Mercantilism Theory

The First Theoty of International Trade

Tina S
Tina S
Nov 24, 2009
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Mercantilism theory

The first theory of international trade emerged in England in the 16th century.
The principle of mercantilism was the gold and silver were the mainstays of national wealth and essential to vigorous commerce. Mercantilism was the main economic system in Europe during the sixteenth, seventeenth, and eighteenth centuries.



This theory suggests that the government should play an active role in the economy by encouraging exports and discouraging imports, especially through the use of tariffs. Mercantilism is the economic policy that flourished in the early modern period is often referred to as mercantilism or as the mercantile system. These ideas stemmed from bullionism, a theory that precious metals equal wealth.

One of the main principles of mercantilism was that global economics was a zero-sum game: if one nation gained, another lost. This meant that it was crucial to minimize the exporting of capital, and to maximize the importing of capital. So nations would eliminate taxes and barriers of trade within their own countries, and raise massive barriers to all exports.

It also became imperative to try to extract every ounce of raw resource domestically, and to transform that raw resource into finished products that could be exported at a hefty profit. If raw materials weren’t immediately available, it was acceptable to import them, then finish them in country, and export them at a profit.

The Austrian lawyer and scholar Philipp Wilhelm von Hornick, in his Austria Over All, If She Only Will of 1684, detailed a nine-point program of what he deemed effective national economy, which sums up the tenets of mercantilism comprehensively: 

•    That every inch of a country's soil be utilized for agriculture, mining or manufacturing.

•    That all raw materials found in a country be used in domestic manufacture, since finished goods have a higher value than raw materials.

• That a large, working population be encouraged.

• That all export of gold and silver be prohibited and all domestic money be kept in circulation.

• That all imports of foreign goods be discouraged as much as possible.

• That where certain imports are indispensable they be obtained at first hand, in exchange for other domestic goods instead of gold and silver.

•  That as much as possible, imports be confined to raw materials that can be finished [in the home country].

• Those opportunities be constantly sought for selling a country's surplus manufactures to foreigners, so far as necessary, for gold and silver.

• That no importation be allowed if such goods are sufficiently and suitably supplied at home.

Mercantilism developed at a time when the European economy was in transition. Isolated feudal estates were being replaced by centralized nation-states as the focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade.

Mercantilism focused on how this trade could best aid the states. Another important change was the introduction of double-entry bookkeeping and modern accounting. This accounting made extremely clear the inflow and outflow of trade, contributing to the close scrutiny given to the balance of trade.




This practice was strongly attacked by Adam Smith in his 1776 work The Wealth of Nations, deprecating mercantilism in favor of free trade. In his 1937 treatise on the theory of international trade, the eminent American economist Jacob Viner analyzed in detail both the theory and modern defenses of mercantilism by economic historians and others.
Adam Smith and David Hume are considered to be the founding fathers of anti-mercantilist thought.

A number of scholars found important flaws with mercantilism long before Adam Smith developed an ideology that could fully replace it. Critics like Hume, Dudley North, and John Locke undermined much of mercantilism, and it steadily lost favor during the 18th century.

For purely economic criticism of mercantilist ideas of trade no one in the 17th century surpassed the directness and forcefulness of the writings of Sir Dudley North. In his Discourse upon Trade, published in 1691, he showed that wealth could exist independently of gold or silver. Agriculture and industry were the true sources of wealth.
Money he conceded was one element of wealth, and it performed invaluable services in facilitating the exchange of goods. The quantity of money in a country might be in excess or less than the requirements of the nation's trade but this was something which would regulate itself without human interference.

North's belief in the importance of domestic trade was extraordinary in a world so dominated by the concern over foreign trade, but it was quite logical considering the emphasis he placed upon domestic agriculture and industry. He condemned the practice of granting business privileges and concessions to one particular group of merchants, saying that every such exclusive privilege was to the public's disadvantage. North stands out as an independent thinker, as a herald of the new economic era that was ushered in nearly a century later by Adam Smith.



Keywords: Mercantilism Theory,The First Theoty of International Trade,Adam Smith,Dudley North, North's belief,domestic trade,1691,16,17 and 18th century, Philipp Wilhelm von Hornick,features of mercantilism.

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