples needed by the State: bureaucrats to run it and merchants to finance it. In England and Holland, the most of the economic writing was done by merchants -- thus the term " Mercantilism ". In France and Germany, where the bourgeoisie was smaller, economic arguments were articulated largely by state officials - thus French Mercantilism is better known as " Colbertisme " (named after Jean- Baptiste Colbert, French minister of finance) and German Mercantilism as " Cameralism " (after the German term for the royal chamber).
Mercantilists recognized the strong relationship between the wealth of merchants and the power of the State : the flourishing of business meant more revenue and thus power for the State; the power of the State could secure the profitable trading routes and grant the monopolies desired by the merchants.
Слайд 5: Mercantilism: 3 Main Goals
Encourage growth of native merchant ships, this included the colonial ships. Protect national manufacturers from foreign competition. Accumulate as much hard money as possible. (Colonial money was worthless, merchants wanted Gold!)
Main features of mercantilist policy Maintaining surplus of exports over imports through tariffs (duties); High tariffs, especially on imported manufactured goods; Duty-free import of raw materials; Building a network of overseas colonies; Forbidding colonies to trade with other nations; Monopolizing markets with staple ports;
Main features of mercantilist policy (cont.) Banning the export of gold and silver, even for payments; Forbidding trade to be carried in foreign ships; Export subsidies; Promoting manufacturing with research or direct subsidies; Limiting wages; Maximizing the use of domestic resources; Restricting domestic consumption with non-tariff barriers to trade.
Слайд 8: Mercantilist policy in Great Britain
The colonists supplied raw materials to England and they could buy the finished products back from GB. GB wanted to be self-sufficient, and knew that the colonies played a large role. For this to be successful, GB needed laws and regulations to protect wealthy British merchants and industrialists at the expense of the colonists. A mercantilist economy is a managed economy, managed by the larger and stronger power.
At the heart of the Mercantilist system is an obsession with the positive feedback between growth and wealth accumulation: more economic activity meant more wealth (for merchants and the State), more wealth meant more activity. They recognized two basic preconditions for increasing enterprise: the existence of profit opportunities and flexible credit facilities. The Mercantilists proposed that activity rose whenever prices rose (because they believed higher prices meant higher profits) and interest rates fell (thus easier credit). Both of these things occur, they noted, when the quantity of money in a country is increased. Money, in the those days, was gold and silver.
Thus, in order to increase national output, the early Mercantilists recommended, every effort, fair or foul, must be made by the State to ensure that, whether bullion or coins, as much gold and silver as possible enters that country and as little as possible leaves the country.
Mercantilism was explained by its proponents as “…philosophy of nation building, a series of economic controls intended to strengthen a country and its colonies against other antagonistic empires. A major tenant of this view was self-sufficiency : sources of supply--raw materials, agriculture, and industry--should be developed domestically, or in colonies, to prevent interruptions by hostile foreigners. A large merchant marine was also deemed important. Cargo vessels of that era were designed to repel pirates and thus could be easily adapted to military roles during wars. Finally, the mercantilists were preoccupied with specie (gold and silver), then a universal foundation of money. Short of possessing gold mines, as Spain did, specie could be acquired with a 'favorable' balance of trade, that is, through earning foreign exchange by selling exports that brought in more money than was paid out for imports.“ (by economic historian Gerald Gunderson)
Mercantilism lasted from the creation of strong central governments in the 15th century until the 19th century, however, mercantilist policies continue to be followed today. Mercantilism was at its height in the 17th and 18th centuries. Although the economic policies adopted in the nations of Europe were not identical, they shared sufficient common characteristics to consider each country's economic system as being of the same type. The objective of these policies was to maximize the nation's wealth. Wealth was defined in terms of gold ; not the way Adam Smith defined it, which is the nation's ability to produce. Gold could be acquired either through a trade surplus or the obtaining of gold-bearing territory. Mercantilism involved the using the power of the state throughout the economy to enrich the state. Therefore, a mercantilist economy is a managed economy.
England, France, Holland, and Spain all restricted their colonies' foreign trade. Subsidies and other assistance was employed to encourage the colonies to produce raw materials; while their right to produce manufactured goods that would compete with those produced by the mother country was restricted. The reason for doing this was to make the nation self-sufficient while enjoying the benefits of specialization. (Most colonial manufacturing took place in the Middle Colonies.) Colonies, by providing raw materials not found in the mother country and increasing the size of the domestic market made both substantial self sufficiency and specialization possible. Self-sufficiency reduced imports; thus making possible or making larger a trade surplus, which would add to the nation's gold stock. Specialization increased the nation's productivity. Navigation laws were common in mercantilist nations. These limited to native (citizens of mother country and its colonies) ships the right to bring goods into (imports) or take goods from (exports). This was expected to increase the size of the nation's merchant marine and earn additional specie through the selling of shipping services.
Mercantilist regulation began in the 1620s, when steps were taken to prevent the importation into Britain of tobacco from Spanish and Dutch colonies. In the 1650s and 1660s the British Parliament passes a set of Navigation Acts Foreign built or owned ships were forbidden to trade with the colonies, and ships that did engage in this trade must have crews, 3/4ths of whose members were British (from Great Britain or British North America). Various colonial exports were enumerated, that is, these goods had to be shipped to Britain, from which, if they were destined for other nations, they would be re-exported. This profited shippers and merchants in Great Britain. Colonial imports had to shipped through Great Britain. This made it easier for the British to collect import duties.
In addition to benefiting Great Britain, these Acts were designed to injure the Dutch. In 1651, Holland declared war on Great Britain in order to get a 1651 Navigation Act repealed. It failed. Nonetheless, the Dutch maintained their maritime and commercial supremacy until well into the 18th century. Although the Navigation Acts did lead to a larger British merchant marine and increased its maritime trade, as Adam Smith pointed out, they imposed a cost on British consumers.
These and other mercantilist policies provided some benefits to the colonies. Protection from foreign competition helped New England's ship building industry. Colonies benefited by specializing. Various colonial exporters benefited when they exported to Britain because competing goods from foreign nations were subject to tariffs theirs were not. The colonies were easily made into “international traders” because of the British Empire.
On the other hand, colonists paid more than they otherwise would have for imports from foreign countries (Tariffs) Colonists also paid more for imported manufactured goods from foreign countries because they had to be shipped through Great Britain. Colonies were often trading with foreign countries illegally.
Слайд 18: Mercantilism: main representatives
UK: Gerard de Malynes (1586-1641) Edward Misselden (1608-54) Sir Thomas Mun (1571-1641) France: Jean Baptiste Colbert (1619-83) Italy: Antonio Serra (1570-?)
Thomas Mun, member of board of Directors of East-Indian trade company, 1571-1641: “The wealth of England is produced by its foreign trade” “The ordinary means to increase our wealth and treasure is by foreign trade, that’s why we must ever observe this rule: to sell more to strangers yearly than we consume of theirs in value”
Thomas Mun in his works admitted the benefit of specie flow into the country. He also noted that outflows/inflows of gold are determined by the balance of payments, which includes the balance of trade, but also capital transfers. His recommendation was that the state can only hold back the outflow of gold not by restrictions on gold movements, but rather by encouraging exports and discouraging imports. This trade-specie flow mechanism was a mechanism forced upon the nations of the world by "natural law". It cannot be stopped, but it can be encouraged in the right direction. The optimal formula had already been laid out years earlier by Jean Bodin : impose high tariffs and duties on the export of raw materials and the import of finished goods, and low tariffs and duties on the import of raw materials and the export of finished goods.
Another contribution of Mun was the recognition that perhaps rising prices were not all that desirable: they decrease the competitiveness of exports, thus worsening the balance of trade and lead to gold outflow. This had not been recognized by Malynes or Misselden, who had argued repeatedly for the benefits of price inflation. A big concern at that time was the possibility of rising prices and industry might also lead to rising wages that might cut into those profits and thus reduce output. Mercantilists recommended that wages should be kept as low as possible. They believed that low real wages actually increased the productivity of laborers. To keep wages low, the Mercantilists applauded policies aimed at increasing population and recommended the use of labor-saving machinery whenever possible.
The watershed in Mercantilist thinking was the work of William Petty (1690). He began focusing attention on income distribution and the relative values of the contributions of "factors of production", which, for him, was basically labor and land.
Слайд 23: Critics of mercantilism
Adam Smith was a fierce critic of mercantilism and convincing advocate of free trade. He believed that the real wealth of a nation is its ability to produce goods and services. The government, should do only those things the private sector would not, such as national defense and a judicial system. Self-interest, regulated by competition, would assure that people would do their best to meet other people's needs. He advocated free trade, saying it would maximize the world's wealth. The concepts of absolute and comparative advantages from nations specialization in production and international trade (A. Smith, D. Ricardo).
The post-Smith critics of mercantilism pointed out that it is erroneous to identify the wealth of nation with gold and silver, and long-term positive balance of trade will inevitably lead under certain circumstances to high inflation.