Three Mercantilist Theories

Mercantilism was a failed economic theory created and used during the 17th-19th centuries.  It failed because it was created by selfish merchants and traders who wanted more money and power for themselves.  There were many fallacies in their arguments but its main reason for failure was probably just because it was not a well thought-out idea.  I will share its main ideas in these three observations: mercantilism is the opposite of a free market, that government was nepotistic towards certain groups or businesses, and the encouragement of exporting but not importing for the sake of treasure.

Opposite of the free-market

The focus of a free-market society is to satisfy the needs and wants of individuals; it responds to the market demands of the people.  In contrast, mercantilism’s fundamental aim was to meet the needs and wants of the government.  This then created a government that was highly motivated to control the market to its own benefit.  It would have so much control, in fact, that it dictated what, to who, and where anything could be sold.  Chi-Yuen Wen described the view of the mercantilists this way:

“…the interests of the state were, in their eyes, by no means necessarily in harmony with the activities of the individual. According to them, wages, interest, industry, and trade should be regulated so as to benefit the State.” (Mercantilism vs. Free Trade: The Early Years)

Unfortunately, many companies and trading establishments readily agreed that the state should have total control. They had all been convinced by the mercantilist literature and saw this as their opportunity to ask for special privileges and power from the government.  Businesses wanted mercantilist rule so that they could be one of the few to be chosen as an agency to sell their item.  If it is not obvious, this blurring of the lines between government and the market can only lead to corruption.

Nepotism

The easiest way to define mercantilism is as the improving of specific groups at the cost of others welfare.  According to Murray Rothbard,

“…their aim was to confer special privilege and subsidy on favored groups; since subsidy and privilege can only be conferred by government at the expense of the remainder of its citizens, the fact that the bulk of the consumers lost in the process should occasion little surprise.” (Mercantilism: A Lesson for Our Times?)

A The aim of a nepotistic economy is to eliminate the need for a consumer-seller relationship and set up government control of all control of trading in its place.  In reality, the only real beneficiaries of a mercantilist society would be those in the government and any of its favored groups.

One of these privileged companies was the East India Trading Company (EIT).  Many English textile traders lost their businesses and jobs to the EIT because it was the only company allowed by the government to sell Indian textiles and cloth—hot items that everybody wanted.  Nepotism destroyed the livelihood of ‘unconnected’ traders, and improved only those connected to the government’s favored one.

Exports? Yes!  Imports? No!

Mercantilists had a flawed understanding of trade.  They loved exporting but were very reluctant to purchase foreign goods.  This short-sighted tenet of their theory was one created out of pure greed.  They wanted to hold on to their ‘treasures’—the gold and silver brought in from selling their commodities to others—and the more they exported the more gold they could pile up and hoard (and just look at)!  While saving is usually wise, they took this to an extreme and did not want to spend any of their ‘treasure’ on imports.

Mercantilists did not view their treasures as money, and therefore not practical for purchases.  Instead, in their mind, gold and silver was simply meant to be accumulated; it satisfied their greed and the pride that came with being wealthy.  Of all the points so far, the discouragement of imports in order to save their treasure seems to reveal the true motives and designs behind their market creation.  They wanted to get rich without at the expense of their fellowmen.  What they did not consider was that, in a crisis or famine, you cannot eat gold or silver and if you suddenly need goods and foods you cannot produce, well, you might just die before any ships willingly sail in to your port.  This shows how unthought-out mercantilism was when created by short-sighted merchants.

Conclusion

The three aspects I explained relating to mercantilism were about how it was fundamentally different from the free-market, how it encouraged nepotism within the government, and how gold and silver were seen as collectibles, and not as means to purchasing wanted or necessary goods.

Mercantilism was a failure.  Its proponents created for themselves a very unstable way to run a government and an economy.  However, it is good to review history and see which ideas worked and which of them did not, that way we can learn and improve our current economic and government situations. Nonetheless, in my opinion, mercantilism is clearly not the model to follow.

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