4. Historical Backgrounds
of Mercantilism
• Generally, Mercantilism is associated with the rise of
the “Nation state.”
• Feudal institutions were weakened by the increasing
use of money and a greater reliance on exchange
within the economy.
• The Protestant Reformation weakened the role of
the church and consequently the civil role of the
state was expanded
• There was a rise of Humanism (the concern for wellbeing of humans in the short term).
5. The decline of feudalism was influenced by
changes in technology
“enclosure movement” and the commercialization of agriculture
Increasing use of money in the economy reduced the role of barter
and reciprocity, people wanted to sell or work for money
three-field system [1 field winter crop, 1 field spring crop, third lying
fallow] extended area peasant could farm by 1/8, 50% increase in
output
rise of mechanical power [water, wind] used in textile and mining
urbanization
6. The Decline of Feudalism and the Plague
• The "Black Death" of 1346-61
restricted trade
reduction in population
Increased production of wool; need industry and
commerce to process and sell wool and textiles.
7. Reduction in Population
• Population of England fell by about 1.5 million
(out of a population of 3.5 to 5 million in
1346).
• Result was more money per person but also
more animals, land and goods per person,
prices fell.
• Labour shortage pushed wages and earnings
up.
8. What is Mercantilism?
England followed this theory with the 13
Colonies
Mercantilism is an economic theory that
states a nation becomes stronger by keeping
strict control over its trade
It also states that a nation should have more
exports than imports
9. What is Mercantilism?
The primary objective of Mercantilism was to
increase the power of the nation state.
One of the important aspects of national
power or strength was wealth that was
equated with specie.
The states that followed a policy of
mercantilism tended to see trade, colonialism
and conquest as the primary ways of
increasing wealth.
10. When and Who started ?
• 16th – 18th C
• Roughly from the 1600-1800
• The Term “Mercantilism” was coined by Maquis de
Mirabeau (a physiocrat)
• It is a system closely associated with the rise of nations
and the concept of Nationalism
• It was a system prevalent in:
–
–
–
–
France
Spain
England
Holland
12. Why?
The Paradox of Mercantilism
To be rich, a country needed to have a
lot of poor people!
• Why?
•Because by encouraging exports and
controlling imports , the governments also
limited domestic consumption and wealth.
• Besides, individuals would prefer to hold gold
and silver against possible attacks by other
nations.
13. Mercantilism Explained
• Mercantilism = unfair or unbalanced trade
• colonies existed for the benefit of the Mother
Country (M.C.)
• Source of Raw materials = cheap
• Raw materials were shipped to M. C. to be
turned into finished goods
• Finished good shipped to Colony = expensive
• profit goes to M. C.
• Pass laws forbidding colonies from producing
their own goods
14. The Mercantilist Economic
System
• A country’s wealth is measured by its holdings of
precious metals (specie).
• International trade is a zero sum game. (One country’s
gain is the loss for the trading partner)
• A country should maintain a positive trade balance
(that is, export more than it imports).
• A country with positive trade balance would increase
its wealth through acquisiton of precious metals.
• The countries had to have a strong military power and
merchant marine to increase their trading.
• According to mercantilists, economic system had 3
components: 1) Manufacturing sector 2) Rural sector
(agriculture) 3) Foreign colonies
15. The Mercantilist Economic
System
• Mercantilism employed the labor theory of value.
• Each commodity was valued relatively in terms of
their labor content. For eg: 2 labor hours / bottle for
wine production.
• Mercantilists believed that economy was operating at
less than full employment.
• Thus, a country with positive trade balance would see
an increase in money supply through inflow of
precious metals (gold and silver) which in turn would
stimulate employment and national output with no
impact on inflation.
16. Physiocrats
• Group of individuals who claimed to be economists.
Important in that they introduced the label to the
profession.
• However, afterwards as the profession evolved it was
recognized that they were a school of thought and
they were renamed the Physiocrats.
• They were called so because assumed Natural Laws
governed the economy
17. Physiocrats
• Among the great contribution of the
Physiocrats was that they introduce to the
profession the importance of building theories
based on models where analysis was done by
isolating one or more variables in the
economy
• Economy was Agriculture based
18. Adam Smith
(1723-1790)
• Appointed to the chair of logic
in 1751 at the University of
Glasgow, Scotland.
• In 1752 he transferred to the
chair of philosophy.
• On his travels to France, he
was influenced by the writings
of the physiocrats.
• 1776 The Theory of Moral
Sentiments and an Inquiry Into
the Nature of Causes of the
Wealth of Nations was
published.
– A vehement attack of the
mercantilist system.
25. Why do countries want colonies?
The money a colony makes goes to the
mother country.
For example, most of the money that the
colony of Georgia makes from growing and
selling tobacco goes to England, its home
country.
Georgia produces $$$$ for England.
27. Mercantilism
To achieve this balance of trade, the English
passed laws exclusively benefiting the
British economy.
These laws created a trade
system whereby Americans provided raw
goods to Britain, and Britain used the raw
goods to produce manufactured goods that
were sold in European markets and back to
the colonies.
28. So in the theory of Mercantilism,why do you
want to have more exports than imports?
►Export – Goods sent to market outside of a
country or colony Exports earn you money (+).
►Import – Goods brought into a country
Imports require you spend money (-).
If you EARN (Export) more than you
SPEND(Import), then you will be left with a
profit in the end.
29.
30. Increasing Control over the
Colonies
As the colonies began to be more successful
and profitable, England began to increase
control over the colonies.
The English began to enact stronger controls
over the Americans.
The first major Act which was placed over
the colonists was the Navigation Acts.
31. Navigation Acts
• ►Between 1651 and 1673, the English
Parliament passed four Navigation Acts
meant to ensure the proper mercantilist trade
balance.
32.
33. Triangular Trade
New England rum was shipped to Africa and
traded for slaves, which were brought to the
West Indies and traded for sugar and
molasses, which went back to New England.
Other raw goods were shipped from the
colonies to England, where they were swapped
for a cargo of manufactured goods.
34.
35. Mercantilism and the Triangle
Trade Increase the Slave Trade
The triangular trade also spurred a rise in the slave
population and increased the merchant population,
forming a class of wealthy elites that dominated
trade and politics throughout the colonies.
36. Trade Expands to America
Along with the voluntary immigration of Europeans
to the Americas, thousands of Africans were forced
to move to the “new world” as slaves.
African slavery in the “New World” began as early as
the 1600s and lasted until emancipation in the mid1800s.
Cramped stacking of slaves on slave shipsduring the
“middle passage” to America resulted in many
deaths.
37. Slave Trade
►When slave trade became illegal, vessels
often discharged their human cargos
rather than be caught by the Royal Navy.
40. Long Term Results
Global trade routes shifted over time the old
silk routes declined
West Asia and the Islamic world were
displaced as the centralized location of global
trade
The Atlantic and Pacific sea routes become
the new focus of global trade
41. The Flaw of Mercantilism
Trade is a zero-sum game
(A gain by one country results in a loss by another)
Example: Trade surplus in Country A → money supply ↑ in Country A
→ inflation in Country A →↓demand in Country A
→ ↑ demand in Country B → no trade surplus in Country A
No one can keep a trade
surplus in the long run
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