Mercantalism

The theory of Mercantalism is enduring classical approach came into practice about 16 th to 18th
century in Europe. This is based on the principle that the world wealth is static and stagnant so
accumulate largest share of wealth by creating favorable balance. The theory of Mercantalism
refutes the claim of Marxism that “Politics is under full control of economic”, but rather
Mercantilist elucidate that it’s the political arrangements that create framework for economic
activities which means nations frequently engaged their military might to ensure local markets
and supply sources. The mercantilist judicious a middle ground between the economic liberalism
(promote integration of markets and economy) and dependency theory (delinking of markets).
Mercantilist strikes a balance between market and state, between autonomy and integration.
Mercantilist place nation-state as a center of analysis. They place explicit political analysis of
international economic relations.
Countries best interest is to maintain surplus
Trade is a zero-sum game
Advocates government intervention to achieve surplus
(Restriction on import, accumulation of foreign currency reserves, gold ans silver knows as
bullionism, granting trade monopolies to firms linked with trade and shipping, subsidies granted
to export industries to give competitive advantage in market, control of colonies, government
investment to mazimize efficeny and capacity of industries)
According to Mercantalist nation’s economic power can be assessed by it’s ownership of precious
metals
(Developments in Japan is due to successive mercantilist policies) (Zero-sum game) (Today its
positive sum game)

 Mercantilism is an economic practice by which governments used their

economies to amplify state power at the cost of other countries.
 Governments pursued to certify that exports surpassed imports and to mount up
wealth in the form of bullion (mostly gold and silver).
 In mercantilism, wealth is viewed as finite and trade as a zero-sum game.
 According to liberal theory international economic relation are beneficial for all whereas
according to Mercantilist it is a zero sum game between nations

Mercantilism was the prevalent economic system in the Western world from the 16th to the 18th century

The excessive state intervention will lead to “bureaucratic failure” in the same way leaving too
much on markets forces will cause market failure for example creation of monopolies in some
 areas or unregulated production leading to more pollution. The neutral strategy between state
and market varies across societies. For example TNCs have different outcomes in different state.
AS in underdeveloped states TNCs will dominate the country and will not be helpful for
strengthening local industries, whereas in developed countries they are a mode of production and
advancement.
It is a most sensible and practical strategy for economic development with certainly no flaws and
defects.
Pros: - Thus mercantilism is seen as a wise strategy of development (CASE OF JAPAN 
ECONOMIC DEVEOPMENT, SOME SOUTH ASIAN COUNTRIES AND TNC’S  MIDDLE GORUND
STRATEGY)
In underdeveloped south countries like sub-Saharan areas there is need to have a sophisticate
state intervention and regulation for economy.
CONS of debate: - By penning off, not surprisingly, ever theory has its blind spots.
If in underdeveloped countries high-administrative units are corrupt. So this strategy will only
benefit the elite in nourishing and flourishing corruption.
There are two approaches of Mercantalism which are focused on state power in an anarchic system.
If two states are economic rivals this process can be understood under the light of these two
approaches of Mercantalism
Benign Mercantalism embraces a degree of protectionism that preserve together value and
interest of a society. According to them national economic interest is basically National interest of
a state. Due to this very reason states go for defensive position called protectionism. It enables a
society to retain domestic autonomy and possess valued industries in a world characterized by the
internationalization of production, global integration of financial markets, and the diminution of
national control. Thus, the major goal of benign Mercantalism is to serve domestic social and
economic objectives of a state including preservation of key industries.
Malevolent Mercantilism is a conduct of interstate warfare through means of economy which
means developed states exploit and take advantage of international economy through
expansionary means. Thus Malevolent Mercantilism sole aim is, Accumulation of national power
and domination on other states.
 Google searched
Mercantalism is command economy not market economy (economic liberalism)
According to Mercantilist economic potential of the world is static. They interpreted that world is
composed of fixed quantum of resource thus the gain of one is a loss of other state (Zero-sum
game). The theory of Mercantalism lacks the belief in economic development.
In that era precious metals like gold and silver were reckoned as Nation’s Wealth.
This theory fixated on “favorable balance of trade” which means amount of exports should be
greater than imports. To achieve this surplus balance of trade mercantilist suggest protectionism
policy such as restriction on imports.
Criticism:-
1. This theory effected underdeveloped countries, as they were suppliers of raw materials to
mother countries and import good in manufacture form with expensive pricing.
2. It was a monopoly of developed states as manufacturing was banned in colonial states.
3. Mercantalism gave birth to favorable environment for capitalism.
4. There are short coming in this approach as it sufficiently not allow any relationship
between economic theory and economic policy.
5. Economic liberalism ideas of Adam smith are a major criticism as they see private interest
in universal frame of economy, whereas mercantilist view public interest of political economy in
national frame.
6. Mercantalism which focuses government regulation leads to inefficiency and corruption.
7. It justified empire building ad poverty of colonies to enrich the empire country.
8. This caused frequent European wars in that time motivated by expansionist policies
9. These policies benefit the government and the commercial class rather than whole population.
10. Too much importance to gold and silver neglecting other commodities.

Effects
  Mercantilism led to the creation of monopolistic trading companies, such as
the East India Company and the French East India Company.
 Restrictions on where finished goods could be purchased led in many cases to
burdensome high prices for those goods.
 Commercial rivalry tended to result in military rivalry as well, notably during
the Anglo-Dutch Wars.
 Colonists seeking to get around the trade restrictions mandated by mercantilism
resorted to widespread smuggling.
 The constraints of mercantilism were a cause of friction between Britain and its
American colonies and were arguably among the elements that led to
the American Revolution.

There are short coming in this approach as it sufficiently not allow any relationship between
economic theory and economic policy.

Case study of France:-

Colbert also increased the size of the French navy, on the belief that France had to control its
trade routes to increase its wealth. Although his practices ultimately proved unsuccessful, his
ideas were hugely popular, until they were overshadowed by the theory of free market economics
The 2019 Global Mercantilist Index finds that China is the world’s most innovation-mercantilist
nation.
▪ to counter global mercantilist policies, the U.S. government should pursue three types of
reforms: government restructuring, diplomatic pressure, and systemic funding .
Protectionism: unconditional free trade serves the interests primarily of the most advanced economies. Less developed
nations lose out from open competition with superior industries. The state thus has to intervene in trade and erect barriers
to protect domestic producers. • Promotion of ‘infant industries’: protectionism’s main objective is to promote the growth of
domestic industries. In their early stage of development, nascent industries are particularly vulnerable to competition from
mature industries. To allow them to establish themselves and reach a state of international competitiveness, the state has to
shield domestic industries from foreign competitors until Chapter 2: Mercantilism and economic nationalism 23 they have
accumulated sufficient capital and technology to withstand international competition.

LIBERALISM

Economic liberalism, for example, is not only an analytic too based on the theories
and assumptions of neoclassical economics, but it is also a normative commitment to
a market or capitalist economy
The foundation of modern economics is laid by David Ricardo in 19 th century.
Essential modernization factors:
• a market economy, free of political interference
• a growing rate of economic investment
• foreign direct investment
Liberal political economy advocates a market economy that promotes individual enterprise. The
state’s role is to support, not hinder, the free interplay of market forces
Individualism and individual liberty: In the words of John Stuart Mill, ‘the free development of
individuality’ is at the heart of liberal politics. The pursuit of individual self-interest is both an
expression of liberty and the engine of social and economic progress.
• Market mechanism: For liberals, the market is the natural, and most effective, mechanism for
coordinating individuals’ pursuit of selfinterest. It guarantees the optimal allocation of resources in
a world of scarcity. The development of the market and the division of labour is the prime source of
economic growth.
• Limited government: Liberals are generally sceptical about the power of government, believing it
to have a detrimental effect on individual liberty and the functioning of the market. They seek to
limit the right of government to interfere in society and the economy, but differ as to the precise
role that government plays in promoting individual and societal well-being.
• Progress in history: Liberals share a belief in the progressive nature of history. Adherence to
liberal principles will allow societies to develop their economic and political potential and realise
prosperity and peace over time.
With regard to international economic relations, classical liberals reject mercantilism’s portrayal of the international
economy as a zero-sum game in which one nation’s gain is another nation’s loss. Instead, all nations can benefit from an
expanding global market through promoting free trade and the international division of labour. ‘Peace-through-trade’, the
belief that free trade would guarantee peaceful relations between states, became the rallying cry of nineteenth-century
liberals.

According to Ricardo, all nations can benefit from international trade, including those that don’t have an absolute advantage
in any economic sector or industry (comparative advantage)

In their view, the free exchange of goods would promote wealth creation, which in turn would reduce the desire in nations
to build empires and use military force for economic gain. Free trade would bring out the common interest of all peoples in
peace and cooperation, and would take away the reason for pursuing economic nationalism

He also rejected colonialism for its negative effects on international trade as much as for moral reasons.

Critics of this approach raised two fundamental objections: • As E.H. Carr and others were to argue in the twentieth century,
free trade benefits mainly the powerful and economically advanced nations. Britain in the nineteenth century may have
believed that free trade reflected the interests of all nations, but this merely disguised real differences in economic interest
and power. The free trade doctrine thus becomes an ideology of the rich and powerful. • Despite a high degree of economic
interdependence and integration in the early twentieth century, the First World War destroyed all hopes that free trade
alone could secure peace. The resurgence of mercantilism and military expansionism after the war posed a serious dilemma
for the progressive interpretation of history by economic liberals. As the rise of fascism and communism and the outbreak of
the Second World War seemed to suggest, deep-rooted nationalist sentiments stood in the way of a peaceful evolution of
international society