mercantilism for gipe 1

8/8/2019 Mercantilism for GIPE 1

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A School of Thought prevailed in Europe from16th to 18th century


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The background for Mercantilismy The Renaissance : The re-birth or beginning of interest

and activities in art, literature and ideas during 14 th ,15th and 16th centuries age of reasoning increasinginquisitiveness led to materialism institution of private property and contract rights

y Protestantism : Weakening of loyal and blindobedience gave rise to more reasoned arguments

y Feudalism was gradually replaced by commercialcapitalism- led to changes in production and exchange

y Concept of nation-states evolved with their owndefensive/armed strength


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Emerging of Mercantilismy Co-incidence of economic interests of merchant

class and political interests of the statey

Agriculture was replaced by industries resulting intrade and in turn use of money in form of gold,silver etc.

y Improvements in science and technology like

compass and printing press opened up newcountries and new marketsy Economic counterpart of political views of

Machiavelli and Jean Bodin


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O bjectives of Mercantilistsy To make a country strong with the help of wealth

consisting of precious metals which attached

importance to Bullions ; the most durable andacceptable form of wealthy To have a favorable balance of trade that is excess of

exports over importsy

To enhance trade with the highest priority followed by industry and commerce and then by agriculturey To offer a larger role to state to augment and exploit

natural resources to increase exports


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W hat is Mercantilism?y It is the economic theory and practice common in

Europe from the 16th to the 18th century.y Closely associated with trade and commerce.y According to Gray, mercantilism was conditioned by

two things: perpetual neediness of government andeffect of discoveries of precious metals and theirinflow on European economies

y It promoted governmental regulation of a nation'seconomy for the purpose of augmenting state powerat the expense of rival national powers.


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Mercantilism Continuedy Aspirations of rising merchant capitalists to whom

strong state was a necessary institution for theirprotection

y An interest in foreign trade acquisition of preciousmetals military strength and power of a country

y It was the economic counterpart of political absolutism.y Its 17th century publicists, most notably Thomas Mun in

England, Jean Baptiste Colbert in France, and AntonioSerra in Italy, never used the term Mercantilist todescribe themselves.

y This name was given to them by the Scottish economistnamed Adam Smith in his Wealth of Nations (1776).


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A Nine-Point Mercantilist Manifesto:

Philipp von Hornick ( A ustria), 1684.y Extensive use of the soil to produce agricultural products.y All commodities found in the country that cannot be used in their

natural state should be worked up within the country.y Promote large population.y Gold and silver not to be taken out of the country.y Inhabitants should make every effort to get along on their domestic

products.y Foreign products to be obtained in exchange for domestic goods, not

gold and silver.y Goods should be imported in unfinished form, then worked up withinthe country.y Seek opportunities to sell the country's superfluous goods to foreigners

in manufactured form.y Allow no imports of which there is a sufficient supply of suitable quality

at home.


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Mercantilism s Principlesy Precious metals, such as gold and silver, were deemed

indispensable to a nation's wealth.y If a nation did not possess mines or have access to them,

precious metals should be obtained by trade.y It was believed that trade balances must be favourable,

meaning an excess of exports over imports.y Colonial possessions should serve as markets for exports

and as suppliers of raw materials to the mother country.y Manufacturing was forbidden in colonies, and all

commerce between colony and mother country was heldto be a monopoly of the mother country.


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S pecie Flow MechanismContinuous favourable trade balance would result into

the following (equation of exchange implicit)Inflow of gold raise domestic prices.Higher prices made imports attractive, domestic goodsunattractive, & therefore more difficult to export.Thus, selling dear and buying cheap tends to increaseimports and decrease exports, which in turn, createsan unfavorable balance of trade against a country.To pay for this unfavorable balance of trade, thecountry loses specie

Because of the specie-flow mechanism, a long term

surplus cannot exist.


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The Dictates of Mercantilismy Human wants were to be minimized, especially for

imported luxury goods since they drained off precious foreign exchange.

y Sumptuary laws (affecting food and drugs) werepassed to ensure that wants were held low.

y Thrift, saving, and even parsimony were regarded as virtues. Only by these means could capital be created.

y In effect, mercantilism provided the favourable climatefor the early development of capitalism, with itspromises of profit.


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Leading Features of Mercantilismy Maintaining a surplus in the balance of trade and

accumulating gold were the keys to prosperity.y Bullion and treasure were the essence of wealth.y

Regulate foreign trade to maximize social welfarey Promote industry import cheap raw materials but notfood materials.

y Promote colonialism.y Place heavy tariffs on imported manufactured goods.y

Encourage exports of manufactured goods.y Increase population and keep wages low.y State intervention is essential to solve problems of society

and enjoy success in wars- power of state to increase withpolicy of protection


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Criticisms of Mercantilismy Too much importance to gold and silvery Overemphasized commerce, trade but undermined agriculturey Wrongly believed in the concept that favourable trade only leads

to prosperity of a country y Lacked universal applications due to lack of scientific system of thought

y Assumed wrongly that in a foreign trade when one country gains,the other loses- a mutually advantageous trade is possiblebetween countries

y Adverse effects of continuous favourable trade were ignored by many mercantilists except Thomas Mun.

y To conclude it was a temporary and short-term policy which cannot be undermined as it provided strong basis for capitalism

mercantilism for gipe 1

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