The Political Economy of Mercantilism

Lars Magnusson

• Publisher: Routledge
• Year: 2015
• ISBN:
  9781317439806
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

Since the days of Adam Smith, Mercantilism has been a hotly debated issue. Condemned at the end of the 18th century as a "false" system of economic thinking and political practice, it has returned paradoxically to the forefront in regard to issues such as the creation of economic growth in developing countries. This concept is often used in order to depict economic thinking and economic policy in early modern Europe; its meaning and content has been highly debated for over two hundred years.

Following on from his 1994 volume Mercantilism – The Shaping of an Economic Language, this new book from Lars Magnusson presents a more synthetic interpretation of Mercantilism not only as a theoretical system, but also as a system of political economy. This book incorporates samples of material from the 1994 publication alongside new material, ordered in a new set of chapters and up-date discussions on mercantilism up to the present day.

Tracing the development of a particular political economy of Mercantilism in a period of nascent state making in Western and Continental Europe from the 16th to the 18th century, the book describes how European rulers regarded foreign trade and industrialisation as a means to achieve power and influence amidst international competition over trades and markets. Returning to debates concerning whether Mercantilism was a system of power or of wealth, Magnusson argues that it is in fact was both, and that contemporaries almost without exception saw these goals as interconnected. He also emphasises that Mercantilism was an all-European issue in a time of trade wars and the struggle for international power and recognition. In examining these issues, this book offers an unrivalled modern synthesis of Mercantilist ideas and practices.

1 Introduction

DOI: 10.4324/9781315694511-1

It was certainly a cry too far when, in 1980, the British economic historian D C Coleman argued that Mercantilism was not only a ‘red-herring’, but also a ‘non-existent entity’ lacking coherence both regarding theory or practice and policy. On the contrary, it seems more conducive to argue that it contained at least as much coherence and that it is useful to use the concept still.¹ Moreover, it is not off the mark to claim that it proposed at least some propositions regarding the modus operandi of an Early Modern economy in Europe. Also, it makes sense to use the word Mercantilism, or the ‘mercantile system’, in order to depict some parts of political practice, a political economy during the same period. As we will see, ‘mercantilist’ writers were often unsystematic in their thinking, and in policy matters the mercantilist politicians were not always very consequent. But that does not mean that they were merely pragmatists who invented ideas and policies off the back. Historical actors in fact seldom do. They are seldom without ambition or lacking an ability to reflect upon their whereabouts. Nor are their policies completely unsystematic or mere ad hoc responses to a confusing outside world.

To the extent that the concept of Mercantilism is accepted at all, another peculiar feature in the dwindling discussions on ‘what it actually was’ – which we will discuss in more depth – has been to treat it as either a theory or a practical policy and regulation. This undoubtedly has a historical pedigree. In the early 1930s the Swedish economic historian Eli F Heckscher published a two-volume treatise on Mercantilism in which he treated it as both practice (economic policy) and theory (the favourable balance of trade, etc.), but also as a worldview (secularism, materialism).² Ever since, many have been sceptical towards Heckscher’s synthetical ambitions. However, in my view, it is fruitful to understand Mercantilism as both theory (or rather language as we will argue later on) and practice. Without doubt there are also connections between the practical and theoretical aspects of Mercantilism. But the relationship is of course complex. Theory cannot be seen as automatically reflecting the level of practice, nor does policy mirror theory in any immediate sense. Thus, language and theory as well as policy have a certain autonomy. At the same time they are deeply entangled.

In the following I will argue that Mercantilism might be an as useful concept as any other in order to try to make generalisations of language and ideas, but also of political practices in Europe roughly during the sixteenth to eighteenth centuries. First, I will discuss how a series of European policies developed during this time in order to handle and understand what, in the mid-eighteenth century, David Hume called ‘jealousy of trade’, or reason of state by economic means, in a world of trade competition where such means and power politics were deeply intertwined. This is also the time and birthplace of the modern state – as formulated by Gustav Schmoller in his foreword to his Studien über die wirtschaftliche Politik Friedrich der Großen (1884)³ – which also is reflected in the policies pursued. Second, I will discuss how a language of the modern market economy was developed during approximately the same time period in order to make such a world of new challenges and possibilities intelligible and possible to handle. This language reflected how the market economy operated and how it was constructed. Hence, while they sought to understand how the price system worked or what factors triggered the interest rates or trade balances to rise or fall, the economic writers of different nationalities were also constructing a basis for our own present theories of the market economy.

Mercantilism

In his seminal Predecessors to Adam Smith, E A J Johnson labelled ‘mercantilism’ an ‘unhappy word’.⁴ Hence, the word ‘mercantilism’ has been used in a number of confusing ways and for many different designs. As reaching a common agreement with regard to the interpretation of Mercantilism has been difficult, discussions dealing with this phenomenon have often been blurred. For Adam Smith, as well as for nineteenth-century opponents of the ‘mercantile system’, such as the classical political economists J R McCulloch and Richard Jones, it was the confusion of wealth and money made manifest in the favourable balance of trade theory that gave the system its coherence. Moreover, it was this idea that once again reappeared in the 1930s with Jacob Viner.⁵ In the late nineteenth century such historical economists as Wilhelm Roscher and Schmoller instead turned Mercantilism into a doctrine of state building, which originated during the Early Modern period in order to bolster a weak state: the transformation from a ‘territorial’ to a ‘national’ state.⁶ As in Heckscher’s studies, the meaning of Mercantilism was expanded even further – as noted above.

More precisely, it was after Smith that Mercantilism was constructed into a more or less coherent ‘system’. Gradually, and on the basis of Smith’s interpretation in the Wealth of Nations, it was constructed as an opposite to the ‘Smithian’ or ‘free trade’ system.⁷ By 1840 its most distinct policy feature was depicted as protectionism and state regulation of the economy. Such a view was even more enforced in the debates concerning the British Corn Laws and their eventual demise in 1846.⁸ However, as we will return to this, it is certainly wrong to describe all mercantilists as protectionists in a modern or even a nineteenth-century sense. Moreover, it is also wrong to characterise Smith as a doctrinaire free trader – as was done after 1846 by the followers of Richard Cobden and the Manchester men.⁹ There were certainly important differences between Smith and the mercantilists, but these were overemphasised during the ninteenth century.

It is commonly known that the term système mercantile first appeared in print in de Mirabeau’s Philosophie Rurale in 1763.¹⁰ It was referred to in a passage in which de Mirabeau overtly attacked the idea that a nation may profit from importation of money. As Smith had apparently read Philosophie Rurale, it is not at all unlikely that he picked up this term from this book.¹¹ However, de Mirabeau was not the first to use the term. It was in use in the discussion on political economy within the so-called Gournay circle some years earlier. In the French discussion it referred back to the eighteenth-century French finance minister Colbert and his ‘system’ of trade and manufacture protection.¹² Regardless, it is with Smith that the ‘mercantile system’ gained its worldwide reputation. In his famous the Wealth of Nations, Smith devoted a very long chapter to delineate the characteristic features of this ‘system’.¹³ According to Smith its kernel was the ‘popular’ fallacy to confuse wealth with money. Smith does not directly accuse Thomas Mun and other mercantilists for this fallacy. On the contrary, he explicitly pictures Mun as an opponent of the old medieval policy in England of forbidding the export of money. Instead, Mun’s main error lies (according to Smith) in that he continued to use this popular bullionist image although he ought to have known better. Whether this error originated for opportunistic reasons (i.e. a conspiracy against the public interest in order to pursue a special interest) we will never know. However, the main point is that those who have read Smith have rarely noticed this error. At least according to Joseph Schumpeter, Mun intentionally used the bullionist image; Smith insinuated this connection, according to him, ‘in such a way that his readers cannot help getting the impression, which has in fact become very general’.¹⁴

Thus, most of Smith’s readers would be tempted to draw a direct line between protectionism and the doctrines of Mun. Smith of course emphasised the devastating consequences of a system of regulation and protection. In several instances he pointed out that such a system was self-defeating as well as erroneous. Thus, instead of extending trade and manufactures, the system most often led to the opposite. Furthermore, those who gained through the system were not the general public but the monopolistic merchants and manufacturers who could increase their capital. In fact, Smith implied that the whole ‘commercial system’ at its core was a giant conspiracy led by powerful interest groups pursuing their own selfish interests. However, Smith’s feelings towards the merchants and manufacturers were rather mixed; it was also well known that he vigorously supported them against the physiocratic accusation that their activities were ‘sterile’. Furthermore, the increase of such activities was an inherent part of Smith’s historical stage theory of economic development.¹⁵ Moreover, Smith was sometimes prone to defend such typical ‘mercantilist’ institutions as the Navigation Acts, and he believed that free trade as a general principle was a utopia that would not be fulfilled in his lifetime, perhaps never.¹⁶ That Smith found it difficult to make up his mind is obvious when he, in the final paragraph of the chapter, concludes:

It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been so entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects.¹⁷

According to Smith, the view of the mercantile system ‘as an agglomeration of commercial interferences fortified by a monetary folly’ was carried further in Britain by classical political economy.¹⁸ It became commonplace for economists such as Nassau W Senior and John Stuart Mill to ascertain that protectionism stemmed from the defunct ‘surviving relic of the Mercantile Theory’ (Mill) that money was the only form of wealth.¹⁹ Auguste Blanqui, in France, and McCulloch, in Britain in particular, helped to reinforce the notion of a ‘mercantile system’ along the lines of Smith.²⁰ In his preface of the 1828 edition of Smith’s magnum opus, McCulloch especially pointed out that this system implied that

the wealth of individuals and of states was measured, not by the abundance of their disposable products – but by the quality and value of the commodities with which they could afford to purchase the precious metals – but by the quality of these metals actually in their possession – And here the policy, as obvious as it was universal, of attempting to increase the amount of national wealth by forbidding the exportation of gold and silver, and encouraging their importation.²¹

And in another paragraph:

Mr Mun lays no stress whatever on the circumstances of foreign commerce enabling us to obtain an infinite variety of useful and agreeable products, which it would either have been impossible for us to produce at all, or to produce so cheaply at home. We are desired to consider all this accession, wealth … as nothing – and to fix our attention exclusively on the balance of £200 000 of gold and silver. … And yet Mr Mun’s rule for estimating the advantage of foreign commerce, was for a long time regarded, by the generality of merchants and practical statesmen, as infallible.²²

Hence, already with McCulloch, we find everything traditionally attached to a full-fledged mercantile system_ the bullionist fallacy as well as protectionism. In line with Smith, McCulloch was ready to admit that Mun’s England’s Treasure by Forraign Trade was ‘a considerable step in the progress to sounder opinions’.²³ However, Mun could not help but fall victim to popular delusions which – as he said elsewhere – ‘have been so widely spread … and of few have the consequences been so disastrous’.²⁴

Among other writers who helped to establish the view of a ‘mercantile system’, particularly Jones stands out.²⁵ It is ironic that he, as a historical economist, helped to establish a definition of Mercantilism, which later historical economists sought to dismantle. Certainly, in his lectures on political economy at King’s College London after arriving there in 183...

Table of contents

• Cover
• Half-Title Page
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• Preface
• 1 Introduction
• 2 Debates on Mercantilism
• 3 Plenty and power
• 4 The favourable balance of trade
• 5 The 1620s debates
• 6 A new science of trade
• 7 Then what was Mercantilism?
• Index