Unit 2: Why Trade?
Part 1: Mercantilism
We
begin with a basic question: Why would nations trade to
begin with? The answer isn’t as obvious as it might
seem, as international trade has never been without its
skeptics, nor without its problems.
Indeed, early
in the modern era, international trade was mercantilist
in nature. According to mercantilist theory, the main purpose
of trade was to enrich one’s own nation by keeping
exports at a maximum and imports to a minimum. Mercantilists
believed that promoting exports would help a nation achieve
a favorable balance of trade: if a country exported more
than it imported, then it would be receiving more in payments
(for the goods it exported) than it paid (for ones it imported).
Since international payments in this period were all made
in gold, that meant that the countries with export surpluses
accumulated a lot of gold. Mercantilist doctrine implied
a zero-sum (win-lose) exchange.
WEBSITE:
To learn more about mercantilism, click here:
Mercantilism
http://www.econlib.org/library/Enc/mercantilism.html
In practice, however, mercantilism was not just the pursuit
of national wealth in gold. It was about local wealth—mainly
of national mercantile classes—and political power.
In return for paying high taxes to support the national
armies and navies, the merchant classes got economic protection
from the state. The states, for example, established monopolies
in their colonial outposts: English colonial settlers were
forbidden from buying manufactured goods from French or
Dutch companies, even if the latter could produce at better
prices. The states often established quotas or tariffs on
imported goods if those goods competed with those of local
producers. They also subsidized purchases of capital equipment
and established pensions for merchants. All of this, while
not spelled out in mercantilist theory, was the practical
result of mercantilist belief in the primacy of export-led
economics.
In the hindsight of 200 years
of free-trade economics, it’s easy to see the flaws
in mercantilist theory. But it’s not as if the mercantile
era was without growth. In fact, the mercantile era exhibited
astounding growth, due in part to the virtuous (or vicious)
cycle of development that mercantilism fostered. In quest
of colonial markets, states had to have bigger armies and
navies, for which they had to have more taxes, for which
they had to have more monopoly markets for merchants, for
which they required more colonial markets, for which they
had to have better armies and navies, and so on.
However, such growth distorted
patterns of trade that might have emerged in the absence
of mercantilist doctrine and colonial practice. These distortions
were evident in two areas: first, in the lopsided accumulation
of wealth in the merchant classes and the government, and,
second, in the distorted balance of payments of the metropolitan
centers of trade.
The second of these problems was the starting point for
a famous critique of mercantilism by the philosopher David
Hume, which we explore next.
VIDEO: Mercantilism: Win-Lose Game
