Mercantilism

The various ideas about economic policy that flourished inearly modern periodoften referredas mercantilism or asmercantile system. These ideas stemmed from bullionism,theory that precious metals equal wealth.

The term was coined byeconomist Adam Smith 1776, fromLatin word mercari, which means "to runtrade", from merx, meaning "commodity". It was initially used solely by critics, such as Smith.

Mercantilists believed:

that European countriesin direct competition,
that whichever country hasmost wealth wins that competition, and
that goldsilver bullionsynonymouswealth.

The main corollarythese precepts, which would define international relationscenturies, was thatkey forcountrygain more precious metals wasthat countryhavefavourable balancetrade. Each hadexport more goodsservices thanimported, unlesscoursecould just producelotits own precious metals. For example, England established colonies inwestern hemisphere partlyorderhave an internal sourcetimber, rather than depending on purchases fromBaltic area; this was importantship-building,thusmaintaining naval power. Mercantilism fueled colonialism underbelief thatlarge empire waskeywealth.

A key tenetmercantilism was that exporting raw or unfinished materials disadvantagednation, as greater wealth would result by performing manufacturing work within that nation. Thusinstance England bannedexportunfinished cloth toNetherlands.

Reliance on foreign trade also appeared harmful. To dealthis England passedNavigation Acts which forbade any ship that was not English, or carrying goods producedits own nation, from entering English ports. The effect wasrestrictabilityEnglish coloniestradenations other than England.

Mercantilism also fueledintense violence ofseventeentheighteenth centuriesEurope. Sincelevelworld trade was viewed as fixed,followed thatonly wayincreasenation's trade wastakefrom another. A numberwars (for example,Anglo-Dutch Wars andFranco-Dutch Wars) can be linked directlymercantilist theories.

One key complaintAmerican revolutionaries inlate 18th century related toBritish usetariffs. Mercantilist theory implies that if one wants as much gold as possibleone's empire,won't doone's coloniesgive goldothersthose others' goods. Thus, trade restrictions limited commerceoutside powerss, forcing colonistsbuy finished goods only from their ruling power,keeping prices higher than Adam Smith would have viewed as efficient. The presence ofsmall Caribbean island (St Eustace) owned by Dutch, who had supportedideafree trade sincedaysHugo Grotius (1583 - 1645), playedmajor role inrevolution that followed. The island was openallhad no tariffs whatsoever. Its governor decidedsaluteSS Andrea Doria,ship underflag ofContinental Congress.

Adam Smith's Invisible Hand liberal theoryeconomics gradually put an end todominancemercantilism. Liberalismmercantilism were fundamentally at odds on one key issue. Mercantilism stated that allworld's people must compete forworld's limited wealth. Adam Smith believed that wealthtrade wasnon-zero-sum game, which essentially means that because needsdifferent, two parties involved intransaction could each actually gain, becauseexchanged items were more valuabletheir new owners. Bullionism dictated that gold was gold—period. Thus, what one party gained,other party hadgive up (i.e.,zero-sum game assumption). Smith felt that gold was really nothing more than yellow rock that was valuable only because there wasn't muchit. Most economists now agreeSmith.

Elementsmercantilist theory have still remainedeconomic discourse throughoutyears. One still cannot dispute that there islimited amountgold inworld and, more importantly today,limited amountoil. A key motivatorJapan's World War II expansionism,example, wasneedacquire controlnatural resources such as minerals, timber, oil rubber, whichJapanese islands lackedbulk. Latin America's Cold-War Populism,import substitution economic schemes, alongpastpresent Marxist theories, rest onbelief thatcolonial economic structures still remainplace,raw-goods exporters at oddswhat equatesfinished-goods exporters. (McDonald's product,example,in its own waysort offinished good.)

The economist John Maynard Keynes also sawgreat dealgoodmercantilism. While Adam Smith rejectedideabullion being more than just another commodity, Keynes saw an inflowgoldsilver as being beneficial. He argued that greater gold reserves would leadincreased borrowinglower ratesinterest that would both stimulate growthaid government borrowing. Keynes also adoptedessential ideamercantilism that government intervention ineconomy wasnecessity. A numberpolitical parties embraced Keynes' theories,they came into force under Franklin Roosevelt's New Deal program inUnited Statesalso under Britain's Labour government afterSecond World War.

Mercantilist theory also influencesnotion that trade surplusesautomatically goodthat trade deficitsautomatically bad. Some economists argue that Japanese trade policy in1970s1980s waslarge part based on mercantilist conceptsthat these policies form one ofcausesJapanese economic stagnation in1990s.