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Daily RC Article 142

Rethinking Mercantilism: A Nuanced Historical Perspective

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MERCANTILISM is one of the great whipping boys in the history of economics. The school, which dominated European thought between the 16th and 18th centuries, is now considered no more than a historical artefact – and no self-respecting economist would describe themselves as mercantilist…

At the heart of mercantilism is the view that maximising net exports is the best route to national prosperity. Boiled to its essence mercantilism is “bullionism”: the idea that the only true measure of a country’s wealth and success was the amount of gold that it had. This idea had important consequences for economic policy. The best way of ensuring a country’s prosperity was to make few imports and many exports, thereby generating a net inflow of foreign exchange and maximising the country’s gold stocks.

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Such ideas were attractive to some governments. Accumulating gold was thought to be necessary for a strong, powerful state. Countries such as Britain implemented policies which were designed to protect its traders and maximise income. …

But there is an important distinction between mercantilist practice and mercantilist thought. And a paper by William Grampp, published in 1952, offers a subtler account of mercantilism.

Mr Grampp concedes that mercantilists were keen on foreign trade. One often reads in mercantilist tomes that foreign trade would be more beneficial than would domestic trade...

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But Mr Grampp argues that, on the whole, we should stop confusing mercantilism and bullionism. Few mercantilists were slaves to the balance of payments. In fact, they were alarmed by the idea of hoarding gold and silver. This is because many mercantilist thinkers were most concerned with maximising employment. Nicholas Barbon – who pioneered the fire insurance industry after the Great Fire of London in 1666 – wanted money to be invested, not hoarded. As William Petty argued, investment would help to improve labour productivity and increase employment. And almost all mercantilists considered ways of bringing more people into the labour force.

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Mr Grampp even suggests that Keynesian economics "has an affinity to mercantilist doctrine”, given their shared concern with full employment. Keynes, in a short note to his “General Theory”, approvingly quotes mercantilists, noting that an ample supply of precious metals could be key in maintaining control over domestic interest rates, and therefore to ensuring adequate workforce utilisation. In some sense, the Keynesian theory of under consumption – that is, inadequate consumer demand – as a cause of recessions was presaged by mercantilist contributions…

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Mercantilism is thought to have begun its intellectual eclipse with the publication of Adam Smith’s "Wealth of Nations" in 1776. A simple interpretation of the economic history suggests that Smith’s ruthless advocacy for free markets was squarely opposed to regulation-heavy mercantilist doctrine. But according to research, Smith’s contribution did not represent such a sharp break. The father of economics was certainly concerned with the effects of some mercantilist policies. He saw the damage that overweening government intervention could do… And he hated monopolies, arguing that greedy barons could earn “wages or profit, greatly above their natural rate”. Smith also grumbled that legislators could use mercantilist logic to justify stifling regulation. But Smith points out circumstances in which government interference is necessary... He outlines other cases where government intervention in trade is useful. Smith was not opposed to regulation per se, but rather instances where individuals and governments could abuse their position of power for personal gain…

Mercantilism, once a dominant economic school between the 16th and 18th centuries, is now often dismissed as an antiquated ideology. At its core lies the belief that a nation's wealth is measured by its accumulation of gold, emphasizing the importance of net exports. Contrary to popular perception, recent analyses have unearthed nuances within mercantilist thought. While focused on foreign trade, many mercantilists were concerned with employment and productivity, seeking to invest rather than hoard wealth. Surprisingly, parallels between Keynesian economics and mercantilist doctrine, particularly in their shared emphasis on full employment, have been identified. Adam Smith's "Wealth of Nations" marked a turning point but didn't entirely break from mercantilist thinking; he criticized excessive government intervention and monopolies but acknowledged situations where intervention could be necessary for fair trade and to prevent abuses of power.
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