World History 2 72 - 5.3.3 Mercantilism and Its Critics

Although European merchants and government ministers enthusiastically relied on mercantilist theory in the building of colonial empires, mercantilism also had many critics. Eighteenth-century Scottish philosopher David Hume argued that as more gold circulated in a country’s economy, prices would rise, eventually becoming so high that no one would purchase goods. Furthermore, Hume maintained, if abundance reduced the value of an item, then the more gold and silver a nation acquired, the less valuable it would be, an idea that undercut the mercantilist emphasis on accumulating precious metals to build wealth.

The eighteenth-century philosopher and economist Adam Smith, also a Scot, criticized mercantilism as well. Smith argued that economic gain for one nation did not mean economic loss for others. Rather, trade could be mutually beneficial for all. One nation could prosper by supplying raw materials to another, which could then convert these materials into finished goods to be sold at profitable prices. Smith also opposed government regulation of the economy. In his view, competition among the producers of goods and the influence of the market (that is, the desires of buyers and sellers) made for a healthy economy. If demand for an item were high, its price would rise. If demand were low or quality poor, price would fall. Although Smith believed government should assist business by, say, building roads and providing for national defense, it should not grant monopolies or subsidize businesses. This would only harm consumers by keeping prices artificially high. Without government assistance, business enterprises would have to learn to operate more efficiently, thus reducing prices, or they would fail.

Smith also argued that it made little sense for a nation to produce everything it needed. If Spain could make a particular product better than England could or could make it for less money, England should use the revenue generated by selling those goods it excelled at making to buy the Spanish product. England could produce textiles more efficiently than Spain, and Spain could make wine more cheaply than England. It was thus more efficient, Smith explained, for England to buy wine from Spain and Spain to buy cloth from England than for each country to produce both the wine and the cloth they required.

Dueling Voices

For and Against Mercantilism: Two Perspectives

Many Europeans argued that the assumptions underlying mercantilist theory were flawed, and that putting it into practice was often harmful. Following are excerpts from Thomas Mun’s 1664 England’s Treasure by Forraign Trade, and Adam Smith’s The Wealth of Nations, published in 1776. Note the very different positions these economists take.

The ordinary means therefore to increase our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value. For suppose that when this Kingdom is plentifully served with the Cloth, Lead, Tin, Iron, Fish and other native commodities, we doe yearly export the overplus to forraign Countreys to the value of twenty-two hundred thousand pounds; by which means we are enabled beyond the Seas to buy and bring in forraign wares for our use and Consumptions, to the value of twenty hundred thousand pounds: By this order duly kept in our trading, we may rest assured that the kingdom shall be enriched yearly two hundred thousand pounds, . . .

Behold then the true form and worth of forraign trade, which is The great Revenue of the King, The honour of the Kingdom, The Noble profession of the Merchant, The School of our Arts, The supply of our wants, The employment of our poor, . . .

—Thomas Mun, England’s Treasure by Forraign Trade

A great empire has been established for the sole purpose of raising up a nation of customers who should be obliged to buy from the shops of our different producers, all the goods with which these could supply them. For the sake of that little enhancement of price which this monopoly might afford our producers, the home-consumers have been burdened with the whole expense of maintaining and defending that empire. For this purpose, and for this purpose only, in the two last wars, more than two hundred millions have been spent . . . . It cannot be very difficult to determine who have been the contrivers of this whole mercantile system; not the consumers, we may believe, whose interest has been entirely neglected; but the producers, whose interest has been so carefully attended to; and among this latter class our merchants and manufacturers have been by far the principal architects.

—Adam Smith, The Wealth of Nations

  • What does Mun believe are the benefits of mercantilism? Do you believe this is a realistic assessment? Why or why not?
  • What does Smith regard as one of the worst of mercantilist policies? How might he respond to Mun’s claims?

Because mercantilist theory saw economic gain for one nation as necessarily a loss for others, European nations engaged in trade wars as each tried to use tariffs to bar others from its markets. At times, real wars accompanied trade wars. England and the Netherlands fought four wars over the course of the seventeenth and eighteenth centuries, partially to gain control of transatlantic trade (Figure 5.19). England also fought France for access to the markets of India.

The oil painting shows boats with white masts filling the choppy waters on a black and white background. Some boats are destroyed, smoking and sinking, while others are still floating. Smoke billows out into the sky and people and debris are shown floating in the water.
Figure 5.19 England and the Netherlands fought four wars for control of transatlantic trade in the seventeenth and eighteenth centuries. This 1657 ink and oil painting by Willem van de Velde the Elder depicts the 1653 Battle of Scheveningen, a Dutch victory. (credit: “The Battle of Terheide” by Rijksmuseum/Wikipedia, Public Domain)

Mercantilism affected the relationship not only between countries but also between classes. For instance, it elevated the interests of merchants and manufacturers over those of workers and consumers by arguing that wages should be kept low. More money would thus remain in employers’ hands, and people would be discouraged (or prevented) from buying luxury goods that could instead be exported for profit. Mercantilists also advocated high taxes to enrich governments. The perceived need to extract raw materials from colonies to benefit the home country’s interests often led governments to restrict colonies’ economic growth and harshly punish people who sought to evade trade restrictions. The desire to exploit the American colonies also led to the abuse of Indigenous populations and enslaved Africans in efforts to extract as much wealth as possible.

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The content of this course has been taken from the free World History, Volume 2: from 1400 textbook by Openstax