Mercantilism and Globalization#

Mercantilism vs. Globalization

Sitzung 3
 Some questions…
• is there any evidence of price convergence prior to the
1820s in the intercontinental commodity trade?
• ‘everything gained was lost during the Wars’. (can you
explain that?)
• O’Rourke published an article arguing there was a
potential for global market integration prior to the
nineteenth century, but this potential was constantly
frustrated by mercantilist policies
• Can we talk of an Euro-Asian and Euro-American trade
boom following the Voyages o f Discovery
 Polanyi´s Critics
• The imposition of mercantilism was, for Polanyi, “a
deliberate construction of a national market by expanding
the regulations from a local level to a national level”
• This allowed the free trade of commodities within the
nation while preventing free trade between nations.
• While the creation of the national market allowed the state
to monetize the economy much further and to increase the
extraction of resources for its own war-making, the market
was still heavily protected in favor of the traditional
classes - the aristocracy, the artisans and craftsmen, and
the peasants
 Polanyi II
• Protectionism took the form of preventing
individuals from selling their labor on the market,
since the creation of the labor market meant that
individuals would travel en masse to cities and work
at very low wages.

• There were also strict regulations on the sale of

land, so as to prevent large-scale displacement or
any alteration in the power of the nobility. It was
only the newly rising burghers in the cities who
wanted to remove these forms of protectionism
 The World in 1500
Three big “Worlds”:
• One was the Muslim world, centered on the
Ottoman Empire.

• The other was East Asia, with China as its

center.

• Western Europe
 Remember?
• Globalisation of world trade, argue O’Rourke/Williamson, should
be defined as synonymous with integration of international
commodity markets.
• “The evidence summarized is never quite what we would like:
sometimes trade was reported in values, sometimes in volumes;
sometimes for one product, sometimes for another; sometimes
carried by one country, sometimes another; and it is never -at
least until 1820- a constant-price world trade index”.
(O’Rourke/Wlliamson, p.421,2002)
• Persson says, convergence might be a transitory event. What is
important is therefore that the convergence is sustained (i.e. not
cancelled out by a new trend of divergence) for a period of time,
even if the transition as such is swifter in some cases.
 Definitions
• Mercantilism is economic nationalism for the purpose of
building a wealthy and powerful state.
• (Common definition) Mercantilism: An economic philosophy
of the 16th and 17th centuries that international commerce
should primarily serve to increase a country's financial
wealth, especially of gold and foreign currency. To that end,
exports are viewed as desirable and imports as undesirable
unless they lead to even greater exports.
• ADAM SMITH coined the term “mercantile system” to describe
the system of political economy that sought to enrich the
country by restraining imports and encouraging exports.
• This system dominated Western European economic thought
and policies from the XVI to the late XVIII centuries.
 The World in Europe back then...
• During the mercantilist period, military conflict between
nation-states was both more frequent and more extensive
than at any other time in history (why?).
• The armies and navies of the main protagonists were no
longer temporary forces raised to address a specific threat
or objective, but were full-time professional forces (they
were constant expenditures for the nation).
• Each government’s primary economic objective was to
command a sufficient quantity of hard currency (silver/gold)
to support a military that would deter attacks by other
countries and aid its own territorial expansion.
• Remember what was “Europe” back then…
An idea
 Colbert‘s plan… (Mercantilist
Theory)
Jean-Baptiste Colbert, the minister of finance under
Louis XIV from 1661 to 1683, had some ideas how to
empower the Govt in order to have more money:
• Restrictions on imports (tarrifs, quotas, "quality
specifications", and other regulations)
• Subsidies on exports (tax abatements, monopoly
privileges, special loans, cash subsidies, government
partnerships, etc.)
• Use of domestic ships rather than foreign ships
• Requirements that all trade with the country's
colonies go through the home country and be
handled on ships of the home country.
 In Short…
• The goal of these policies was, supposedly, to
achieve a “favorable” balance of trade that would
bring gold and silver into the country and also to
maintain domestic employment.

• The three main tenets of mercantilism are to:

a) Maintain a balance of trade surplus
b) Import raw materials, export finished products
c) Protect Domestic Currency.
 Political Consequences…
• Most of the mercantilist policies were the
outgrowth of the relationship between the
governments of the nation-states and their
mercantile classes (Monopolies).

• In exchange for paying levies and taxes to support

the armies of the nation-states, the mercantile
classes induced governments to enact policies that
would protect their business interests against
foreign competition
 Mercantilism: inside and outside
the Borders
Domestically, governments for example would:

1. provide capital to new industries

2. exempt new industries from certain rules and
taxes
3. establish monopolies over local and colonial
markets
4. grant titles and pensions to “successful
producers”
 Mercantilism: inside and outside the
Borders II
Internationally the government

1. assisted local industry by imposing tariffs, quotas, and

prohibitions on imports of goods that competed with local
manufacturers.
2. prohibited the export of tools and capital equipment and
the emigration of skilled labor that would allow foreign
countries, and even the colonies of the home country, to
compete in the production of manufactured goods.
3. At the same time, diplomats encouraged foreign
manufacturers to move to the diplomats’ own countries.
 Mercantilism and Transportation
• Shipping was particularly important during the
mercantile period. With the growth of colonies and the
shipment of gold from the New World into Spain and
Portugal, control of the oceans was considered vital to
national power.
• Because ships could be used both for merchant or
military purposes, the governments of the era
developed strong merchant marines.
• In France, Jean-Baptiste Colbert, the minister of finance
under Louis XIV from 1661 to 1683, increased port
duties on foreign vessels entering French ports and
provided rewards to French shipbuilders.
 Mercantilism and Transportation II
• In England, the Navigation Act of 1651 prohibited
foreign vessels from engaging in coastal trade in
England and required that all goods imported from
the continent of Europe be carried on either an
English vessel or a vessel registered in the country of
origin of the goods. Finally, all trade between England
and its colonies had to be carried in either English or
colonial vessels.

• The Staple Act of 1663 extended the Navigation Act by

requiring that all colonial exports to Europe be landed
through an English port before being re-exported to
Europe.
 English „Triangle routes“
• Between 1651 and 1673, the English Parliament passed
four Navigation Acts meant to ensure the proper mercantilist
trade balance. The acts declared basically the following:

• Only English or English colonial ships could carry cargo

between imperial ports.
• Certain goods, including tobacco, rice, and furs, could not be
shipped to foreign nations except through England or
Scotland.
• The English Parliament would pay “bounties” to Americans
who produced certain raw goods, while raising protectionist
tariffs on the same goods produced in other nations.
• Americans could not compete with English manufacturers in
large-scale manufacturing.
 Smith‘s critics against Mercantilism
(and protectionism)
• Adam Smith made a number of important criticisms of
mercantilist doctrine. Mercantilism creates poverty and ruin
1. First, he demonstrated that trade, when freely initiated,
benefits both parties.
2. Second, he argued that specialization in production allows for
economies of scale, which improves efficiency and economic
growth.
3. Third, Smith argued that the relationship between government
and industry was harmful to the general population.

• While the mercantilist policies were designed to benefit the

government and the commercial class, the doctrines of laissez-
faire, or free markets, which originated with Smith, interpreted
economic welfare in a far wider sense of encompassing the
entire population.
 Today…
Mercantilism is currently associated with a force against free
trade and thus against globalization.

• Free-market theory demands that countries to open up

their trade and reduce tariffs, quotas and other trade
barriers. It encourages liberalization of the movement of
goods, services, people, capital and ideas.

• Mercantilism, on the other hand, makes economic

protectionism and imperialism its primary point.
Mercantilists also believe countries can go to war to protect
their economic interests.
 Today II…
Both mercantilism and free trade require certain
government policies.
• Free trade argues for smaller government whose
primary function is to facilitate and protect trade
• Mercantilism requires the government to pursue
narrow nationalistic economic policies such as "beggar-
thy-neighbor" initiatives--policies aimed at isolating
and weakening neighbor states.
• Trade restrictions can be imposed not only through
Tariffs but through subsidized consumption