Economic theory of mercantilism Essay

Mercantilism was popular and it was the prevailing economic philosophy in the Great Britain, the Netherlands, Spain, and France from the 16th to the 18th century (Gabay, et al. 2007). Gabay, ET al. asserts that according to the theory of mercantilism, for a nation to become rich and powerful, it needs to export more and import less. This basically meant that a nation on its conquest to grow richer, it had to achieve that at the expense of other nations. The difference would be an inflow of precious metals mostly gold. The more gold a nation had the richer and powerful it was. Due to this idea, mercantilists pushed for the government to restrict import and stimulate export and the fact that not all nations could do this, the mercantilists acquired precious bullion or precious metals at the expense of weaker nations (Gabay, et al. 2007). According to Ingrid Hahne Rima (2009) the larger issue of the role of trade in raising living standards of the English was not the concern of the mercantilists. For them the purpose of trade is to enrich the king and strengthen the nation politically. Rima asserts that their â€Å"fear of goods† was rooted in the premise that the quest for gold, like the quest for territory, is a zero-sum game; that is, more for England is at the expense of Spain, Italy, and Holland, and vice versa. According to Ingrid Rima (2009), most mercantilists suspected a direct relationship between the quantity of money and the level of prices. The earliest theoretical analysis of the relationship between the quantity of money and inflationary price increases was made by the sixteenth century French political philosopher Jean Bodin. He attributed the marked price rise experienced by Western Europe in his time primarily to the inflow of monetary metals from South America. Rima states that Bodin also observed that monopolies, through their policies of restricting output, and large demands by consumers of luxury commodities contributed to price increases. According to Rima, since few mercantilists favored inflation, their recommendations for a continuous accumulation of monetary metals via a favorable balance of trade appears contradictory. The mercantilists typically thought that increases in the amount of money â€Å"quicken trade† instead of producing an inflation of prices. Their advocacy of a favorable balance of trade, with its associated inflow of specie, was thereby rescued from a seeming contradiction of objectives. According to Rima, this line of reasoning reflects awareness that a growing volume of money and credit is essential to continued expansion of the physical volume of trade. Mercantilist reasoned that an inflow of hard money would keep interest rates low, while the downward pressure on prices resulting from an inadequate supply of money would serve to dampen further expansion of economic activity. Mercantilists seemed to sense the necessity of avoiding downward pressure on prices if commercial activity was to be expanded (Ingrid Hahne Rima, 2009). According to Walter LaFeber (1998) the mercantilist solicitude for production did not arise originally from a fear of overproduction, underemployment, or overpopulation. The desire for a favorable balance of trade which would result in an inflow of bullion caused the seventeenth-century thinkers to want increased production. Preoccupation with the wealth and growth of the state and the acquisition of treasure played a vital role by setting the stage for a number of corollary doctrines and policies intended to foster the achievement of these goals (Ingrid Hahne Rima, 2009). Rima states that the theory of production is of major importance, for the creation of the largest possible export surplus requires maximum utilization of the factors of production. Rima asserts that mercantilists distinguished between productive and unproductive labor in terms of its contribution to the national opulence. Manufacturers and farmers were regarded as productive, though the warmest praise was, understandably, reserved for merchants. It was also urged that the government hold the number of unproductive people to a minimum in order to direct their labor to some more useful occupation. According to Rima, mercantilist ideas on production are part of their legacy from the Scholastics of the medieval period, who regarded wealth as evidence of God’s bounty and production as the exploitation of this bounty by labor. According to Rima, another aspect of mercantilist emphasis on the importance of labor in production is the encouragement of population growth, not for the sake of mere numbers, but to increase the size of the working force. It was generally accepted that a large population, by keeping wages close to subsistence levels, would not only reduce the cost of producing goods but would also discourage the idleness that might become associated with higher wage levels. One of the most interesting bits of mercantilist reasoning incorporating views on both labor and balance of payments, according to Rima, was that when goods were exported, foreigners, in effect, pay the wages of the workers employed in making them, whereas imports involve like payments to foreigners. The obvious duty of government would therefore be to minimize foreign imports in order to achieve a favorable balance of foreign-paid income. Rima asserts that bullion is the most desirable import because it is wealth, and also has little labor incorporated in it s compared with the manufactured exports. During the era of mercantilism, economic behavior began to manifest itself through commercial activities. This is according to Ingrid Rima (2007). Rima states that mercantilist thinkers emphasized the importance of commerce and industry and the role of state in promoting economic development and national wealth (Ingrid Hahne Rima, 2009). References Gabay, Et Al (2007): Economics: It’s Concepts & Principles (w/ Agrarian Reform & Taxation) 2007: Rex Bookstore, Inc. Ingrid Hahne Rima (2009): Development of Economic Analysis 7e: Taylor & Francis Walter LaFeber (1998): The new empire: an interpretation of American expansion, 1860-1898 Cornell paperbacks: Cornell University Press