Mercantilism

Mercantilism

The first principle of mercantilism can be found in the idea that the greatness and power of a state are determined by the abundance of money (precious metals). This stock of money grows with what is now called a favorable balance of trade. The exports of home commodities should exceed in value the imports of foreign commodities, and this positive balance of trade is settled with the importation of money or precious metal.

Historically, this supply of gold and silver acquired through a positive trade balance made it easier for monarchs to raise funds either by loans or taxes. An edict in 1603 of Henry IV, king of France, stated that the arts and manufactures were to be encouraged as the only means of preventing the exportation of precious metals out of the kingdom and the resulting enrichment of other countries.

Adam Smith’s Inquiry into the Nature and Causes of the Wealth of Nations discussed mercantilism at length. He described the “restraints on importation” along with the “encouragements of exports” by which a nation could turn the balance of trade in its favor. Restraints on imports, in the form of duties or prohibitions, were applied to the import of such foreign goods as could be produced domestically. They could also be directed to the imports from countries with which an unfavorable balance of trade existed. Goods that were imported for the purpose of reexport could enter duty free, and the encouragements to exports took the form of subsidies for the production of exportable goods, advantageous commercial treaties, and the establishment of colonies.

Smith strongly attacked the logic of the mercantilist system. He argued that a high per capita output played a much larger role than the stock of domestic precious metal in determining a nation’s economic welfare. John Maynard Keynes in his book The General Theory (1936) referred to “what now seems to me to be the element of scientific truth in mercantilist doctrine. At a time when domestic authorities had no direct control over the domestic interest rate the effect of a favorable balance of trade on the influx of precious metals was their only indirect means of reducing the domestic rate of interest and so increasing the inducement to home investment.”

In modern times Japanese economic policy has been described as mercantilist. The Japanese have maintained a favorable balance of trade and have enjoyed above-average economic growth.