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Lecture 2 Mercantilism
Mercantilism was the dominant economic system in Europe between 1500-1700. It aimed to maximize exports and minimize imports in order to accumulate gold and silver. Governments would intervene in economies through subsidies, tariffs, and monopolies to promote exports of domestically produced goods and discourage imports. Colonies existed to provide raw materials to the mother country in exchange for manufactured goods.
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Lecture 2 Mercantilism
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- 2. Economic system –Europe, 1500- 1700 Michelangelo, 1475- 1576
- 3. Economic system –Europe, 1500- 1700 L. Da Vinci. 1452-
- 4. Economic system –Europe, 1500- 1700 Titian, 1477-
- 5. Economic system –Europe, 1500- 1700 Raphael, 1483- 1530
- 6. Mercantilism = Commandeconomy Economics – study of production, distribution and consumption of goods and services 1) What to produce? 2) How to produce? 3) For whom to produce? Market economy Command economy MERCANTILISM LIBERALISM The government decides about questions Individuals make decisions
- 7. Mercantilism - Definition Mercantilismis an economic policy whereby a nation aims to maximize exports and minimize the imports. Wealth is measured by precious metals – gold and
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- 9. 1) National wealth– gold & silver The strength of the country depends on gold and
- 10. 2) Zero-Sum Game Ifone gets more, the other will get less!
- 11. 3) Favorable Balanceof Trade! Exports > Imports
- 12. 4) Self-Sufficiency Instead ofimporting, the country is producing!
- 13. 4) Self-Sufficiency Country shouldlook like a Mercantile Store!
- 14. 5) Promoting domesticmanufacture
- 15. 6) Economic regulation- Protectionism Government passes laws to discourage imports!
- 16. 7) Government incentives (“hands-on”approach)
- 17. 7) Government incentives-types SUBSIDIE S MONOPOL Y TARRIFS Cash – payments in order someone to encourage to produce certain things Exclusive rights given to someone to produce something! No one in the country can! Protective tariffs that stop foreign competition! Tax on imports!
- 18. 8) Preferred industries Luxurygoods Shipping Armaments
- 19. 9) Reliance onColonies Colonies – Backbone of a self-sufficient economy
- 20. 9) Reliance onColonies Colonies The mother country Raw materials Finished goods
- 21. 10) Corruption –negative side Corruption – the fruit of economic regulation
- 22. A) Mercantilism inFRANCE Jean Baptiste Colbert (1619-1683) Finance minister to Louis XIV COLBERTISM Member of Bourgeoisie, wealthy merchant’s son Wanted to create system that would support Louis XIV reign Power of state depends on gold More export than import Development of FR industries Importance of colonies
- 23. B) Mercantilism inGREAT BRITAIN Thomas Mun (1571-1641) “England's Treasure by Foreign Trade”: “We must sell more to strangers yearly than we consume of theirs in value” Imported goods that can be produced domestically should be banned. Reduce luxurious imported goods by making Englishmen have a taste for English goods. Reduce export duties on goods produced domestically for foreign markets. If no alternatives are available to its neighbors, England should charge more money for its exports. Cultivate wasteland for higher production and to reduce the amount of imports needed from abroad.
- 24. Types of Mercantilism IPHASE – Early Mercantilism Bullionism ( Bullion = gold, silver, other precious metals) BAN of imports of goods II PHASE – Late Mercantilism Imports is allowed, but not to exceed Exports Favorable balance of trade
- 25. Little quiz: 1. Mercantilism,as an economic system, is: a) Mixed economy b) Free market economy c) Command economy 2. During Mercantilism, the wealth of nation is measured by: a) Number of colonies b) Factors of production c) Gold and Silver 3. “Hands on” approach means: a) Government puts its hands on economy b) Government stays out of economy c) Economy puts its hands on the government 4. Mercantilism in France is knows as: a) Cubanism b) Colbertism c) Cubism
- 26. Little quiz: 5. Subsidiesare: a) Protective tariffs for businesses b) Exclusive rights to businesses c) Cash payments to businesses 6. Gold, silver, precious metals in Mercantilism are known as: a) Factors of production b) Bullion c) Exclusive property rights 7. Goods that colonies trade with the mother country were: a) Only services b) Finished goods c) Fur, cocoa, sugar, raw materials
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- 28. Homework Write an essay,using your OWN WORDS, about the Mercantilism in Italy! Minimum one page!
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Editor's Notes
- #3 Mercantilism is an Economic system of trade in European countries, in the long period of 1500-1700. This system replaced the Feudal economic system in the Western Europe. It was dominant in England and France. Mercantilism is a dominant school of economic thought in Europe through the Renaissance and the early modern period (15th-18th century). The mercantilist period is characterized by: - Establishment of powerful absolute monarchies in Europe, Disintegration of the Feudal social system, Development of trade and manufacturing Technical new discoveries - gunpowder, compass… New sea routes and discovery of new countries Trade bourgeoisie helps monarchs to strengthen power and fight local feudal lords Strengthening the state and building a modern, centralized and powerful state Time of Renaissance and Humanism and breaking of Dogmatic views (emphasizing man/humans and worldly values, not spiritual ones) Famous authors and painters from this period: Michelangelo (1475-1576), Leonardo da Vinci (1452-1519), Titian (1477-1576), Raphael (1483-1530), Bellini (1410-1516) Originating in 16th-century Europe, mercantilism began with the emergence of the nation-state. The dominant economic theory was that the global supply of wealth was finite, and it was in the nation’s best interest to accumulate as much as possible. During that time, wealth was measured by a country’s quantity of silver and gold. To accumulate more wealth, European countries, such as Britain and France, would focus on maximizing their exports and minimizing imports, which resulted in a favorable balance of trade. For countries with a negative trade balance with a mercantilist country, the difference would be paid back in silver or gold. To maintain a favorable trade balance, the early mercantilist countries would enact imperialist policies by setting up colonies in smaller nations. The aim was to extract raw material to send back to the home country, where it would be refined into manufactured goods. The goods would then be resold to the colonies, allowing early mercantilist nations to accumulate wealth through a positive trade balance. As an economic theory, mercantilism relies on government intervention to regulate international trade and protect domestic industries. Mercantilist policies involve the protection of domestic corporations through regulations and the promotion of trade surpluses. In the context of international trade, a favorable trade balance is achieved through government regulations, such as tariffs and restrictions on imports. On the domestic side, mercantilist policies support domestic industries by establishing monopolies and allocating capital to encourage growth. Such policies are a form of economic protectionism meant to encourage self-sufficiency and are in direct opposition to the free-market economics of trade and globalization. Mercantilism is a form of protectionism that was practiced throughout the Age of Discovery (16th – 18th Centuries). It became popular among the seafaring nations of Europe as it discovered the other nations of the world. Notable examples include Spain, Britain, France, and Portugal.
- #7 Economics is the study of production, distribution and consumption of goods and services. To economize mean to do them on the most efficient way. There are different ideas of how a nation can produce, distribute and consume goods and services. The 3 economic questions that each nation has to answer are: What should it produce? How should it produce? For whom should it produce? Mercantilism is a type of command economy. It is not a market economy. The government, central authority, monarchy answers these questions.
- #8 Mercantilism is a system of political and economic policy evolving with the modern national state and seeking to secure a nation’s political and economic supremacy in its rivalry with other states. According to this system, money was regarded as the state of wealth, and the goal of the state was the accumulation of precious metals by exporting the largest possible quantity of its products and importing as little as possible, thus establishing a favorable balance of trade. Mercantilism – origin from Latin word – meaning “merchant”, “trade” and “trading”. Mercantilism is an economic policy that is designed to maximize the exports and minimize the imports for an economy. It promotes imperialism, colonialism, tariffs and subsidies on traded goods to achieve that goal. The policy aims to reduce a possible current account deficit or reach a current account surplus, and it includes measures aimed at accumulating monetary reserves by a positive balance of trade, especially of finished goods. Historically, such policies frequently led to war and motivated colonial expansion. Mercantilist theory varies in sophistication from one writer to another and has evolved over time. Mercantilism is an economic theory developed in the 16th to 18th centuries that says that a government should control the economy and that a nation should increase its wealth by selling more than it buys from other nations. Mercantilism is an economic theory that emphasizes self-sufficiency through a favorable balance of trade. Mercantilist policies focus on the accumulation of wealth and resources while maintaining a positive trade balance with other countries. By maximizing exports and minimizing imports, mercantilism is also viewed as a form of economic protectionism. Originating in 16th-century Europe, mercantilism is now viewed as a mostly outdated economic theory, replaced by the supply and demand forces of the market economy. Present-day mercantilism commonly refers to economic policies that restrict the importation of foreign goods. Mercantilism is an economic policy whereby a nation aims to maximize exports and minimize the imports. Originally adopted by European nations between 1500 and 1800, mercantilist nations implemented policies such as tariffs and subsidies in order to boost exports and make international imports more expensive. Mercantilism originates from the term ‘mercantile’, which refers to merchants and trade. By extension, mercantilism is the philosophy and belief that trade with other nations should be regulated through what is now known as ‘protectionism’.
- #10 National wealth is measured in precious metals – gold and silver. The strength of the country depends on how much gold and silver it has. However, the wealth is FINITE! There is a limited amount of gold and silver. The fundamental aim of the mercantilists was to make the country strong. The strength of the country was found in the wealth of the country, especially that portion of wealth which consisted of precious metals like gold and silver. Mercantilism firmly believed that gold was the basis of wealth and power. Hence the mercantilist slogan was ‘more gold, more wealth and more power’. All the economic activities in the country were centered around wealth. According to Gray, “Everybody thought that his country was engaged in a race with other countries and in that race it must not be the looser”. Accumulation of gold - Gold was associated with wealth and power. It not only allowed nations to pay for soldiers and expand the empire but also for its symbolism of wealth. Nations saw gold as protection against invasion and a lack of gold would inevitably lead to the nation’s demise. Gold mines were in short supply in colonist nations such as Great Britain, France, and Spain, so they relied on their colonist nations to provide its supply. By procuring raw materials from the colonies, it would convert them to final goods and sell them back for a profit in gold.
- #11 Zero-sum game is an economic rivalry. If one pumpkin pie of 8 pieces has to be divided between 2 persons, each has to get 4 pieces. However, if one wants more of the pie, the other has to get less. At the heart of mercantilism was the belief that wealth was static. As gold was rare, it was seen that there is only a limited supply. So importing more from one nation than it exported meant it was losing wealth. In other words, one nation could only benefit at another’s expense.
- #12 The Mercantilist theory of foreign trade is known as the balance of trade theory. The aim of this theory was to get large amount of precious metals. Foreign trade was considered to be the only Source for getting gold and silver. They believed that all those nations which did not possess their own gold and silver mines could become rich after getting gold and silver from foreign countries through trade. Sir Thomas Mun the greatest representative of Mercantilist declared that, “foreign trade ought to be encouraged, for, upon it hinges the great revenue of the King, the honor of the kingdom, the noble profession of the merchant, the supply of our poor, the improvement of our lands and means of our treasure”. The mercantilists insisted that the value of export should always be greater than imports. In short, they advocated a favorable balance of trade. Hence they encouraged exports and discouraged imports. “Export more, import less and collect the balance in the form of gold and silver”, was the essence of this theory. Accordingly every exporter was considered to be a close friend of the state and every importer as an enemy. Mercantilists believed that by exporting more than they imported, it would be able to acquire a net accumulation of wealth from other nations. However, by contrast, if the nation brought more goods from abroad, it was essentially sending gold, wealth, and power abroad. Favorable Balance of trade is when exports exceed imports. The state should send out more goods than take in. That is the way how a state can collect gold and silver-only by selling goods abroad, one can get money (gold) inside. With import of goods, you have to pay out more silver and gold, and you are losing wealth. The main objective is to get more gold and silver, meaning you should export more than you import.
- #13 Self Sufficiency is very important in the context of Mercantilism. If a country exports more than imports then it is not dependent on other countries. It will produce what it needs and will not import lots of goods from abroad, so will save gold and silver. As a society, it tries to create a Mercantile store.
- #14 Self Sufficiency is very important in the context of Mercantilism. If a country exports more than imports then it is not dependent on other countries. It will produce what it needs and will not import lots of goods from abroad, so will save gold and silver. As a society, it tries to create a Mercantile store. Mercantile store is a place where you can find everything, from flour, plates, meat, calendar, chocolates to books, tables, furniture.
- #15 Mercantilists have a goal: to promote domestic manufacturing, domestic production. If you want to be self-sufficient you need to be able to produce as many products as you can and not to be dependent on other countries. You don’t need to import. The mercantilists wanted to utilize all the natural resources to the maximum extent so as to produce more, export more and import less. They also attached importance to agriculture in order to solve the food problem. Colonies were developed to supply the required raw materials. Further, the colonies were not allowed to export directly to foreign countries. All the commodities should be exported to the mother country only. The mercantilists considered commerce and industry as the most important branches of the national economy. They wanted to increase the national productive efficiency by means of regulation of industry and commerce. They believed, that commerce and trade were the most productive occupation and agriculture was the least productive. Further, as they believed that manufacturing industries were more closely connected with commerce, they must receive all attention from the government. However, it should not be misunderstood that the mercantilists regarded agriculture as insignificant. They thought that agriculture did not contribute directly to the strength of the country.
- #16 Economic regulation: If you like to promote domestic manufacture, you have to regulate some things. In an open economy, if some other country produces some products better and cheaper, no matter how patriotic you are, you will be inclined to import and consume them. That is why in Mercantilism there is a need of protectionism, an economic regulation to protect your domestic production. Protectionism: is when government passes laws to discourage trade. Mercantilist policies discouraged imports, which were seen as threating domestic industries. No Foreign Competition! This way you are encouraging exports and limiting imports. Imports threatens domestic industry. By importing cheaper, people will buy it instead of buying what is offered within a country. By Laws (protective measures), you want to protect domestic producers from foreign, but also from domestic competition. Domestic competition in key industries was deemed to be destructive to the “team spirit” of mercantilism. In a lot of cases, mercantilists will regulate who can produce something within the country, keeping in mind that this is a command economy. It is not only about regulating foreign trade, but also regulating who is producing, how much it can produce in the country. Mercantilists believed that commercial regulations were essential for maximizing social welfare. Commercial laws were passed to restrict the import of food materials. But no regulation was applied to the import of raw materials because they were required for the industrial development of the country. The state supported the export industries and shipping which would secure a favorable balance of trade. The mercantilists regarded the state as the supreme power for controlling the activities of the people. State was the master and its citizens, the servants. The mercantilists believed that state intervention was necessary to solve the problems of the society. They believed that for securing success in wars a strong nation was required. Nearly, all the mercantilist writers believed that since the total economic resources of the world were limited, the economic policy must be framed in such a manner as to increase the power of the state. As a result they suggested the policy of protection. The state policies were shaped according to this idea. Special acts were passed to encourage exports and the development of industries. Protection was given to the industries because their main objective was to maintain a favorable balance of trade.
- #17 Government incentives (“Hands-on” Approach): In order to promote domestic manufacturing and to control who is producing, how much they are producing, the government will offer incentives in order to create the mercantilist economy. This is so-called “Hands-on” approach, meaning that the Government is putting its hands on economy and is controlling it.
- #18 Government incentives types – through them Government controls the production of what is desired. Mercantilists doesn’t support competition, not from outside, neither from inside.
- #19 Preferred industries at the time of Mercantilism are: Luxury goods – French still are known for their luxury products, such as fur, wine, cheese. Shipping – You need to build ships to export Armaments – Weapon is better to be build in the country than to import it
- #20 French colonies: Canada - furs Louisiana - raw materials St. Dominique – sugar Colonies is a “must” because one country can not produce everything and with colonies you can expand your production ability. British empire – Navigation Acts: colonies can not trade to anyone else, but Britain. That is how self-sufficiency can be maintained.
- #21 This is a system of internal trade that replaces a system of external trade. Colonies were expected to trade exclusively with the mother country. Protective tariffs discouraged trade with other nations and their colonies.
- #22 Negative side: Corruption Those closest to the decision-making authorities enjoy privileges that are not available to others. This is an economic non-efficiency and that is why Mercantilism is not much in favor today.
- #23 France Colbertism French finance minister and mercantilist Jean-Baptiste Colbert served for over 20 years. Mercantilism arose in France in the early 16th century soon after the monarchy had become the dominant force in French politics. In 1539, an important decree banned the import of woolen goods from Spain and some parts of Flanders. The next year, a number of restrictions were imposed on the export of bullion. Over the rest of the 16th century, further protectionist measures were introduced. The height of French mercantilism is closely associated with Jean-Baptiste Colbert, finance minister for 22 years in the 17th century, to the extent that French mercantilism is sometimes called Colbertism. Under Colbert, the French government became deeply involved in the economy in order to increase exports. Protectionist policies were enacted that limited imports and favored exports. Industries were organized into guilds and monopolies, and production was regulated by the state through a series of more than one thousand directives outlining how different products should be produced.[28] To encourage industry, foreign artisans and craftsmen were imported. Colbert also worked to decrease internal barriers to trade, reducing internal tariffs and building an extensive network of roads and canals. Colbert's policies were quite successful, and France's industrial output and the economy grew considerably during this period, as France became the dominant European power. He was less successful in turning France into a major trading power, and Britain and the Dutch Republic remained supreme in this field. Colbertism was named after Jean-Baptist Colbert, First Minister of State in France between 1661 and 1683. It refers to the number of mercantilist policies implemented during his time in office. He introduced tariffs, encouraged public works programs, and set up the France merchant navy – in the bid to expand exports abroad. Colbert's central principle was that the wealth and the economy of France should serve the state. Drawing on the ideas of mercantilism, he believed state intervention was needed to secure the largest part of limited resources. To accumulate gold, a country always had to sell more goods abroad than it bought. Colbert sought to build a French economy that sold abroad and bought domestically.
- #24 British Navigation Act 1651 In 1651, the British government, led by Oliver Cromwell, introduced a legislation that made it illegal for any foreign ship to carry goods from or to any of its colonies. All trade was to be conducted by a British ship, with a British owner, master, and majority crew. East India Company In 1600, the British government created the ‘East India Company’ which was a state-sponsored monopoly looking to take advantage of the Asian markets – particularly the East Indian spice trade. Whilst privately owned, it was granted monopoly powers in the market until the British government revoked these in 1813. Since the company’s inception and its eventual decline, it paid the government in exchange for sole rights to trade with India. This not only brought gold back to Britain, but also helped establish a strong and permanent trade route between Britain and her colonies.