Download Chapter 5: Mercantilism Instead, the bulk of the earlier literature was

Chapter 5: Mercantilism
Instead, the bulk of the earlier literature was devoted to special phases or aspects of the
subject.
The writing was usually stimulated by the events of the day, and it was often designed to
assist the public authorities in policy making or to influence them by special pleading.
Rather, as a modern observer ha put it, every one was his own economist. The writers of
the period include public officials, journalists, scientists, philosophers-- and especially
businessmen.
Child, an outstanding figure in economic discussion, was the wealthiest Englishman in
the seventeenth century. Both he and Mun, another outstanding writer on economic
questions, were closely associated and had leading positions with the east India company.
THE MAN OF THE RENAISSANCE
Versatility rather than specialization was the hallmark of the ideal of the renaissance, the
“universal man” who was to develop his potentialities to the utmost and in all possible
directions.
This ideal was closely approximated by such great figures as Lorence de’ Medici, the
merchant prince and ruler of Florence who was also reputable scholar and poet, and
Leonardo da’ Vinci, the painter, sculptor, architect, musician, engineer and scientist.
ECONOMIC THOUGHT OF THE PERIOD
That so many businessmen attained stature as economic thinker has its effects on the
quality of economic thought.
By the standards of their own time as well as by our own these men are well educated,
trained in the humanities, familiar with several languages- not excluding Latin and
Greek-and able to draw on suitable authorities for quotations to support their arguments.
In general, the thought of the period was eminently practical and policy oriented, largely
based on what was considered observation of reality but also on a few general principles.
On the empirical side it often failed because of the tendency to interpret as cause and
effect relationships mere sequences of events that followed each other in time.
Such lapses into the fallacies of “non sequitur” or “post hoc Ergo propter hoc” were
common when writers attempted to make the bare facts speak.
The writers of the period were interested in a few special economic problems and they
did not have on hand, nor did they try to construct, an integrated model of the economy
showing the relationship between relevant variables such as only the pursuit of systematic
knowledge can produce.
As they were usually concerned with a segment of the economy, heir thought lacked this
integration and was replete with contradictions.
NATIONAL CHARACTERISTICS
The observations made thus far apply especially to England, when the connection
between economic thought and business was especially close.
However with its shortcomings, English economic thought was oar superior than that of
other countries.
In the one exhaustive study of Dutch economic thought of the period, a study now over a
hundreds years old, the author commented on this discrepancy between the thought and
the accomplishments of the Dutch and concluded that the more an economy prospers the
less is written about it.
In Spain, the decay of the economy failed to stimulate notable economic thought,
whereas in prosperous countries such as Italy and France contribution of significance was
made.
SPECIAL PLEADING
The situation in England, where the businessmen-economist was so prominent, calls for
come further comment.
Not seldom these men dealt in their writings with matters involving their own private
interests, which in turn bound to be affected by the policies advocated by them.
Unlike the high official of General Motors who claimed that what is good for General
Motors is good also for United States, these men were aware of the possibility of conflict
between their own interests and those of society.
MERCANTILISM
The first attempt to systematize the thought of the writers here considered, those of the
seventeenth and the first half of eighteenth century, was made in 1776 by Adam smith in
book IV of the Wealth of Nations, which discusses the “Systems of Political Economy”.
By far the larger part of book IV, more than 200 pages, contains a review of what Smith
calls “the commercial or mercantile system.”
Smith’s intent was principally critical.
He held up the weaknesses of the mercantile system and exposed them in the strong light
of his own system of economic freedom.
To him the mercantile system was a fraud perpetrated by the business class on the public:
“The interested sophistry of merchants and manufacturers confounded the common sense
of mankind.”
What Smith called the mercantile system later became known as mercantilism.
In the present context it is principally the ideas of the mercantilists that call for
discussion.
These developed against the background of rivalry and warfare among the great powers
of Europe, which were at peace in only a single year during the period from 1600 to
1667.
England, once a backwater, had successfully challenged the Spanish Armada in 1588. In
seventeenth century, she took on the Dutch, then the strongest nation of Europe, and early
in the eighteenth she put an end to the expansion of France, then the most powerful
military country of Europe.
The rise of mercantilist thought thus parallels the rise of England and the British Empire
as a world power.
ECONOMIC RIVALRIES
The Dutch, located at the crossroads of east-west and north-south trade, had made the
most of the opportunities offered by geographic location and had developed a profitable
carrying trade side by side with their seasonal fisheries.
Both activities provided a reserve of naval strength and stimulated host auxiliary
industries.
The Dutch fisheries, which had been a minor enterprise in medieval times, expended
greatly after the early fifteenth century.
The herring became both a source and a symbol of Dutch commercial strength and of
Dutch-English commercial rivalries, which a common religious preference did little to
restrain.
In the protracted conflicts that the troubling of the English waters by Dutch brought
about, there was born an economic literature dealing with matter of international trade
and finance as well as the modern law of nations, which takes its starting point from the
work of Hugo Grotius, the Dutch jurist, who in his Mare Liberum of 1609 asserted that
the sea was free to all, provoking the English reply from John Selden in his Mare
Clausum of 1635.
It was however, not only international rivalry that formed background of mercantilist
controversies but also domestic conflicts of interest.
Tracts and pamphlets were used as weapons by the spokesmen of the great chartered
companies which were active in foreign trade and colonization. Of these, there were two
kinds, the regulated company, whose members traded on their own, and the joint stock
company whose operations resembled those of the modern corporation.
Both needed a charter and had to cultivate good relations with the king, high officials and
the public.
They were often involved in bitter hostilities and jealousies among themselves.
Thus the society of Merchant Adventures, the oldest and most widely known of the
regulated companies founded in 1359, might denounce the East India Company, the
greatest of all of them, chartered in 1600, and both might find fault with “free traders” or
interlopers who carried an independent activities.
On occasion, however, regulated companies, joint stock companies and interlopers were
united in their complaints about merchant bankers and financers.
If they did not deplore high rates of interest, they accused them of manipulating foreign
exchange rates.
Thus the usury controversy did not die down but was transformed from a moral to an
economic issue.
THE BALANCE OF TRADE
The central doctrine in mercantilist thought is that of the “balance of trade”, a phrase
probably derived from accounting precedents, which seems to have come into usage in
1610s.
As enunciated by Francis Bacon in 1616, the Doctrine states: “Let the foundation of
profitable trade be thus laid that the exportation of home commodities be more in value
than importation of foreign, so we shall be sure that the stocks of the Kingdom shall
increase, for the balance of trade must be returned in money of bullion.
By 1600 little was left of these regulations except the prohibition of the export of coin or
bullion.
At least one extremist, the diplomat and customs official Thomas Milles, wanted to
restore the earlier system with its “staple”, which restricted the export trade to certain
companies and towns, its “hosting”, which meant the supervision of foreign merchants by
local “hosts,” its statutes of employment,” which compelled the foreign sellers to employ
the proceeds from an import on the purchase of English merchandise, its Royal
Exchequer, which was to be transformed into the instrument of exchange control and
other ancient institutions which had long fallen into disuse.
Milles was so much out of step with the time that his pamphlets had little influence, but
as they contained attacks against the merchant adventurers, John Wheeler, the secretary
of the society, replied to these in his Treaties of Commerce of 1601.
This work was an apology for what would now be called orderly competition as carried
on by the society’s thirty five hundred members.
This state of affairs is much preferable to “the straggling and single merchant’s trade,”
but it must not be confused with monopoly-of which the society has been accused.
According to Wheeler, “monopoly is when one man alone buys up all that is to be got of
one kind of merchandise, to the end that he alone may sell at hiss own lust and pleasure.”
Milles found much fault with the regulated companies, as he did with the bankers.
“Merchandise Exchange,” he said “is that labyrinth of errors and private practice,
whereby (though kings wear crown and seem absolutely to reign) particular bankers,
private societies of merchants, and covetous persons (whose end is private gain) are to
suspend their councils and control their policies…thus making kings to be subjects and
vessels to be kings.”
MALYNES
Milles prejudices against foreign exchange transactions were shared by Gerard de
Malynes, who proudly called himself a merchant and who had a part in a number of
business adventures of the time, fortunate as well as unfortunate, one of the latter causing
him to spend some time in the London debtors’ prison.
Malynes’s picture of the world was in substance that of a medievalist who lived in an
environment that he found difficult to accept. He was deeply suspicious about usury and
his thought in this matter reflects the not always acknowledged influence of Thomas
Wilson.
His complaint that money, by nature a mere measure, had become an article of
commerce, and his insistence that exchanges should be traded at par recall the medieval
motions of money and of the just price.
His ideal was an orderly, static, well-regulated economic universe, in which the desire for
gain was always to be restrained by public policy.
Malynes’s long and active career as a writer begins with an eighty page tract, Saint
George for England Allegorically Described, published in 1601.
THE TERMS OF TRADE
Malynes does not speak of the balance of trade in so many words but insists that a
country should have “a certain equality” of its exports and imports. It should not suffer
“an overbalancing of foreign commodities” with home commodities which will cause it
to loose wealth.
Such a loss may be incurred in three ways: by exporting bullion or coin, by selling
domestic goods too cheaply, or by buying foreign goods at too high a price “wherein
chiefly consists the aforesaid overbalancing.”
“This overbalancing,” he says, “consists properly in the price of commodities and not in
the quantity or quality,” that is, the overbalancing is connected with what is now known
as “terms of trade,” the relationship between the prices of exports and imports.
The terms of trade have deteriorated because prices abroad have increased faster than
English prices.
England thus buys dear and sells cheap. Would devaluation of the English coin, a
measure always proposed by a few, be of help in this situation? Malynes rejects this
remedy, stating that it would raise prices both at home and abroad and abroad more than
at home.
THE RATE OF EXCHANGE
When England’s exports fell short of her imports, foreign claims on England would
exceed English claims on foreigners. The demand for foreign exchange would exceed the
supply, English exchange would fall, and foreign exchange would rise up to the specie
export point.
Once the foreign exchange rate had exceeded the specie export point, a merchant who
had to make a payment abroad would find it to his advantage to ship coin or bullion
rather than purchase foreign exchange. Of all this, Malynes was aware, but with the
blindness and obstinate ness of a fanatic believer in conspiracy theories, he closed his
eyes to the fact that fluctuations of the exchange rate, which give rise to specie exports,
reflect commercial operations.
Instead, he attributed to the bankers the power to manipulate the rate of exchange for the
sake of their own gain, and he denounced the being responsible for the outflow of specie
accompanying a rising foreign exchange.
Malynes’s mind had a speculative bent that enabled him to detect relationships-not only
figments of his imaginations but also real insights-that were beyond the grasp of his
contemporaries.
While attaching vital importance to the balance of trade, neither he nor they ever raised in
so many words the question, what determines exports ad imports?
Because high rate of foreign exchange-or a low rate of English exchange-leads to an
outflow of specie from England, one would think that a low rate of foreign exchange- or
a high rate of English exchange- would bring specie into England.
Normally an English exporter’s factor might use the proceeds from the sale of English
goods on the continent to purchase a bill of exchange on London, drawn by the London
banker’s foreign correspondent. If the London exchange were high enough, the factor
would prefer to ship specie once the specie import point have been reached.
But this is not Malynes’s argument. If the English exchange is high, that is, if per unit of
foreign balances little English money can be obtained, the proceeds from exports will be
used neither for the purchases of bills of exchange on London nor for the importation of
specie.
Again and again the fluctuations of the exchange rates are ascribed to the tricks of the
bankers rather than to the movement of exports and imports.
The remedy that Malynes proposes is the elimination of fluctuations of exchange rates by
pegging the rates at mint parity, combined with a comprehensive system of exchange
control.
Malynes is highly optimistic about the benefits that will follow from the adoption of his
proposal. His list includes the following statement: “The commodities of the realm will
be advanced in sale and price.” It is not clear, however, how this would be so if the
exchange rate rose to mint parity, causing English goods o become more expensive to
foreign purchasers. Perhaps Malynes considered the foreign demand for English goodsmainly cloth-inelastic, and this indeed indicted in statements that he made elsewhere.
MISSELDEN
Malynes views about exchanges were challenged by the balance of trade theorists such as
Misselden and Mun, who played down the influence of bankers and who believed that the
outflow of specie was not the result of a low English exchange but of an “unfavorable”
balance of trade. Edward Misselden, a businessman with a checkered career, a merchant
adventurer who at times also served the East India Company, tried to explain the causes
of the business depression from which England was suffering in the early 1620s in a tract
of approximately 130 pages. Free Trade or the Means to Make the Trade Flourish,
published in 1622.
Misselden is obsessed by the idea that England needs more specie, to obtain it; she must
force exports and restrain imports. When Misselden employs the words “free trade” he by
no means wants to endorse what the terms connote now, that is, absence of restrictions on
imports. What he had in mind was “freedom from competition” as well as “freedom to
export,” that is, a trade that was neither disorganized, such as that of the competitive
interlopers, nor monopolized by a joint stock company, such as was the East India trade
by the great East India Company.
More adequately than his predecessor he defines monopoly as “a kind of commerce, in
buying, selling, changing or bartering usurped by a few and sometimes but by one
percent, and forestalled from all others, to the game of the monopolist and to the
detriment of other men.” Every monopoly turns upon two hinges: “The restraint of the
liberty of commerce to someone or few, and the setting of the price at the pleasure of the
monopolian to his private benefit, and the prejudice of the public.”
But while Misselden castigates the monopolist, he by no means favors pure or perfect
competition in the modern sense. The orderly competition that he supports is a market
structure most adequately classified as oligopoly, although he does not use this word.
Misselden thus made the most of the contrast between the merchant adventurers who sold
English woolen cloth on the continent, and the East India Company, which brought
merchandise into the country. In addition Misselden introduced a number of policy
proposals which included the devaluation of English money, or “raising the coin,” as the
euphonious phrase went, always the controversial step and one that Malynes was opposed
to. Since he also in a cavalier manner rejected Malynes’s proposal for a restoration of
exchange parity.
MUN
Thomas Mun(1571-1641) had broken into print-in 1621 with A Discourse of Trade from
England unto the East- Indies.
THE DISCOURSE OF TRADE
Mun’s first work, a tract of some 50 pages, is principally a defense of the East India
Company. His second work, although probably completed by 1630, is superior in style
and presentation, more modern in its approach to the bullionist controversy, and broader
in perspective as well as in the range of topics.
Is the East India trade really a blessing if it drains Europe of specie? Mun’s answer is a
resounding yes. Oriental drugs and spices are necessities; indigo is an indispensable dye;
raw silk provides employment for the poor; calicoes are a substitute for linen imports and
will bring their prices down. Before the seaway around Africa was opened up, this
merchandise had to travel over land and was purchased from the Turkish middleman at
three times at what it costs to buy it in India. Much of the difference goes into the cost of
shipping the goods from India to Europe, but this does not require “ready money” as
would payment to the Turk; it merely involves the use of domestic labor and materials. It
is true that the East India Company is licensed to export a certain amount of silver every
year, but it also has the obligation to bring back as much pleasure as takes out. Actually
the exports of silver have always fallen short of the maximum allowed, and the company
has brought back more than it exported. It has also found new markets for English cloth,
lead, and tin, and expects to increase these sales. Some of the merchandise imported by
the company is retained in England and sold their much more cheaply than in earlier
times.
Admittedly the East India trade uses up English raw materials, such as timber .this
however, is the purpose of such materials. Shipbuilding provides employment for the
poor, and the warehouses of the shipbuilder and of the company constitute an emergency
reserve useful for the nation in war time. If England were to relinquish her East India
trade, the Dutch would soon get hold of it. This would only increase the outflow of specie
because the Dutch would double the price or charge what they please for goods imported
to England.
“For in respect the prices of the exchange do rise and fall according to the plenty or
scarcity of money which is to be taken up or delivered out, the exchange is hereby
become rather a trade for some great moneyed men than a furtherance and
accommodation of real trade to merchants, as it ought to be in the true use thereof.”
ENGLAND’S TREASURE BY FOREIGN TRADE
Mun’s first work dealt specifically with the East India trade: his second work is an
elucidation of the significance of the nation’s foreign trade in general for the national
economy. The theory of the balance of trade is boldly stated in the beginning of the work:
“the ordinary means to increase our wealth and treasure is by foreign trade, wherein we
must ever observe this rule: to sell more to strangers yearly than we consume of theirs in
value.”
The cultivation of hitherto unutilized land can be instrumental in reducing import
requirements for such goods as hemp, flax, and tobacco.
Mun praises the sumptuary legislation of foreign countries and the laws commanding the
use of domestic manufacturers. Here as in other contexts he shows moderation and tact:
“All kind of bounty and pomp is not to be avoided, for if we become so frugal that we
would se few or no foreign wares, how shall we then vent our own commodities?”
Frugal living will not only reduce imports but leave more goods that are available for
exports.
Exports may be derived either from “natural” or from “artificial” wealth. The former are
mainly minerals or products of the soil, whereas the latter consists of manufacturers and
the carrying trade.
The cultivation of artificial wealth has further advantages. Natural wealth, although”
most noble and advantageous, being always ready and certain,” nevertheless makes
people “careless, proud and given to excesses,” whereas artificial wealth enforces
vigilance, literature, arts, and policy.” Artificial wealth provides opportunities for greater
“diversity of employments.”
The promotion of exports requires that proper attention be given to commodity prices. A
judicious price policy will reflect the type of market in which the sale takes place as well
as the elasticity of the demand for exports.
Goods that constitute necessities for foreign buyer, who is unable to procure them from
other sources, maybe sold “dear, so far forth as the high price cause not a less vent in the
quantity.” As for other goods we must “strive to sell as cheap as possible we can, rather
than to loose the utterance of such wares.”
INVISIBLE ITEMS
Mun calls attention to the importance of the service, or invisible items in the balance of
trade and gives a virtually complete list of these including shipping, fisheries, insurance,
traveler’s expenditures, remittance to Rome, merchant commission and so forth.
Commercial policy should be so fashioned that manufacturers made from foreign
material can be relived of export duties. This measure would lead to increased exports as
well as give employment to the poor.
PARTICULAR AND GENERAL BALANCES
Mun now distinguishes between particular and general balance pf trade, the former
representing commercial relation with another country, the latter trade with the rest of the
world.
TREASURE AND TRADE
A strong case is again made in favor of “the exportation of our monies in trade of
merchandise” as “a means o increase our treasure.” Money must be sent out “to enlarge
our trade by enabling us to bring in more foreign wares, which being sent out again will
in due time much increase our treasure.”
Money must not be left idle but it must be employed as capital funds; it must be turned
into merchandise and then again into money, whereby it is multiplied.
People’s assets need only include a relatively small reserve of ready money.
Mun recommends price restraint when considering the competitiveness of the export
economy, but in a chapter entitled “Foreign trade is the only means to improve the price
of our lands,” he apparently forgets what he said before, and has no qualms about relating
rising prices to rising exports and vice versa.
In Mun’s theory of balance of trade there is no other way to bring treasure into the
country than by the export of merchandise and of services.
PUBLIC FINANCE
Taxes “seem to be a rabble of oppression,” but when all circumstances are considered
they will be found necessary and even profitable to the commonwealth. Moreover, taxes
don’t oppress the people as much as it may seem at first glance “for as the food and
raiment of the poor is made dear by excise so does the price of labor rise in proportion.”
Mun adhered by implication to a subsistence theory of wages: if the subsistence became
more expensive, wages would go up. If taxes contribute a burden, it is one that is places
on the wealthy who have “the use and are the great consumers of the Poor’s labor.”
THE BALANCE OF POWER
When Bacon, the leading light of the age, whose writings enjoyed a wide distribution,
spoke of the balance of trade, he associated it with “balance of greatness”, or balance of
power and both balances were to become foremost objectives of English policy.
Underlying mercantilist thought was the notion that power, trade and treasure are in the
nature of fixed quantities. When one country increases its share of any of them, another
country is bound to suffer a corresponding loss.
THE CONFLICT OF INTERESTS
Both in the international and in the domestic field of mercantilists are from envisaging a
harmony of interest such as the classical school was to postulate. If in international
relations one country’s gain is another country’s loss, and if it can be assumes that
countries will strive to make gains and to avoid losses, then commercial policy
specifically and foreign economic policy generally become instruments of economic
warfare. In this sense mercantilists may be said to have considered the pursuit of national
gain the solution of the economic problem as they saw it.
In Mun’s opinion the commonwealth may gain while the merchant suffers a loss, for
example, when a carrying trade brings treasure into the country in excess to what was
paid out in the initial acquisition of the merchandise but not enough to cover the expenses
of the merchant.
By recognizing the possibility of conflict between private and public interests, the
mercantilists are thus driven to endorse regulations and restrictions placed on the pursuit
of private gain.
The mercantilist’s belief in the potential in compatibility of private and public interest
reflects their narrow view of productivity. Strictly domestic transactions between citizens
of the same country are transfers of wealth, or what Mun calls “commutations,” matters
that are little account for the balance of trade, which is “the rule of our treasure.”
Again, the mercantilist’s concentrations on production for export forms a sharp contrast
to the thought of the classical school.
THE FLOW OF SPECIE
Mun was prominent among the latter, and it is not surprising that he failed to develop a
specie-flow theory that would have destroyed the structure he so carefully built up.
All the elements of such a theory can be found in his writings. He is well aware of the
relations between the quantity of money and the level of prices: “it is a common saying
that plenty or scarcity of money makes all things dear or good or cheap.” He repeatedly
stresses that high prices reduce exports: “when by the excessive price of wool our cloth
was exceedingly dear, we lost at the least half or our clothing for foreign parts.” His
principal argument, so often stated, is that an export balance will bring specie to the
country. But whereas he is cognizant of each of these relationships, he fails to link them
together in a chain that would constitute the automatic flow-of-specie theory.
It will never be known whether his failure to develop this theory was an oversight r
whether he considered such a theory inapplicable in the light of special conditions
stipulated by him.