Saturday, February 9, 2008

Sam Pepys on Mercantilism

To another question of mine he made me fully understand that the old law of prohibiting bullion to be exported, is, and ever was a folly and an injury, rather than good. Arguing thus, that if the exportations exceed importations, then the balance must be brought home in money, which, when our merchants know cannot be carried out again, they will forbear to bring home in money, but let it lie abroad for trade, or keepe in foreign banks: or if our importations exceed our exportations, then, to keepe credit, the merchants will and must find ways of carrying out money by stealth, which is a most easy thing to do, and is every where done; and therefore the law against it signifies nothing in the world. Besides, that it is seen, that where money is free, there is great plenty; where it is restrained, as here, there is a great want, as in Spayne.

via Ambrosini Critique

Shipping was particularly important during the mercantile period. With the growth of colonies and the shipment of gold from the New World into Spain and Portugal, control of the oceans was considered vitally important to national power. Because ships could be used for merchant or military purposes, the governments of the era developed strong merchant marines. In France Jean-Baptiste Colbert, the minister of finance under Louis XIV from 1661 to 1683, increased port duties on foreign vessels entering French ports and provided bounties to French shipbuilders.

In England the Navigation Laws of 1650 and 1651 prohibited foreign vessels from engaging in coastal trade in England and required that all goods imported from the continent of Europe be carried on either an English vessel or a vessel registered in the country of origin of the goods. Finally, all trade between England and her colonies had to be carried in either English or colonial vessels. The Staple Act of 1663 extended the Navigation Act by requiring that all colonial exports to Europe be landed through an English port before being reexported to Europe. Navigation policies by France, England, and other powers were directed primarily against the Dutch, who dominated commercial marine activity in the sixteenth and seventeenth centuries.

During the mercantilist era it was often suggested, if not actually believed, that the principal benefit of foreign trade was the importation of gold and silver. According to this view the benefits to one nation were matched by costs to the other nations that exported gold and silver, and there were no net gains from trade. For nations almost constantly on the verge of war, draining one another of valuable gold and silver was thought to be almost as desirable as the direct benefits of trade.

Adam Smith refuted the idea that the wealth of a nation is measured by the size of the treasury in his famous treatise, The Wealth of Nations, a book rightly considered to be the foundation of modern economic theory. Smith made a number of important criticisms of mercantilist doctrine. First, he demonstrated that trade, when freely initiated, benefits both parties. In modern jargon it is a positive-sum game. Second, he argued that specialization in production allows for economies of scale, which improves efficiency and growth. Finally, Smith argued that the collusive relationship between government and industry was harmful to the general population. While the mercantilist policies were designed to benefit the government and the commercial class, the doctrines of laissez-faire, or free markets, which originated with Smith, interpreted economic welfare in a far wider sense of encompassing the entire population.

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