THE MERCANTILIST SCHOOL

• Appeared between the

Middle Ages and the
period of the triumph of
laissez-faire (1500-1776)
• The main goal was to
increase a nation's wealth
by imposing government
regulation concerning all
of the nation's commercial
interests.
• The goal of these policies
was, supposedly, to
achieve a “favorable”
balance of trade that
would bring gold and
silver into the country
105
 THE MERCANTILIST SCHOOL
Discussion in this topic can be
divided into 3 parts:
• “5 major questions” to provide
an overview of mercantilism.

• 2 individuals who expressed

mercantilist ideas (Thomas
Mun & Jean Baptiste Colbert)

• A mercantilist who developed

some concepts that
foreshadowed classical
economics (William Petty)
106
 THE HISTORICAL BACKGROUND
Start from 1500:
• The self-sufficiency of the
feudal community slowly gave
ways to the new system of
merchant capitalism
• Cities became increasingly
important.
• Trade flourished both within
each country & between
countries & the use of money
expanded.
• The discovery of gold in the
Western Hemisphere
facilitated the growing volume
of commerce and stimulated
theorizing about precious
metal.
107
 THE HISTORICAL BACKGROUND
• Great geographical
discoveries, based in part of
the development of navigation,
were extending the sphere of
commerce.
• The merchant capitalists were
becoming key figures in the
world of business.
• National states were rising,
and the most powerful of them
were acquiring colonies and
spheres of influence.
• Economic rivalries between
nations were intensified.

108
 THE HISTORICAL BACKGROUND
• It is not surprising, then,
that a body of doctrine
evolved that:
 superseded feudal
concepts
 promoted nationalism
 gave new dignity and
importance to the
merchant
 Justified a policy of
economic and military
expansion

• This body of doctrine

became the “mercantilist
school”.
109
 MAJOR TENETS
• The main principles of this school
are as follows:
• Gold & silver the most desirable
form of wealth
• Nationalism
• Export > import (surplus)
• Colonization & monopolization of
colonial trade.
• Opposition to internal tolls, taxes
& other restriction on the
movement of goods.
• Strong central government
• Importance of a large, hard
working population
110
 Gold & silver the most desirable form of wealth
• Wealth of nation = the
amount of gold & silver
bullion it possessed.
• Early mercantilists even
believe that these precious
metal were the only type of
wealth worth pursuing.
• Mercantilists valued bullion
as the way to achieve power
& riches.
• A surplus of exports from a
country was therefore
necessary to generate
payments in hard money.
• Even when at war, nations
would exports goods to the
enemy as long as the product
were paid in gold.
111
 Nationalism
• Only a powerful nation could
capture & hold colonies,
dominate trade routes, win wars
against rivals & compete
successfully in international
trade.
• Mercantilist believed in the
“static” concept of economic
life.
 There was a fixed quantity of
economic resources in the world.
 One country could increase its
resources only at the expense of
another.
• Mercantilism nationalism quite
naturally led to militarism.
112
 Nationalism
• Strong navies & merchant
fleet were an absolute
requirement.
• Because fisheries were
“nurseries for seamen”, that
is because they were training
grounds for naval personnel,
the mercantilists imposed
“political Lent” on England
in 1549.
 People were forbidden to eat
meat on certain days of the
week to ensure a domestic
market for fish & hence a
derived demand for sailors.
113
 Export > import (surplus)
• Mercantilists try to promote
export & restrict import to
enhance the country’s
wealth & power.
• This is because if export >
import, surplus will exist &
more gold & silver can be
accumulated.
• Import is only allowed for
raw materials that could not
produced domestically.
• In order to protect the local
manufactured goods, export
of local raw materials were
prohibited.
114
 Export > import (surplus)
• Prohibitions against the
outward movement of raw
materials helped keep the
prices of finished exports
low.
• For example, a law passed in
1565-1566 during Queen
Elizabeth’s reign forbade the
export of a live sheep.
• The penalties for violating
this law were the confiscation
of property, a year in prison
& the cutting off of the left
hand.
• The death penalty was
prescribed for a second
offense. 115
Colonization & monopolization of colonial trade.
• Merchant capitalists
favored colonization &
wanted to keep the colonies
eternally dependant upon &
subservient to the mother
country.
• Any benefits that spilled
over to the colonies from
the home country’s growth
& military power were an
accidental by product of the
policy of exploitation.
• Example: The English
Navigation Acts (TENA)
of 1651& 1660 116
Colonization & monopolization of colonial trade.
• According to TENA:
 Goods imported into Great
Britain & the colonies had to
move in English or colonial
ships or in ships of the
country where the goods
originated.
 Certain colonial products had
to be sold only to England.
 Foreign import into the
colonies were restricted or
prohibited.
 Colonial manufacturing was
curbed so that dependant
territories would remain
suppliers of low cost raw
materials & importers of
English manufactured goods. 117
 Opposition to internal tolls, taxes & other
restriction on the movement of goods.
• Tolls & taxes could throttle
business enterprise & drive
up the price of a country’s
exports.

• However, the mercantilists

did not favor free internal
trade in the sense of allowing
people to engage in any trade
that they wished.

• On the contrary, mercantilists

preferred monopoly grants &
exclusive trading privileges
whenever they could acquire
them.
118
 Strong central government
• In general, a strong central
government was needed to
promote mercantilist goals
discussed previously:

 Nationalism
 Protectionism
 Colonialism
 International trade
unhampered by tolls &
excessive taxes.

119
 Strong central government
• In specific, a strong central
government was needed to:
 grant monopoly privileges to
company engaged in foreign
trade.
 restrict free entry into business
at home to limit competition.
 support local economic sector
(agriculture, mining & industry)
by giving subsidies & protect all
the sectors from imports via
tariffs.
 closely regulated the methods of
production & the quality of
goods (so that a country would
not gain bad reputation for its
product in foreign markets,
thereby hampering exports)
 To ensure uniform national
regulation.
120
Importance of a large, hard working population

• Large population will:

 Provide soldiers & sailors
ready to fight for the glory
& the wealth of nation.
 Keep labour supply high &
wages therefore low.

• These low wages would:

 Enable lower price on
exports, thereby increasing
the inflow of gold.
 Reduce idleness & promote
greater participation in
labour force.

121
Importance of a large, hard working population

• Idleness & begging by

able-bodied people were
dealt with mercilessly, and
thievery was severely
punished.
• For example, during the
reign of King Henry VIII
in Great Britian (1509-
1547), 7200 thieves were
hanged.

122
 WHOM DID THE MERCANTILIST SCHOOL
BENEFIT OR SEEK TO BENEFIT ?

• In general
 benefited the merchant
capitalists, the kings &
government officials.

• In specific:
 benefited those who
were most powerful
and had the most
favored monopolies &
privileges

123
 HOW WAS THE MERCANTILIST SCHOOL
VALID,USEFUL OR CORRECT IN ITS TIME ?
• Example: gold & silver were
important during that time
because:
 The rapid growth of commerce
required more money in circulation
& banking was insufficiently
develop to produce it.
 Wars were fought on a pay-as-you-
go basis, & bullion provided a
reserve that could be used to hire &
maintain soldiers, build ships, buy
allies & bribe enemies.
 Some mercantilist were also aware
the increases in the amount of gold
& silver in circulation reduced
interest rate and promoted business.

124
 HOW WAS THE MERCANTILIST SCHOOL
VALID,USEFUL OR CORRECT IN ITS TIME ?
 Before the development of
international finance and
multilateral trade , bullion was of
major significance in making
international payment.
British trade with the Baltic
region & the East Indies
required international liquidity
by way of precious metals.
Great Britian produced little
that could have been exported
to those areas, and latter would
not accept paper sterling
because of the underdeveloped
international money market.
The British colonies were
therefore tapped to yield gold
& silver that could be used in
payment for Baltic & East
Indian wares. 125
 WHICH TENETS OF THE MERCANTILIST
SCHOOL BECAME LASTING CONTRIBUTIONS?
Cannot be use anymore:
• Wealth of nation = the amount of
gold & silver bullion it possessed.
 Most of them failed to grasp that a
country could become richer not
only by accumulating gold & silver
but also by discovering a greater
quantity of natural resources,
producing more capital goods &
using labour more efficiently.
• Static concept of economic
– They also did not comprehend that
all nations can enrich themselves
simultaneously through
specialization & trade. (without have
to impoverish its neighbours).

126
 WHICH TENETS OF THE MERCANTILIST
SCHOOL BECAME LASTING CONTRIBUTIONS?
Lasting contributions:
• The important of international trade
 Develop the economic & accounting
notion known today as “balance of
payment”
• Promoting nationalism
 Some developing nations still promote
nationalism as a way of overcoming
tribalism & local loyalties that impede
economic development. They also
frequently offer monopoly grants to
encourage new investments & erect
trade barriers to protect infant domestic
industries.
 For example: China’s strategy for economic
growth in the 2000s includes maintaining
large trade surplus by keeping exports cheap
& import expensive. 127
 WHICH TENETS OF THE MERCANTILIST
SCHOOL BECAME LASTING CONTRIBUTIONS?
Lasting contributions (indirectly)
• Permanently influenced attitudes
toward the merchant
 The medieval aristocracy had classed
people engaged in business as second
class citizen.
 The mercantilists gave respectability
and important to merchants by arguing
that, when their activities were properly
channel by government, merchant
enriched not only themselves but also
the king & the kingdom.
 The landed aristocrats eventually began
to participate in business ventures
without losing their status & dignity.

128
 WHICH TENETS OF THE MERCANTILIST
SCHOOL BECAME LASTING CONTRIBUTIONS?
• In short mercantilist ideas are still
alive & well.
• It is important to realize, however
that ideas & policies reflect only
selected aspects of the overall
doctrine of mercantilism.
• Furthermore, nations are applying
these ideas today in different
circumstances, for different reason,
and in the context of social policies
different from those of the
mercantilist era.

129