Mercantilism

Mercantilism was an economic policy that was practiced till the late 1700s. Its origins date
back to the late 15th century, when writings on economic and commercial policies started
to surface in the common discourse of matters. As an economic policy, it can be best
termed as policies aimed at increasing national power and prestige through accumulation
of increasing amounts of wealth. ‘Wealth’, in that time, consisted primarily of precious
bullion, of which gold and silver was the most sought after. Therefore, a country that could
accumulate as much bullion (especially gold) as possible would be the dominant power of
its day, as per the Mercantilist philosophy. This philosophy held complete sway over the
policies of European nation states till the advent of Adam Smith’s magnum opus, the
‘Wealth of Nations’ (1776), which decisively broke the hold of mercantilist thinking and
called cooperation on trade rather than competition and wars over it.

To understand mercantilism, it is important to understand the context and the world in

which this philosophy arose. The early part of the rise of mercantilist philosophy
coincided with a time when the European nation states like England, France and Spain
(along with independent princely kingdoms like Sicily, Piedmont, Prussia, Naples, etc.)
were engaged in an intense rivalry that resulted in incessant warfare. Hardly a year or two
would pass without some kind of war breaking out somewhere in Europe. Wars, in turn,
are costly affairs. Not only do they require tremendous financial effort from the state, but
also pushes the states to look for allies in their struggles against each other.

But financing wars was not easy (as it never has been). Money at that time consisted of
metallic money, made from metals such as gold, silver, tin and copper. The supply of these
metals was either limited, or not enough to keep up pace with the demands of financing
wars. So there was this challenge of finding new sources or mines from where extra
amounts of metals could become available.

A breakthrough in this regard came with advances in naval technology and sea faring,
which allowed for circumnavigation of the globe and discovery of new destinations like
Africa and America by adventurers like Vasco de Gama and Columbus (most of these
missions were supported, if not financed, actively by the governments). As new
destinations were discovered, the chance to indulge in trade with them also arose, and so
did the possibility of finding new sources of precious metals. A remarkable discovery in
South America, where the Inca Empire ruled, hastened the race between the European
nation states to exploit the newly discovered markets. When the Spanish ‘conquistadors’
(conquerors) landed in South America, they found a land awash with gold and other
metals. Moreover, in nearby areas, mines of bullion (especially silver) were common
place. As the Spanish took over the land by subjugating the locals, all that precious metals
flowed to Spain which suddenly found itself with excess supply of metals and money.

This development was not lost upon the other, rival powers. Since the place in question
had already been taken by the Spanish, there was nothing that could then be gained by
the others. In short, the gain of Spain was loss for others. In modern parlance, this is
known as ‘zero-sum game’, where the gain of one is necessarily the loss for its rival. The
other way of saying this is that there is no possibility of mutual gain. This thinking quickly
came to dominate the minds of policymakers of the mercantilist era, and hence began a
race to ‘capture’ the newly discovered markets. Aside from the realization that the new
markets may contain huge quantities of precious metals (as in South American case),
another thought pre-occupied the minds of policymakers: that the supply of the precious
metals is finite, i-e, it will finish someday. This, in turn, implied that the quantity of wealth
in the new markets (and in the world) is fixed. Thus, whoever can get their hands on this
limited supply first, that country would be better placed than its rival. This thinking
explains well the reason behind European powers fighting battles in newly discovered
markets like India and Africa (the French and English, for example, fought many battles
for control of India and North America): the market cannot be shared since there was no
such thing as shared benefits. Either it’s yours or it was mine.

The external aspect of this philosophy (capturing foreign aspects) was complemented by
an internal aspect: how to use trade and national wealth to prop up production and
employment in home country. There was an implicit realization (although no proof or
economic theory) among policymakers that not only increase in money supply, but
increase in exports, can beef up local production and employment substantially. But for
that to happen, a country needed to export as much as possible (and import as less as
possible) in order to realize the gains from trade. Even here, one can see the shades of
‘zero-sum’ philosophy since the thinking was that the real gain only lay in selling to the
other party rather than buying from it. And what was the link between increasing exports
and gain in national wealth? Because selling something would beget bullion in return,
especially gold and silver. Another way of saying this, thus, was that more exports meant
more precious metal coming within the country, and thus more imports meant the loss of
it, a thing that should be avoided if the country was to realize gain in wealth. The gain in
wealth could then be used to increase the supply of wealth within the country, which in
turn would create more employment and more opportunities.

In its heyday, mercantilist philosophy was unrivalled and unchallenged. European nation
states followed it without any second thoughts about the damage it have inflicted upon
them. But it is also important to clarify that at a later stage, even some ardent mercantilist
writers and supporters had realized that there are certain disadvantages to pursuing such
a course of action, and that there needs to be some fine-tuning of the mercantilist policies
in terms of ground realities. Although they could not express it convincingly, they had
realized that there actually were mutually beneficial alternatives for competing nations,
who could gain by cooperating on trade rather than waging wars against each other. It
was left to Adam Smith to clearly demonstrate that nations can benefit mutually through
trade by laying down the concept of ‘Absolute Advantage’ in his famous book, which began
the downfall of mercantilist theory.

Can we then infer that mercantilism died long ago? That would be mistake, since the
mercantilist thought underpinning trade can be seen clearly in action in today’s trade
practices and conduct. The difference is that instead of gold and silver, the much sought
after ‘wealth’ is now in the form of dollars, the currency that oils the wheels of
international trade (money is part of ‘wealth’. Also, note that the central banks around the
world still hold a sizeable portion of gold reserves). Countries still prefer to have more
exports than imports, and many countries (especially China and India) have been
tremendously boosted by their increasing exports in their quest for development. The oft
heard notion of ‘national self-sufficiency’ or ‘economic self-sufficiency’ is another name
for mercantilism, without today’s policymakers realizing this. There is, though, lesser
resistance to imports than the time of mercantilism, with an understanding that
international cooperation rather than enmity can beget better results.