Economic Ideas Before

Adam Smith

Mercantilism
 By the late 16th and early 17th century most
of the large cities in England, France, Spain
and the Netherlands had been transformed
into thriving capitalist economies
dominated by merchant-capitalists.
In these early-modern nation states
coalitions of monarchs and capitalists
wrested power from the feudal nobility in
areas related to production and commerce.
This period of early capitalism is generally
known as Mercantilism.
 The earliest phase of mercantilism is
also known as bullionism.
Bullionism originated in the period
when Europe was experiencing a
shortage of gold and silver bullion
which was needed to service a
rapidly expanding volume of trade.
Bullionist policies were designed to
keep gold and silver inside a country
and prevent their export. The
restrictions lasted from the middle-
ages to about the 17th century.
 The mercantilists desire to keep
bullion inside a country took the form
of policies designed to maintain a
favourable (i.e. positive) balance of
trade: more money coming in than
flowing out.
Exports of goods and services were
encouraged, imports were
discouraged.
An important policy to maintain a
positive trade balance was the
creation of trade monopolies.
 A country like England could buy
goods cheaply if only one English
merchant bargained with foreigners
rather than several competing
merchants who may bid up the price.
Similarly, English merchants could
sell their goods to foreigners for
much higher prices if there was only
one seller rather than several sellers
who may bid down prices.
 The English government could
exercise control over English
merchants and prohibit more than
one seller or buyer.
However, the English government
could not exercise such control over,
say, French, Dutch or Spanish
merchants.
One way of excluding foreigners was
to set up colonies controlled by the
Mother country to ensure a
monopoly of trade.
 In the early mercantilist period, most
production was carried by workers who still
owned and controlled their own means of
production.
Capitalists were primarily merchants
whose capital consisted mostly of money
and inventories of goods to be sold.
Merchant capital consisted of ownership
of the means of buying, transport and
selling while Industrial capital consisted
of ownership of the means of production.
 During the early phase of mercantilism
industrial capital was fairly insignificant, so
merchant capital was more important.
Consequently, the source of profits mainly
lay in buying and selling rather than
production.
If the price at which a merchant sold a
commodity was sufficiently high to cover the
buying price plus expenses for handling,
storing, transporting and selling the
commodity, plus a surplus over and above
these costs, then the merchant accrued a
profit (which was the surplus).
 We need to understand the
determinants of price to understand
the nature of mercantilist profit.
In the early medieval period it was
asserted that the price of a
commodity had to be sufficient to
cover the costs of production and
yield a surplus which would ensure
the craftsman enjoyed a standard of
living deemed appropriate.
 Mercantilists viewed prices
differently.
Firstly, the value or natural value
of commodities was simply their
actual Market price.
Secondly, the forces of supply and
demand determined market value.
Thirdly, commodities embodied
intrinsic value or use value,
which was the most important factor
determining demand.
 Price inflation during the 16th and 17th
centuries led to appreciation of held
inventory, while immobility of
resources between geographic
regions (of differing production
conditions) led to large differences in
relative prices. Mercantilists
exploited these conditions to accrue
large profits.
Since mercantilists felt supply and
demand determined price they
naturally concluded that competition
 Consequently, control over supply would
generate and perpetuate high profits. But
early mercantilists did not necessarily
pursue profit for its own sake.
During the early mercantilist period, there
still remained a continuity in the thought
process linked to the earlier medieval
economic order which was largely based on
a Christian paternalistic ethic.
Under the latter, inequality of wealth was
justified on the basis that God chose the
wealthy to be benefactors of the poor
masses.
 The Catholic Church was the
institution which implemented the
paternal order.
However, as capitalism developed,
the influence of the Catholic Church
grew weaker.
Eventually the state assumed many
of the charitable functions of the
Church.
Promotion of trade was seen to be
one of the ways in which
unemployment problems could be
 In order to promote trade various
measures were undertaken by the
state, including standardisation of
production and the granting of
patents (which led to monopoly).
It was natural that monopoly rights
came to be abused.
Laws and statutes were passed to
ameliorate the excessive negative
impact of monopolies.