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Mercantilist and liberals , political economy

What were the goals of the mercantilists and the liberals, and what kinds of policies did each set of theorists advocate? Why?

Introduction:

• Both these ideologies arose between the 17th and 19th centuries.
• Mercantilism came first and focused (as the name suggests) on trade as a means to prosperity
• Economic liberalism came next and extended the enlightenment ideals of liberty to the economy
• This essay will look at what these two schools of thought wanted to achieve, what policies they adopted and why they did so

Para 1: The philosophy of mercantilism

• Mercantilism was a fundamentally combative theory of political economy
• One country can only do well when another does badly; trade is a zero-sum game
• Trade brought wealth which in turn brought power (Thomas Mun)
• The aims of mercantilism were:
o to maximise the trade surplus of a country, which was seen as a way to accumulate wealth in a country
o to bring in as much precious metal as possible through selling goods to other countries. This was in line with their contra-quantity theory of money, which broadly says that the quantity of money did not affect the inflation levels in a country
o to find new markets (often through colonial possession) for domestic goods to be exported to
o to maintain domestic employment
• Mercantilism as an expression of national competition. The goal was to accrue as much power as possible and have currency (in the form of precious metals) on hand to support an army and a navy which would be used defensively against threats from other nation states and offensively to gain more territory which could be used for trade
• An expression of this theory is the idea of pursuing “beggar thy neighbour” policies, which were designed to prevent other countries from having a large amount of precious metals (Blitz, Rudolph C. “Mercantilist Policies and the Pattern of World Trade, 1500 – 1750” The Journal of Economic History Vol. 27, No. 1 pp 39 – 55)

Para 2: Mercantilist policies

• How did the mercantilists go about achieving this aim?
• Mercantilism was an extension of the relationship between the government and the mercantile class.
• The mercantile class submitted to paying taxes to the government (used to pay for standing armies) in return for the government enacting policies which protected their foreign trading interests
• One of the primary tools used by governments to help merchants was the imposition of tariffs, quotas and straight prohibitions on imports that might threaten their local trade.
• Governments prevented the export of specialised equipment and the emigration of skilled craftsmen in order to keep an advantage industrially (Jeremy, David I. “Damming the flood: British Government Efforts to check the outflow of technicians and machinery, 1780 – 1843” The Business History Review Vol. 51, No. 1 pp 1 – 34)
• They also encouraged the converse of this, the immigration of skilled workers and equipment into the country
• Shipping was particularly important so countries strengthened their navies with the hope of taking control of the seas. This was supported by legislation often limiting the ability of foreign navies to operate for example the Navigation Act of 1651 passed in England which prohibited foreign vessels from engaging in trade on the coast of England

Para 3: The rise of the liberal economists

• The dominance of mercantilist thinking came to an end with the rise of economic liberalism
• The key text that started this change was “The Wealth of Nations” by Adam Smith (1776).
• Smith said “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves not to their humanity, but to their self-love, and never talk to them of our own necessities but of their advantages.”
• He is saying that the economy will find the best allocation of resources without the guiding hand of the government or anyone else telling them what to do.
• Smith argued against key mercantilist ideas such as the imposition of barriers to trade or the idea that people are linked by duty to their country:
o “As a rich man is likely to be a better customer to the industrious people in his neighbourhood than the poor, so likewise is a rich nation. [Trade restrictions] by aiming at the impoverishment of all our neighbours, tend to render that very commerce insignificant and contemptible”
o “The proprietor of stock is necessarily a citizen of the world, and is not necessarily attached to any particular country”
• Ricardo also recognised that trade could benefit both parties. There is a difference between absolute and comparative advantage which means that everyone can benefit from trade.
• In terms of international relations, economic liberalism reflects the enlightenment liberalism. Nations could work together cooperatively as opposed to in a “state of nature” that was vicious and combative

Para 4: Policies of Liberalism

• The basis of economic liberalism is in private property and contracts between individuals. Both private property and the fulfilment of contracts need to be then protected by the government
• Governments can also provide public goods but not much else. This is the laissez-faire approach that Quesnay advocated
• Along the lines of Ricardo’s comparative advantage, barriers to trade should be dropped and free trade encouraged
• Taxation should not be too burdensome and should only be enough to supply essential services that the government is best placed to do. Anything apart from that will discourage commerce and restrict the economy

Conclusion

• Mercantilism was the defining policy of the era of national competition and expansion. The mercantilists pursued the policies outlined above as a way of promoting the interests of their own nation at the expense of others. They saw trade as a powerful tool that could be used to acquire wealth and with that wealth, power.
• Economic Liberalism took the ideas of cooperation and the guiding hand of self-interest and applied it to international relations. If governments left the economy alone and allowed individuals to pursue their own interests, then the outcome will benefit everyone. This is also true of trade between nations as well. There is benefit to everyone in trade through comparative advantage, which directly goes against the mercantilist theory of trade being a zero sum endeavour.
• The dawn of economic liberalism shattered any mercantilist consensus that there had been and ushered in a new dawn in economic thinking. We are still feeling the effects of this thinking 250 years later. Our world has been shaped by liberal and then, more recently, neoliberal thinking. We are still wrestling the question of whether markets left unfettered can really lead to the best outcomes for everyone in society.