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  1. 1. Historical Backgrounds of Mercantilism • Generally, Mercantilism is associated with the rise of the “Nation state.” • Feudal institutions were weakened by the increasing use of money and a greater reliance on exchange within the economy. • The Protestant Reformation weakened the role of the church and consequently the civil role of the state was expanded • There was a rise of Humanism (the concern for wellbeing of humans in the short term).
  2. 2. The decline of feudalism was influenced by changes in technology  “enclosure movement” and the commercialization of agriculture  Increasing use of money in the economy reduced the role of barter and reciprocity, people wanted to sell or work for money  three-field system [1 field winter crop, 1 field spring crop, third lying fallow] extended area peasant could farm by 1/8, 50% increase in output  rise of mechanical power [water, wind] used in textile and mining  urbanization
  3. 3. The Decline of Feudalism and the Plague • The "Black Death" of 1346-61 restricted trade reduction in population Increased production of wool; need industry and commerce to process and sell wool and textiles.
  4. 4. Reduction in Population • Population of England fell by about 1.5 million (out of a population of 3.5 to 5 million in 1346). • Result was more money per person but also more animals, land and goods per person, prices fell. • Labour shortage pushed wages and earnings up.
  5. 5. What is Mercantilism? England followed this theory with the 13 Colonies  Mercantilism is an economic theory that states a nation becomes stronger by keeping strict control over its trade  It also states that a nation should have more exports than imports
  6. 6. What is Mercantilism? The primary objective of Mercantilism was to increase the power of the nation state. One of the important aspects of national power or strength was wealth that was equated with specie. The states that followed a policy of mercantilism tended to see trade, colonialism and conquest as the primary ways of increasing wealth.
  7. 7. When and Who started ? • 16th – 18th C • Roughly from the 1600-1800 • The Term “Mercantilism” was coined by Maquis de Mirabeau (a physiocrat) • It is a system closely associated with the rise of nations and the concept of Nationalism • It was a system prevalent in: – – – – France Spain England Holland
  8. 8. Where? Western Europe particularly England and France, and colonies such as Africa and America
  9. 9. Why? The Paradox of Mercantilism To be rich, a country needed to have a lot of poor people! • Why? •Because by encouraging exports and controlling imports , the governments also limited domestic consumption and wealth. • Besides, individuals would prefer to hold gold and silver against possible attacks by other nations.
  10. 10. Mercantilism Explained • Mercantilism = unfair or unbalanced trade • colonies existed for the benefit of the Mother Country (M.C.) • Source of Raw materials = cheap • Raw materials were shipped to M. C. to be turned into finished goods • Finished good shipped to Colony = expensive • profit goes to M. C. • Pass laws forbidding colonies from producing their own goods
  11. 11. The Mercantilist Economic System • A country’s wealth is measured by its holdings of precious metals (specie). • International trade is a zero sum game. (One country’s gain is the loss for the trading partner) • A country should maintain a positive trade balance (that is, export more than it imports). • A country with positive trade balance would increase its wealth through acquisiton of precious metals. • The countries had to have a strong military power and merchant marine to increase their trading. • According to mercantilists, economic system had 3 components: 1) Manufacturing sector 2) Rural sector (agriculture) 3) Foreign colonies
  12. 12. The Mercantilist Economic System • Mercantilism employed the labor theory of value. • Each commodity was valued relatively in terms of their labor content. For eg: 2 labor hours / bottle for wine production. • Mercantilists believed that economy was operating at less than full employment. • Thus, a country with positive trade balance would see an increase in money supply through inflow of precious metals (gold and silver) which in turn would stimulate employment and national output with no impact on inflation.
  13. 13. Physiocrats • Group of individuals who claimed to be economists. Important in that they introduced the label to the profession. • However, afterwards as the profession evolved it was recognized that they were a school of thought and they were renamed the Physiocrats. • They were called so because assumed Natural Laws governed the economy
  14. 14. Physiocrats • Among the great contribution of the Physiocrats was that they introduce to the profession the importance of building theories based on models where analysis was done by isolating one or more variables in the economy • Economy was Agriculture based
  15. 15. Adam Smith (1723-1790) • Appointed to the chair of logic in 1751 at the University of Glasgow, Scotland. • In 1752 he transferred to the chair of philosophy. • On his travels to France, he was influenced by the writings of the physiocrats. • 1776  The Theory of Moral Sentiments and an Inquiry Into the Nature of Causes of the Wealth of Nations was published. – A vehement attack of the mercantilist system.
  16. 16. The Wealth of Nations (1776)
  17. 17. Why do countries want colonies? The money a colony makes goes to the mother country. For example, most of the money that the colony of Georgia makes from growing and selling tobacco goes to England, its home country. Georgia produces $$$$ for England.
  18. 18. Mercantilism ►Beginning around 1650, the British government pursued a policy of mercantilism in international trade.
  19. 19. Mercantilism To achieve this balance of trade, the English passed laws exclusively benefiting the British economy. These laws created a trade system whereby Americans provided raw goods to Britain, and Britain used the raw goods to produce manufactured goods that were sold in European markets and back to the colonies.
  20. 20. So in the theory of Mercantilism,why do you want to have more exports than imports? ►Export – Goods sent to market outside of a country or colony Exports earn you money (+). ►Import – Goods brought into a country Imports require you spend money (-). If you EARN (Export) more than you SPEND(Import), then you will be left with a profit in the end.
  21. 21. Increasing Control over the Colonies As the colonies began to be more successful and profitable, England began to increase control over the colonies. The English began to enact stronger controls over the Americans. The first major Act which was placed over the colonists was the Navigation Acts.
  22. 22. Navigation Acts • ►Between 1651 and 1673, the English Parliament passed four Navigation Acts meant to ensure the proper mercantilist trade balance.
  23. 23. Triangular Trade New England rum was shipped to Africa and traded for slaves, which were brought to the West Indies and traded for sugar and molasses, which went back to New England. Other raw goods were shipped from the colonies to England, where they were swapped for a cargo of manufactured goods.
  24. 24. Mercantilism and the Triangle Trade Increase the Slave Trade The triangular trade also spurred a rise in the slave population and increased the merchant population, forming a class of wealthy elites that dominated trade and politics throughout the colonies.
  25. 25. Trade Expands to America Along with the voluntary immigration of Europeans to the Americas, thousands of Africans were forced to move to the “new world” as slaves. African slavery in the “New World” began as early as the 1600s and lasted until emancipation in the mid1800s. Cramped stacking of slaves on slave shipsduring the “middle passage” to America resulted in many deaths.
  26. 26. Slave Trade ►When slave trade became illegal, vessels often discharged their human cargos rather than be caught by the Royal Navy.
  27. 27. Mercantilist Thinkers Josiah Child  Bernard Mandeville David Hume Von Hornick Thomas Mun
  28. 28. Long Term Results Global trade routes shifted over time the old silk routes declined West Asia and the Islamic world were displaced as the centralized location of global trade The Atlantic and Pacific sea routes become the new focus of global trade
  29. 29. The Flaw of Mercantilism Trade is a zero-sum game (A gain by one country results in a loss by another) Example: Trade surplus in Country A → money supply ↑ in Country A → inflation in Country A →↓demand in Country A → ↑ demand in Country B → no trade surplus in Country A No one can keep a trade surplus in the long run 41