Mercantilism, economic system of the major trading nations

during the 16th, 17th, and 18th cent., based on the premise that
national wealth and power were best served by increasing
exports and collecting precious metals in return. It superseded
the medieval feudal organization in Western Europe, especially
in Holland, France, and England. The period 15001800 was
one of religious and commercial wars, and large revenues were
needed to maintain armies and pay the growing costs of civil
government. Mercantilist nations were impressed by the fact
that the precious metals, especially gold, were in universal
demand as the ready means of obtaining other commodities;
hence they tended to identify money with wealth. As the best
means of acquiring bullion, foreign trade was favored above
domestic trade, and manufacturing or processing, which
provided the goods for foreign trade, was favored at the
expense of the extractive industries (e.g., agriculture). State
action, an essential feature of the mercantile system, was used to
accomplish its purposes. Under a mercantilist policy a nation
sought to sell more than it bought so as to accumulate bullion.
Besides bullion, raw materials for domestic manufacturers were
also sought, and duties were levied on the importation of such
goods in order to provide revenue for the government. The
state exercised much control over economic life, chiefly through
corporations and trading companies. Production was carefully
regulated with the object of securing goods of high quality and
low cost, thus enabling the nation to hold its place in foreign
markets. Treaties were made to obtain exclusive trading
privileges, and the commerce of colonies was exploited for the
benefit of the mother country. In England mercantilist policies
were effective in creating a skilled industrial population and a
large shipping industry. Through a series of Navigation Acts
England finally destroyed the commerce of Holland, its chief
rival. As the classical economists were later to point out,
however, even a successful mercantilist policy was not likely to
be beneficial, because it produced an oversupply of money and,
with it, serious inflation. Mercantilist ideas did not decline until
the coming of the Industrial Revolution and of laissez-faire .
Henry VIII, Elizabeth I, and Oliver Cromwell conformed their
policies to mercantilism. In France its chief exponent was Jean
Baptiste Colbert.

A Period and a Pattern of Thought

The ideas of the mercantilists did not constitute a coherent
system. Some of these ideas reflected medieval patterns of
thought; others anticipated liberal theories of a later age. Many
of these ideas were bold and new at that time though they
appeared to be limited and hidebound to later critics The
historical period in which these ideas were expressed is characterized by many other designations- Absolutism, Enlightenment,
Baroque but none of these designations has been the subject
of such a fierce debate as the term mercantilism. This is due to
the fact that they very origin of this term was polemical. It was a
11.587

term coined by the critics of the economic thought of this

period. The critics imputed a systematic theory of mercantilism
which they want4ed to refute. But even those who wished to
rehabilitate the mercantilists later on like Eli Huckster in his
massive work on this subject have added fuel to the fire. In fact,
Hucksters work gibe rise to new spate of criticism and many
scholars tried hard to show that mercantilism of the kind which
Heckschers work gave rise to new spate of criticism and many
scholars tried hard to show that mercantilism of the kin which
Heckscher had portrayed had never existed at all. Cautious
authors would, therefore, like to avoid this term altogether
when discussing the economic thought of this period. But if
one does not postulate a coherent system of mercantilist
thought and thinks of it in term s of tendency, a style of
thought, an approach to economic problems, mercantilism is at
least as useful a designation as the other ones which have been
mentioned above. In looking at mercantilism in this way we
may we many also distinguish its various trends and stages just
as one speaks of early and of enlightened absolutism or of the
various stages of the Baroque style of art and architecture.

Navigation Acts
Navigation Acts, in English history, name given to certain
parliamentary legislation, more properly called the British Acts
of Trade. The acts were an outgrowth of
Mercantilism , and followed principles laid down by Tudor and
early Stuart trade regulations. They had as their purpose the
expansion of the English carrying trade; the provision from the
colonies of materials England could not produce, and the
establishment of colonial markets for English manufactures.
The rise of the Dutch carrying trade, which threatened to drive
English shipping from the seas, was the immediate cause for
the Navigation Act of 1651, and it in turn was a major cause of
the First Dutch War . It forbade the importation of plantation
commodities of Asia, Africa, and America except in ships
owned by Englishmen. European goods could be brought into
England and English possessions only in ships belonging to
Englishmen, to people of the country where the cargo was
produced, or to people of the country receiving first shipment.
This piece of Commonwealth legislation was substantially
reenacted in the First Navigation Act of 1660 (confirmed 1661).
The First Act enumerated such colonial articles as sugar, tobacco,
cotton, and indigo; these were to be supplied only to England.
This act was expanded and altered by the succeeding Navigation
Acts of 1662, 1663, 1670, 1673, and by the Act to Prevent
Frauds and Abuses of 1696. In the act of 1663 the important
staple principle required that all foreign goods be shipped to the
American colonies through English ports. In return for
restrictions on manufacturing and the regulation of trade,
colonial commodities were often given a monopoly of the
English market and preferential tariff treatment. Thus Americans benefited when tobacco cultivation was made illegal within

Copy Right: Rai University

33

ECONOMIC AND BUSINESS HISTORY

LESSON 5:
MERCANTILISM

ECONOMIC AND BUSINESS HISTORY

England, and British West Indian planters were aided by high

duties on French sugar. But resentments developed. The
Molasses Act of 1733, which raised duties on French West
Indian sugar, angered Americans by forcing them to buy the
more expensive British West Indian sugar. Extensive smuggling resulted. American historians disagree on whether or not
the advantages of the acts outweighed the disadvantages from a
colonial point of view. It is clear, however, that the acts
hindered the development of manufacturing in the colonies
and were a focus of the agitation preceding the American
Revolution. Vigorous attempts to prevent smuggling in the
American colonies after 1765 led to arbitrary seizures of ships
and aroused hostility. The legislation had an unfavorable effect
on the Channel Islands, Scotland (before the Act of Union of
1707), and especially Ireland, by excluding them from a
preferential position within the system. Shaken by the American
Revolution, the system, along with mercantilism, fell into
decline. The acts were finally repealed in 1849.
Dutch Wars
Dutch Wars, series of conflicts between the English and Dutch
during the mid to late 17th cent. The wars had their roots in the
Anglo-Dutch commercial rivalry, although the last of the three
wars was a wider conflict in which French interests played a
primary role.
War of 165254
The 165254 war between the English and the Dutch marked a
crisis in the long-standing rivalry between the two nations as
leaders in world trade. The crisis was precipitated by English
search and seizure of Dutch merchant ships in the course of an
unofficial Anglo-Dutch maritime war and, secondarily, by the
English Navigation Act of 1651, which was directed against
Dutch trade with British possessions. Hostilities were opened
(May, 1652) by a sea fight between the British and Dutch
admirals, Robert and Maarten . At the beginning of the war
Blake broke up the Dutch herring fleet, while George Ayscue
successfully waylaid Dutch ships in the English Channel.
However, the victory of Tromp over Blake off Dungeness
(Nov., 1652) gave the Dutch command of the Channel, and in
Jan., 1653, a Dutch treaty with Denmark closed the Baltic to
English trade. Meanwhile reforms were introduced into the
British navy for greater efficiency, and generals Richard Deane
and George Monck were associated with the naval command.
Tromps fleet was forced to retire after an engagement off
Portland (Feb., 1653), and the English regained control of the
Channel. After Blakes succeeding victory off Gabbards Shoal
(June, 1653) the British were able to blockade the Dutch coast.
While Dutch trade was thus effectively cut off, England itself
was approaching financial exhaustion. Negotiations were
undertaken but failed. On July 31, 1653, Tromp attacked the
blockading fleet; he was defeated and killed, but the English
ships were forced to return home for refitting. Peace was finally
signed in Apr., 1654. The Dutch agreed to salute the British flag
in British seas, to pay compensation for English losses, and to
submit territorial claims to arbitration.
War of 166467
The years 166467 saw another war between the English and
the Dutch. The first war had humbled, but had not crushed,
34

the Dutch power, which continued to challenge English

commercial supremacy, especially in the East Indian trade and in
the West African slave trade. In 1664, Robert Holmes raided the
Dutch colonies on the coast of Africa, and Richard Nicolls took
the Dutch colony of New Netherland (later New York and New
Jersey) in North America. War was officially declared by England
in Mar., 1665. The duke of York (later James II) won the battle
off Lowestoft (June, 1665), and in September the bishop of
Munster, an ally of the English, overran the eastern province of
the Netherlands; he was, however, soon expelled. In Jan., 1666,
Louis XIV of France declared war on England, yet his interests
did not lie on the side of the Dutch, and he took little part in
the war. The British fleet under Monck and Prince Rupert was
defeated in the Four Days Battle or Battle of the Downs (June
14, 1666) by Michiel de Ruyter and Cornelis Tromp, but in
August they inflicted a severe defeat on the Dutch and destroyed shipping along the Dutch coast. The plague, the great
fire, and disaffection in Scotland made England anxious for
peace, and negotiations were undertaken, while Charles II let the
fleet fall into a state of unpreparedness that enabled De Ruyter
to attack the British ships in the Thames and inflict heavy losses
(1667). By the Treaty of Breda (July, 1667) the trade laws were
modified in favor of the Dutch, and all conquests of war were
retained, with the English receiving New Netherland and
Delaware and the Dutch keeping Suriname. At the same time
the English and French both gave up their conquered territories.
The Treaty of Breda was a blow to English prestige but proved
in the long run to English advantage.
War of 167278
The war of 167278 was the first of the great wars of Louis
XIV of France. It was fought to end Dutch competition with
French trade and to extend Louis XIVs empire. Having
obtained the support of
Hyperlink http://www.infoplease.com/ce6/people/
A0811428.html
Charles II of England by the secret Treaty of Dover (1670) and
allied himself with Sweden (see Charles XI ) and several
German states, Louis overran the southern provinces of the
Netherlands (May, 1672). The Dutch stopped his advance on
Amsterdam by opening the dikes; about the same time, under
the command of De Ruyter, the Dutch defeated the English
and French fleets at Southwold Bay. When Dutch peace
proposals made at this juncture were spurned by the French, a
revolution broke out, and William of Orange (later William III
of England) took over Dutch leadership from the ill-fated Jan
de (July, 1672). Williams attempt to divide the French lines and
enter France was countered by the French seizure of Maastricht
(1673). By the end of the year the French were forced to retreat,
and Spain, the Holy Roman emperor, Brandenburg, Denmark,
and other powers entered the war on the side of the Dutch. In
1674, England made peace with the Dutch. Nevertheless, the
military situation changed in favor of France. In 1674, Louis II
de won the battle of Seneff, while Turenne was victorious at
Sinzheim. The defeats suffered in 1675 were balanced by the
successful naval campaign of Abraham Duquesne in 1676, and
in 1677 the French defeated William at Cassel and took
Freiburg. Peace was negotiated at Nijmegen in 1678. Maastricht

Copy Right: Rai University

11.587

Laissez-faire
Laissez-faire [Fr.,=leave alone], in economics and politics,
doctrine that an economic system functions best when there is
no interference by government. It is based on the belief that the
natural economic order tends, when undisturbed by artificial
stimulus or regulation, to secure the maximum well-being for
the individual and therefore for the community as a whole.
Formulations of the Doctrine.
Historically, laissez-faire was a reaction against Mercantilism , a
system of commercial controls in which industry and trade,
especially foreign trade, were merely seen as means of strengthening the state. Navigation laws, trade monopolies, taxes, and
paternalistic regulations of all kinds bore heavily upon the rising
class of merchants in the period of European colonial expansion. It was on behalf of this class that the French physiocrats ,
pioneer economists in the 18th cent., first formulated the
principles of laissez-faire. With the physiocrats, state noninterference became a cardinal teaching; they especially opposed the
taxation of commercial pursuits.
Opposition to mercantilism and state paternalism also motivated Adam Smith, father of classical economics, whose name
more than any other is connected with British laissez-faire
doctrines. Smith believed that individual welfare rather than
national power was the correct goal; he thus advocated that
trade should be free of government restrictions. When
individuals were free to pursue self-interest, the invisible
hand of rivalry or competition would become more effective
than the state as a regulator of economic life. Smith did not
believe in laissez-faire in an absolute sense; he found a place for
government activity in public works, such as the building of
canals and docks to facilitate trade, and in the regulation of
foreign commerce to protect certain home industries.
In the hands of Jeremy Bentham the doctrine of laissez-faire
became a philosophy of individualism and of utilitarian ethics,
and John Stuart Mill brought it to what was probably its
highest point. The strong individualism of the theory naturally
appealed to the factory owners and merchants of the.
Industrial Revolution , whose attempts to transform society
along capitalistic lines were often hampered by old laws and the
opposition of landed interests.
The so-called Manchester school of economics, especially
Richard Cobden and John Bright, popularized the doctrines of
free trade and laissez-faire which, after initially being considered
radical doctrines, were becoming the accepted theory of classical
economics. Cobden and Bright, both successful businessmen,
brought laissez-faire into the arena of politics: they secured the
repeal of the corn laws mercantilist import duties that raised the
price of food needed by the industrial workersand they
opposed even the minimal provisions of the factory acts that

11.587

Parliament had passed in order to regulate such abuses as long

hours and woman and child labor. Laissez-faire principles were
nowhere embodied fully in legislation. Governments, at the
very least, continued to levy tariffs as a means of protecting
domestic manufacturers.
Modifications
As the system of capitalist enterprise evolved in the 19th cent.,
more and more businesses found it in their interest to combine
with their competitors in huge trusts or cartels in order to
control prices and production. Competition, which had been
expected to regulate the market, seemed instead to be encouraging monopoly. The principle of state noninterference was
discarded; indeed, during the 20th cent. the state was often
called upon to restore and preserve freedom of competition
where it appeared to be in danger of disappearing. Agreements
in restraint of trade and practices of unfair competition were
outlawed. Thus the practice of laissez-faire was modified. The
theory, however, was not abandoned; it became a tenet of the
opponents of socialism. It was credited with lowering consumer prices by eliminating the high costs of competition. In
that way, the emphasis in laissez-faire theory was shifted from
competition to the importance of profit as an incentive to
production and of individual initiative as necessary to economic
progress.
The Economic Programme
The mercantilists did not propound a coherent theory but they
had a programme, which may be characterized by referring to
the historical preconditions of its emergence. The programme
presupposed the existence of political units, which were also
conceived of as economic units, i.e. states in which population,
employment, general welfare and public finance were seen in an
interrelated context. The programme also depended on the
existence of not only bilateral and public finance were seen in an
interrelated context. The programme also depended on the
existence of not only bilateral but multilateral trade among such
units and on the availability of political instruments ( legislation, customs, taxes, public expenditure, etc.) which enabled the
government to influence these relations. The rise of the
modern state created these preconditions and also enhanced the
political will to use such instruments. Frequent wars highlighted
the importance of public finance, especially when feudal levied
were replaced by standing armies which had to be paid regularly.
The experience of such wars prepared the mind for looking at
trade relations in terms of a continuation of war by different
means. The idea of universal economic growth had not yet
been conceived by the economists and they tended to look at
the exchange goods as a zero-sum game in which the sum total
of all resources was continuation of war by different means.
The idea of universal economic growth had not yet conceived
by the economists and they tended to look at the exchange of
goods a zero-sum game in which the sum total of all resources
was constant and the more successful participants enriched
themselves at the cost of the others. The precursors of the
mercantilists, the monetarists or balloonists saw this zero-sum
game exclusively in terms of the bilateral balance of payments
or more specifically in terms of the accumulation of precious
metals. The mercantilists shook off this primitive outlook by

Copy Right: Rai University

35

ECONOMIC AND BUSINESS HISTORY

was ceded to the Dutch and a trade treaty modified the French
restrictive tariffs in favor of the Dutch. By a subsequent treaty
with Spain, Louis received Franche-Comt and a chain of
border fortresses in return for evacuating the Spanish Netherlands. By a treaty with the Holy Roman emperor (1679), France
was confirmed in possession of Freiburg and a part of
Lorraine.

ECONOMIC AND BUSINESS HISTORY

emphasizing the multilateral balance of trade . The doctrine of

the monetarists, if taken seriously, was bound to lead to an end
of all international trade. The first proponent of the theory of
the multilateral balance of trade was probably Antonio Sera, an
Italian economist whose work was hardly noticed by his
contemporaries. He only wrote about the balance of trade, he
even formulated a law of diminishing returns in agriculture and
derived from this a programme of active state support of the
development of manufactures.
Employment and the proper utilization of available labour was
one of the main items in the mercantilist programme. This was
later on neglected by economic theorists because the liberal
theory of international trade simply presupposed full employment in all countries. Only the Great Depression and the work
of Keynes re-introduced a concern for employment into
economic thought. The mercantilists who were by no means
surrounded by full employment in their day and age and who
had not yet heard of the confident liberal conviction that the
forces of the market would establish full employment automatically were very much aware of the problem of
employment. Their preoccupation with foreign trade heightened their awareness of this problem. As they did not yet
believe in harmonious universal growth and conceived of
international trade as zero-sum gram they were keen to
mobilize the tesources of their own country in terms of
manufactures of export. They held a position halfway between
the primitive monetarists and the later liberals. This also
explains their frequent lapses into earlier patterns of thought as
well as their surprising premonitions of later theories. This
ambivalence has enabled later critics to characterize the age of
mercantilism as a period, which was still largely dominated by
primitive medieval views and was still largely dominated by
primitive medieval views and in which there were only occasional flashes of liberal insights.
After these preliminary warnings about mercantilist thought we
may nevertheless try to sum up the programme of mercantilism in six points:
Political units are also economic units and must be stabilized
internally and externally. External economic relations are of great
importance and they should be viewed in a multilateral context.
The doctrine of the monetarists must be rejected, because in the
course of multilateral trade relations precious metals may flow
in one direction but return from elsewhere. However, if there is
a consistent drain of the precious metals this would be a sign
of serious problems which should not be disregarded.
The sum total of all resources is more or less constant.
International trade is therefore a d of war with different means.
Military power and commercial activities should, therefore,
progress jointly.
The resources of ones own country must be mobilized so as to
ensure adequate employment and to increase the countrys
potential in the inter national power game.
The productive potential of ones own country must be
protected against foreign competition. Economic protection is a
political duty.

36

Differential Relevance of the Mercantilist

Programme
The six-point summary shows that the full programme was of
immediate relevance only to such states, which had both, a
considerable home market and a substantial share in foreign
trade. States with a large home market but only an insignificant
share in foreign trade as well as small states with an insignificant
home market but a substantial participation in foreign trade did
not fit into this pattern. Wherever foreign trade was largely
conducted as a export business this trade was a kin of service
and the respective economy flourished because of the earning
and profits derived from this service. Venice and the Netherlands would belong to this category, whereas England and
France belonged to a category to which the full programme
would be applicable. For this reason there is no Dutch mercantilist literature while it abounds in England and France.
This difference was not obvious to the contemporary mind. On
the contrary, English authors constantly referred to the Dutch
example. Both English and French mercantilist literature was
essentially of a defensive nature and the Dutch were seen was
essentially of a defensive nature and the Dutch were seen as
rivals whom one should emulate in order to be able to defeat
them. In the 18th century this confrontation with the Dutch
ceased to be of importance. Instead the rivalry between the
British and the French determind the course of European
history. The zero-sum game was now projected on the screen
of global territorial control. In spite of the discovery of many
new territories it was obvious that the number of such
territories was limited and the control of one power would
necessarily mean the exclusion of the other.
The Age of Mercantilism as a Historical Period
The emergence of liberal economic thought in the last decades
of the 18th century marked the end of the age of mercantilism.
The Boston Tea Party of 1779 was perhaps the most
conspicuous single event, which indicated that mercantilist
policy had outlived its usefulness. This ingenious demonstration was sponsored by American free-traders who deeply
resented the monopoly of the East Indian Company which had
only continue it as smugglers. The East Indian Company had
been eager to acquire this privilege in order to bolster up its
declining fortunes. The Boston Tea Party thus provides a
convenient terminal date for the age of mercantilism. It is much
more difficult, however, to find an equally convincing date for
the beginnings of this period. Monopoly trades as such more
difficult, however, to find an equally convincing date for the
beginning of this period. Monopoly trade as such was not the
most distinctive feature of the age of mercantilism. Privileged
trade was essentially medieval. A monopoly such as the royal
monopoly finally led to an utter neglect of the internal economic development of the country. The Portuguese system has
been described in one of the subsequent chapters only because
it created important preconditions for the pattern of European
expansion in Asia, not because it is considered to be the
harbinger of mercantilism.
The age of mercantilism begins with the increasing importance
of modern corporations of merchants, which differ from
medieval gulds in terms of the scale of their operations and

Copy Right: Rai University

11.587

ECONOMIC AND BUSINESS HISTORY

their organizational structure. The foundation of the Dutch

and English East India Companies at the beginning of the
17th century therefore provides an adequate point of departure.
At the same time mercantilist thought as a reflection of the
structure of trade relations emerges. It differs from medieval
contemplations of the rights and duties of merchants by
focusing on such phenomena as the balance of trade, the factors
encouraging or preventing employment, etc. The main period
of mercantilism more or less coincides with the 17th century. In
the 18th century the great monopoly corporations as well as
mercantilist thought face more and more criticism and free trade
upon the East India Trade, published in 1701, is of great
significance in this context this will be discussed in detail later
on. But the monopoly companies which had acquired a
substantial political weight began to outlive their usefulness and
even in many other respects mercantilism was fighting a
successful rearguard battle in the 18th century.
Bibliography
See J. W. McConnell, Basic Teachings of the Great Economists
(1943); F. W. Hirst, ed., Free Trade and Other Fundamental
Doctrines of the Manchester School (1903, repr. 1968); A. W.
Coats, ed., The Classical Economists and Economic Policy
(1971).
C. H. Wilson, Profit and Power (1957); P. Geyl, Orange and
Stuart, 16411672 (1970).
W. Horrocks, A Short History of Mercantilism (1925); D. C.
Coleman, ed., Revisions in Mercantilism (1969); R. B. Ekelund,
Jr., and R. D. Tollison, Mercantilists as a Rent-Seeking Society
(1982); J. C. Miller, Way of Death: Merchant Capitalism and the
Angolan Slave Trade (1988).
G. L. Beer (190713); L. A. Harper, The English Navigation
Laws (1939, repr. 1964); O. M. Dickerson, The Navigation Acts
and the American Revolution (1951, repr. 1974).
Notes

11.587

Copy Right: Rai University

37