A Companion to the History of Economic Thought - Chapter 4 ppsx

46 L. G. MAGNUSSON CHAPTER FOUR Mercantilism Lars G. Magnusson 4.1 THE HISTORY OF THE CONCEPT In common scholarly and popular vocabulary, the concept of “mercantilism” designates either a system of economic policy or an epoch in the development of economic doctrine during the seventeenth and eighteenth centuries, or both of them, before the publication of Adam Smith’s path-breaking Wealth of Nations (1776). The bulk of what is commonly known as “mercantilist literature” appeared in Britain from the 1620s up until the middle of the eighteenth century. However, the concept also appeared as a label for trade protection and dirigiste views during later periods, most often as “neo-mercantilism.” Among the first mercantilist writers, who are explicitly named as such, we find two Englishmen, Thomas Mun and Edward Misselden in the 1620s, while James Steuart’s Prin- ciples of Political Oeconomy (1767) is conventionally perceived as perhaps the last major “mercantilist” work. Most of the mercantilist writers during the seven- teenth and eighteenth centuries were businessmen, merchants and government officials. They wrote mainly about practical matters concerning trade, shipping, the economic effects of tariffs and protection of industries, monetary issues (the devaluation of coins), interest rates, and so on (Magnusson, 1994). The concept of “mercantilism” first appeared in print in Marquis de Mirabeau’s Philosophie Rurale in 1763 as systeme mercantile, although it was used by other physiocrats during the same period as well. In France during this period, the concept was utilized in order to describe an economic policy regime character- ized by direct state intervention, intended to protect domestic merchants and manufacturers. This system, which was designed primarily to finance state manufactories, was more commonly known as “Colbertism,” after the famous seventeenth-century French finance minister. However, the main creator of “the mercantile system” was Adam Smith. According to Smith, the core of the mercantile system – “the commercial system” as he called it – consisted of the popular folly of confusing wealth with money. He argued that even though mercantilist writers mainly were practically oriented, they nevertheless proposed MERCANTILISM 47 an analytic principle; namely, that a country must export more than it imported, which would lead to net inflow of bullion. This goal would be achieved through an active policy and thus make the state – or commonwealth – richer. This was the core argument of the much debated so-called “positive balance of trade theory.” According to Adam Smith, the main architect of the mercantile system of eco- nomic thinking was the English writer and tradesman Thomas Mun (1571–1641). His main published writings appear in two short treatises, A Discourse of Trade from England unto the East Indies (1621) and perhaps the more important Eng- land’s Treasure by Forraign Trade (1664). Adam Smith picked out this last tract – published posthumously after Mun’s death, but probably written during the late 1620s – as the archetype of mercantilist texts; its manifesto. Underlying this erroneous theory of the favorable gains from a positive trade balance lurked – further according to Smith – a mercantile special interest, which used the idea of a positive balance of trade in order to propagate a protective trade policy in general, including duties on imports, tariffs, bounties, and so on. According to Smith, the mercantile system implied a gigantic conspiracy on behalf of master manufacturers and merchants in order to cheat the public and consumers. This view of mercantilism as a policy of rent-seeking developed by special interests has in recent times been further elaborated by economists inspired by positive and public-choice theory; especially by Robert E. Eklund and Robert D. Tollison, who have defined mercantilism as “a rent-seeking society.” Hence, according to their view, rent-seeking was the real, but most often hidden, agenda behind the mercantilist doctrines and, especially, the view that trade among nations, by and large, was a zero-sum game; what one gained in trade someone else lost, as stated by many pamphleteers during this period (Ekelund and Tollison, 1997). From Smith and onwards the view of the mercantile system, or simply mer- cantilism, as state dirigisme, and sometimes also protectionism, in order to sup- port a special interest with the aid of the positive balance of trade, was carried further by classical political economy. In France, Auguste Blanqui and, in Britain, J. R. McCulloch were those who were most influential in creating this image of mercantilism. In the 1830s, Richard Jones argued that the seventeenth century had seen the emergence of a protective trade system that built on “the almost romantic value which our ancestors set upon the possessions of the precious metals” (Jones, 1964 [1859], p. 312). Hence, mercantilism was based on the King Midas folly and could be described as a mere fallacy. Certainly, already Hume and others before him had used a simple specie-flow argument to correct this mistake: a net inflow of bullion must certainly mean a relative increase in prices, which through the export and import mechanism will tend to correct itself. Smith and his followers were thus quite content to draw the conclusion that the argument for protection and against free trade was based on a mere intellectual and analytic mistake. During the nineteenth century, this viewpoint was contested by the German historical school, which preferred to define mercantilism as state-making in a gen- eral sense. Hence, the doctrines of mercantilism were no mere folly. Instead, they were the rational expression of nation-building during the early modern period (i.e., 1500–1750). The definition of mercantilism as a process of state-making 48 L. G. MAGNUSSON during a specific historical epoch first appeared in a series of articles published from 1884 to 1887 by the German historical economist Gustav Schmoller. These were translated into English as The Mercantile System and its Historical Significance (1896). “Mercantilism” was the term that Schmoller used to designate the policy of unity and centralization pursued by the Prussian government in particular during the seventeenth and eighteenth centuries. Hence, mercantilism expressed the economic interest of the state and regarded economic wealth as a rational means to achieve political power. According to Schmoller, mercantilism expressed the “. . . economic interests of the whole states” (Schmoller, 1896, p. 59). With his roots in the older German historical school – which included such outstand- ing figures as Wilhelm Roscher and Friedrich List – Schmoller argued that the core of mercantilism consisted of dirigiste ideas propounding the active role of the state in economic modernization and growth. Although the balance of trade theory was perhaps an analytic blind shot, it was rational in a more general and historical sense, as it emphasized the pivotal role of protectionism and tariffs to protect new, emerging infant industries in order to create a modern industrial nation. These two widely different definitions of mercantilism are certainly not easy to combine. However, an attempt was made by the Swedish economic historian Eli Heckscher, who in his massive Mercantilism (1955, first published in 1931) aimed to present mercantilism both as a system of economic thought and of economic policy. As a broader school of economic doctrine, he principally accepted Adam Smith’s description. He was in agreement with the balance of trade theory being at the core of the mercantilist doctrine. Moreover, he agreed that it was a folly that later on was upset by modern thinking, such as Hume’s specie-flow mech- anism. His explained the core of the positive balance of trade theory by pointing at what he believed was a distinct “fear of goods” that dominated the popular mind of the seventeenth century. According to him, the fear of goods and love of money was an expression of the transition from a barter economy to a money (gold and silver) economy, which took place during this period. However, Heckscher also regarded mercantilism as a system of economic policy. And as such its core logic was – as the historical economists emphasized – state-building. Hence, with the aim of pursuing the goal of state power, the mercantilists developed a number of nationalist economic policy tools, including tariffs. Therefore, the British Navigation Act of 1651, as well as the establishment of national standards of weights and measurements, a national monetary system, and so on, could be viewed as the outcome of the same mercantilist policies. It is not easy to grasp, in Heckscher’s synthesis, how mercantilism as a system of economic theory, a system of economic policy, and a world-view (moral philosophy) relate to each other. Unfortunately, and for this reason, his grand construction has caused grave misunderstandings. For example, Jacob Viner has therefore unfairly interpreted Heckscher as a follower of Schmoller and the his- torical school (Viner, 1991). Following Smith, Viner was eager to point out that a main characteristic of the mercantilist writers was their confusion of wealth and money. Unlike Heckscher’s more complicated picture, he thus portrayed the mercantilist writers as bullionists pure and simple (Viner, 1937). MERCANTILISM 49 Another response to Heckscher became common in the heated discussion over mercantilism in the 1950s and 1960s. As early as 1939, A. V. Judges had vigor- ously rejected the notion of a particular mercantilist doctrine or system. He stated that mercantilism had neither a common theoretical core nor any priests to defend it (Judges, 1969 [1939]). His rejection of mercantilism as a coherent system was later taken up by a number of British economic historians. For example, D. C. Coleman denounced the usefulness of mercantilism outright, both as a description of economic policy and of economic theory; it was “a red-herring of historiography,” he stated. The main problem with using this concept was that it gave a false unity to disparate events and ideas. Coleman argued that mercantil- ism was not a school of economic thinking and doctrine as was, for example, the physiocratic school of the eighteenth century. It was a concept invented by Adam Smith, and its core was a literature of seventeenth-century pamphlets that dealt mainly with practical matters. This literature was neither analytic nor can we here find any definite theoretical propositions (Coleman, 1969). The majority of modern interpreters seem to agree with Coleman that mercant- ilism was no finished system or coherent doctrine in the nineteenth- and twentieth- century sense. Although “mercantilist” views mainly appeared in pamphlets that dealt with contemporary economic and political issues, this does not – as several authors have pointed out – necessarily imply that economic writers during the seventeenth and eighteenth centuries composed economic texts without some common objectives, views, and shared concepts in order to make intelligible the complex world of economic phenomena. Hence, it is perhaps more fruitful to perceive the situation as if mercantilist writers shared a common vocabulary in order to argue for specific political and economic viewpoints. On the other hand, Coleman and others were certainly right when they stressed that commentators such as Schmoller and Heckscher overemphasized the systematic character of mercantilism as a coherent system both of economic ideas and of economic policy that stemmed more or less directly from these doctrines. Moreover, it seems evident that Smith and his followers helped to cement a view of the mercantilist writers that made them more “old-fashioned” than they actually were. As we shall see, rather than being in complete opposition to Smith, they can – to some extent – be regarded as forerunners of both Smith and the liberal school. Any first-hand knowledge of their texts will suggest that they were not totally devoted to dirigisme. Moreover, their methodology and supply- and-demand analysis has formed the nucleus of modern theorizing ever since. 4.2 THE ENGLISH CONTEXT Mercantilism is thus perhaps best understood as a literature of pamphlets and books, mainly of English origin, which primarily dealt with practical political and economic policy issues, roughly between 1620 and 1750. However, an over- all objective in much of this literature was the question how England should be able to achieve national wealth and power. In the bulk of this literature, these two goals of achieving wealth and power were looked upon as identical. To 50 L. G. MAGNUSSON some extent, this was perhaps not anything that distinguishes the generation after Mun from its predecessors or, indeed, from much later “schools” of economic writers. Such an identity can be traced in English, Italian, French, and other European economics texts from the sixteenth century and onward. Inter- preted in this sense, Italian writers such as Giovanni Botero (1544–1617) and Antonio Serra (1580–?), as well as Spanish writers such as de Vitoria, de Soto, de Azpilcueta, and Luis de Ortiz during the sixteenth century, were perhaps the first “mercantilists.” Nor were such ideas absent in later economic writing and thinking, including that of members of the German historical school from List and onwards, and followers of the “American system” as well as the British “free-trade imperialists” during the nineteenth century. Hence, the recommenda- tion that a state should try to keep as much gold and silver as possible within the country, or to organize its foreign trade in such a manner that the net export of manufactured goods is maximized, seems to have been common parlance all over Europe since at least the early sixteenth century. However, in the English discussion from the 1620s and onwards we can iden- tify a number of other topics as well. Hence, the Dutch example provided an argument for how economic wealth could be achieved through increased inter- national trade and a great population, as well as more manufactories utilizing in- creased division of labor. Moreover, an increase in trade and manufacture could only be accomplished by propounding sound laws and establishing effective institutions. Thus, most writers were unwilling to put their sole faith in the self-equilibrating forces of the marketplace in order to achieve wealth and growth. On the other hand, as many argued, too much interference in the laws of supply and demand could be just as harmful as none at all. Hence, it is a mistake to interpret all “mercantilists” as protectionists. After all, during the seventeenth century “protectionism” was still not a clear-cut concept, and few argued that duties should be introduced in order to protect domestic industries from foreign competition. It was only gradually that this viewpoint won ground during that century and the next. On the contrary, according to most writers on the subject the main objective of duties was to increase the income of the state. Hence, English “mercantilism” can to some extent be seen as a special national case of a broader dirigiste literature, which appeared in a number of European countries during the sixteenth, seventeenth, and eighteenth centuries, with the overall aim of making the state powerful and rich, and to this effect proposing a number of policy recommendations. Among these were included different proposals for what we perhaps today would call “administered” foreign trade, as well as the notion of keeping money within the country as much as possible. Such writers, who appeared all over Europe, were called “consultant administr- ators” by Joseph Schumpeter. They were especially common in Spain, Austria, France, and the German states, including Austria (Schumpeter, 1954, pp. 143– 207). However, it is clear that English mercantilist literature also included some additional features. As proposed by for instance Joyce Appleby, this was perhaps due to the fact that many of the English writers were not consultants in any true sense; that is, they were not civil servants, working in the interests of the state MERCANTILISM 51 or prince. Rather, many of the English writers during the seventeenth century – including Mun and Misselden – were tradesmen and merchants (although this certainly does not exclude them from having political views and objectives as well as a stake in a certain kind of policy). Their different social and occupational makeup might very well have made a difference, and it may have implied that many of them were more clear about how the marketplace actually worked and were less enthusiastic about state intervention as a general principle (Appleby, 1978). Be that as it may, it is clear that the mercantilist literature from the 1620s gradually introduced analytic ideas and concepts which, 150 years later, became part of the classical synthesis. Hence, as early as during the 1620s in the writings of Mun and Misselden, we can detect a number of new viewpoints that would be developed later on by many writers. To a large extent, the economic depression of the early 1620s was pivotal in inaugurating the famous debate between Gerrard de Malynes (1583–1641), in one corner, and Thomas Mun and Edward Misselden, in the other, which most often has been regarded as the starting point of mer- cantilism proper as an economic doctrine. Being asked by the Crown to provide explanations for the ongoing depression at the beginning of the 1620s, Malynes and Mun (and Misselden) came up with totally divergent viewpoints. In the heated discussion, Malynes repeated an argument for which he was well known; namely, that the main cause of the depression was the deteriorating terms of trade for English wares caused by foreign money speculators (especially Dutch merchants and Jews). He argued that abroad there was a conspiracy to lower the value of English money. Furthermore, according to Malynes, money speculation was a form of usury and, as such – to use the title of one of his earliest treatises from 1601 – “the Canker of England’s Commonwealth.” Mun, together with Misselden, had come up with another explanation as early as 1622, when he chaired a Privy Council committee aimed at finding remedies for the crisis. Both Mun and Misselden agreed with Malynes that the terms of trade had worked against England during recent years. However, the main reason for this was not evil speculation by foreign usurers, but that the “real” trade balance between England and other European countries had developed in a negative way since the beginning of the Thirty Years’ War. Thus, an earlier English trade surplus had been transformed into a negative balance of trade. They argued that it was this negative balance that had made English exchange rates less favorable and caused a general crisis. In this context, we are not concerned with whether or not this interpretation was correct. Obviously, one reason why Mun and Misselden differed so much in their interpretation from that of Malynes was that they placed much more em- phasis on the problem of why foreign buyers showed so little interest in buying English wares, such as wool and cloth, than on the issue of why these wares were exchanged for a lower price than before. It was this loss of demand from abroad that caused a negative trade balance, an outflow of bullion, deflation, and a general economic crisis. However, as Raymond de Roover among others em- phasized, the worsening terms of trade for England certainly had a great deal to do with monetary chaos triggered by the Thirty Years’ War (de Roover, 1974). 52 L. G. MAGNUSSON It is more important here, perhaps, that by introducing the “real” economy into the picture, Mun and Misselden introduced ideas that would be further elaborated during the seventeenth century and, certainly, serve as a main stimulus to what, for England, Terence Hutchison has called “the economic boom of economic thinking” from the 1690s onwards, including such authors as Josiah Child, Charles Davenant, Nicholas Barbon, Sir Dudley North, John Martyn, and William Petty, whose work became known to a larger circle especially dur- ing that decade (Hutchison, 1988). First, as we have seen, mercantilists such as Mun and Misselden believed that the “real” balance of payments was the main cause for the over- or under-valuation of the English currency. Secondly, and in line with this, they recognized the overall importance of the supply-and-demand principle and applied this to price formation in general (at least concerning commodities and money). Thirdly, unlike Malynes and many before him, they did not perceive the “economy” as primarily a moral order. Men were certainly self-interested – and some were evil – but the economic system was a self- regulating order in which supply and demand ruled. Hence, to some extent they perceived the economy as an independent system with its own laws and orders, its “springs and balances.” This view was certainly developed much further by later writers during the seventeenth (Barbon, North) and eighteenth centuries (Martyn, Gervaise, Decker, Tucker Hume, Smith), but we can already detect these ideas at a much earlier date. Fourthly, and last, Mun and Misselden proposed a methodology for studying economic phenomena which was clearly inspired by a Baconian program, and which also included a critique of Aristotlean formalism, and they hailed empiricism as a general methodological principle. Certainly, as Finkelstein has propounded most recently, much of the vocabu- lary used by seventeenth-century writers on economic phenomena was still borrowed from Aristotle, including concepts such as “balance,” the use of bodily metaphors in order to describe economic relations (blood or dung as money, and so on; Finkelstein, 2000). However, the understanding of what “economy” was in relation to state, morals, politics, and so on had slowly begun to change. 4.3 INTERPRETATION OF THE MERCANTILIST DOCTRINE The mercantilist writers – in Britain and elsewhere – were preoccupied with the question of how the nation should become prosperous, wealthy, and powerful. To this effect, they proposed, among other things, the doctrine of a favorable balance of trade mentioned above. As this theory seems to be in total contrast to later theories, such as Hume’s specie-flow mechanism, numerous interpreters have tried hard to make sense of why the mercantilist would hold such (errant) beliefs as the positive advantage of having a long-run trade surplus. First, from Adam Smith to Jacob Viner in the 1930s, the orthodox view that the mercantilist writers confused money with wealth has been repeated over and over again. However, more recent research has been in agreement about how this explication fails for empirical reasons. Although Viner brings forward a MERCANTILISM 53 number of citations to support his view, they are taken out of context and do not really provide a fair illustration of the contemporary opinions. In fact, the Midas interpretation has no real support at all in actual texts from this period. For example, in 1699 Charles Davenant – one of the most famous “reform” or “tory mercantilists” – wrote: “Gold and Silver are indeed the Measure of Trade, but that the Spring and Original of it, in all nations is the Natural or Artificial Product of the Country; that is to say, what this Land or what this Labour and Industry Produces” (Davenant, 1771 [1699], p. 171). It is quite clear that a major- ity of writers from Thomas Mun and Edward Misselden in the 1620s largely agreed with this statement. Some of them might have added that having an abundance of money in the country was of great importance for economic progress and for the wealth of the nation. However, this did not imply that money was identical with wealth. Rather, writers such as Davenant and Child argued that a net inflow of money was a barometer that signaled whether a nation won or lost in its trade with other countries. Others would say that an abundance of money would help to speed up interaction in the marketplace, and stimulate growth and development. Thus, a net inflow of money could be a means of procuring wealth; but wealth itself was always the result of production and consumption. Bruno Suviranta’s interpretation from 1923 – which probably inspired Heckscher to follow the same line of thinking – of the balance theory being a natural folly, considering the preoccupation with money during this period (money fetishism), is also problematic for the same reason; after all, very few of the mercantilist writers seem to have confused money with riches (Suviranta, 1923). Secondly, as we have seen, during the nineteenth century historical economists such as Roscher and Schmoller interpreted mercantilism as the theory and practice of state-making. Rather than being a shallow camouflage of private rent- seeking – as envisaged by Smith – mercantilism was a reflection of the modern state bureaucracy and its interests. To some extent, this interpretation was also incorporated into Heckscher’s synthesizing work on mercantilism: “mercantilism as a system of power.” However, this was only one of several aspects mentioned by Heckscher in order to understand what mercantilism really was. Hence, it is wrong to see Heckscher as a mere fellow-traveling historical economist. On the contrary, he objected loudly to being placed within this tradition, as Viner and other writers have tended to do. It is not easy to say to what extent this interpretation of mercantilism as state- making is accurate. However, if we undertake a careful reading of the British mercantilist literature in particular, it is notable how seldom these authors refer to a particular state interest when they put forward their policy recommenda- tions. Certainly, it is the aim of these writers to find means and ways to enrich the nation. Moreover, they often emphasize how increased wealth is a precondi- tion for a strong and militarily powerful state. However, in the bulk of this literature, to enrich the state or prince is by no means an end in itself. Hence, there seems to be quite a big difference between this literature and, for example, the German cameralist literature of the eighteenth century or, for that matter, the French economique politique as it was developed by Laffemas and Montchrétien in the early seventeenth century. 54 L. G. MAGNUSSON From another point of view, it is of course also debatable whether it is possible to see a clear and direct line between mercantilism perceived as a set of economic ideas and the policies of the seventeenth- and eighteenth-century states. Espe- cially for the historical school – as well as for Heckscher – it seemed natural to draw a clear line of correspondence from economic ideas to economic policies. Hence, mercantilism has often been regarded as an excuse for protective policies by the state during the l’ancien régime. On the contrary, most of the leading English mercantilist writers seem to have been quite critical of the protective policies of the early modern state. Although they can by no means be character- ized as free traders in the modern sense, the most significant feature was their attempt to locate the limits of dirigisme rather than to praise it in all circum- stances. In this respect, there is no significant difference between the early- and late-seventeenth-century English writers. Hence, it is misleading for several interpreters to have drawn a clear line of demarcation between a more “liberal” and a more “protectionist” phase during the seventeenth century, and to have said that it was not until the late seventeenth century that “mercantilism proper” emerged. Certainly, from the 1690s and onwards, many writers drew the conclu- sion that the British textile industry must be protected from the inflow of cheap calicoes from India. Furthermore, during the same period many writers argued that England had lost out in its trade with France and for that reason must pro- tect itself. Nevertheless, a majority of the discussants seem to have been hesitant to allow state policies to interfere too much in the workings of the economy. A minority was even against protection as a general principle. Among them, we especially find the so-called “Tory free traders,” to use W. J. Ashley’s famous phrase (Ashley, 1900), a group that included Davenant, Child, North, Barbon, and so on. To cite Davenant once more: “Trade is in its nature free, finds its own channels, and best directeth its own course: and all laws to give it rules and directive . . . may serve the particular ends of private men, but are seldom advant- ageous to the public” (Davenant, 1699, p. 98). Thirdly, it is sometimes proposed that the English mercantilist writers sup- ported a favorable balance of trade because they saw an advantage in higher prices. According to such an interpretation, the mercantilists were thus nothing more than supporters of price inflation. However, it is difficult to find any hard evidence for such a view. For example, Mun fully understood that part of the specie-flow argument which stated that an inflow of money would necessarily imply rising prices. For the bulk of the seventeenth-century writers on economic and trade issues, the quantity theory of money was a standard point of depar- ture. As Viner correctly stated, there were in fact very few price inflationists among the English mercantilists (Viner, 1937). Instead, the majority were in agree- ment about how high prices would cause lower exports – that is, they argued that elasticity of demand was considerable in most export markets. Hence, neither the Midas folly nor the idea that the mercantilists sought to fill the princely coffers with bullion or believed in price inflation seems to have any real support in the texts themselves. In his Early British Economics (1938), Max Beer suggested that in order to find a more realistic understanding of the doc- trine of the favorable balance of trade, the crux of this “doctrine” was the idea of the need to have more money in circulation: “a struggle for liquid assets.” MERCANTILISM 55 Hence, a main concern for writers on economics in seventeenth- and eighteenth- century England was that the shortage of money would curtail economic devel- opment. This was a major problem for England in particular, as it had no silver or gold mines of its own. The only solution to this dilemma was to import money from abroad. As bullion only could be obtained in exchange for goods, one possible interpretation of the favorable balance idea might be the existence of an export surplus of goods, which would mean that gold and silver could be obtained without having to sell more wares than were being brought into the country. The kingdom’s stock would therefore be enlarged both in wares and in money. Another interpretation – first suggested by J. D. Gould – takes Thomas Mun’s complex discussion in his England’s Treasure by Forraign Trade (1664) as a point of departure. As pointed out by Viner, Mun was certainly aware of both the quantity theory of money and the existence of demand elasticity. So the puzzle is why he did not follow this line of thought and state that an inflow of money could not be obtained over a longer period, as an increase in prices would only lead to less foreign demand, in accordance with the specie-flow mechanism developed later on by Hume and others. According to Gould, the reason for this was simply that Mun believed that an increased stock of bullion could be used as liquid capital to finance a greater volume of trade. This would then imply that Mun – perhaps reflecting the contemporary factual circumstances that the bulk of the capital stock consisted of liquid capital assets – identified money with capital (Gould, 1955). However, it is possible to interpret Mun in another way as well. Along with many others during this period, Mun seems to have feared that without a steady inflow of money originating from a favorable balance of trade, trade and indus- try would stagnate, land prices would fall, and so on. Thus, the predicament might arise that the circulation of goods would expand so fast that it would lead to a shortage of money. For practical reasons, this could not easily be remedied by an increase in the velocity of money – the importance of which in the quantity theory of money equation was acknowledged as early as in the sixteenth century. Another alternative was to counter this shortage of bullion in circulation by allowing a steady inflow of money through a net trade surplus. Hence no infla- tion would occur as a consequence of the positive net inflow of bullion, since the new money was necessary in order to cope with increased levels of trade activity. Fourthly, it is questionable whether we really can talk of a full-fledged, favorable balance theory dominating economic thinking during the period, say, from 1620 to 1750 (or 1776!). The idea of a specific mercantilist “central theory” in the mod- ern sense has already been rejected by Suviranta, but has been hard to root out. It is true that Mun and Misselden evidently seemed to believe in a positive trade balance – whatever they meant by that concept – but it is also clear that this “theory” was abandoned in its most simple form by most writers as early as the late seventeenth century. Some argued that this principle was impractical as a policy goal since it was impossible to account for a trade surplus in quantitative terms. Others found problems on more theoretical grounds – that is, directly or indirectly agreed with the specie-flow argument. Instead, from the 1690s, writers such as Josiah Child (1630–99), Charles Davenant (1656–1714), and Nicholas Barbon (1640–98) developed a new idea that has alternatively been called “the [...]... extent, many writers on economic topics in England as well as other countries shared a common vocabulary and some common ideas As we have seen, many of them were preoccupied with the importance of trade and payment balances, defined either as a positive balance of trade theory or as a positive balance of labor theory However, what they mainly shared was a preoccupation with the question of how a nation... “competitive advantage” (Porter, 1985) They argue that the pattern of international trade cannot be explained on the basis of comparative advantage, or with the help of the simple Heckscher– Ohlin theorem Instead, the flow of international trade is a consequence of scale and scope, economic strength, and increasing returns to scale Thus, the basis of the Brander–Spencer model and the new trade theory’s” plea... and the Careys (father and son) in particular stressed that the “cosmopolitanism” developed in much English economics during the time was false and in reality concealed the fact that free trade was a tool for preserving England’s superiority as an industrial nation It is usually emphasized that the first “national economist” was the American Alexander Hamilton, the first finance minister of the USA At the. .. Kuttner, R 1991: The End of Laissez-faire National Purpose and the Global Economy after the Cold War New York: Knopf Magnusson, L 19 94: Mercantilism: The Shaping of Economic Language London: Routledge Perrotta, C 1991: Is the mercantilist theory of the favourable balance of trade really erroneous? History of Political Economy, 23(2), 301–36 —— 1993: Early Spanish mercantilism: the first analysis of underdevelopment... G MAGNUSSON 56 theory of foreign-paid incomes,” the “labor balance of trade theory,” or the export of work theory.” Instead of holding on to the dogma that a country should strive to receive an inflow of bullion through the balance of trade, these authors stressed that a country should export products with as much value-added content as possible and import as little of such products as they could They... this background, the radical American economist Robert Kuttner has argued for (state) “administrated” foreign trade, especially in his The End of Laissez-faire National Purpose and the Global Economy after the Cold War (1991) Certainly, this is another way to defend the infantindustry argument, with clear implications for trade policy An often-used example propounded by the strategic trade policy theorists... theorists is the current fierce competition between the airplane builders Boeing in America and Airbus in Europe As these theorists would argue, the active support of the government is doubtless of great importance for a certain nation’s position in the international division of labor 4. 6 PROTECTION AND UNDERDEVELOPMENT As we have seen, free-trade liberalism and the theory of comparative advantages has often... crises – such as during the 1920s and 1930s Such ideas have also become common since World War II, and are now called “neo-mercantilism”or “strategic-trade theory.” From the late 1970s onward, economists such as Lester Thurow, James Brander, Barbara Spencer, and Paul Krugman have sought to replace Torrens’s and Ricardo’s theory of comparative advantages with something that Michael E Porter has called “competitive... serve as a competitive advantage The political implications of the “new trade theory” have been pretty straightforward, although some of its originators (Krugman, for example) have been reluctant to go so far as to state that governmental support could bring forward a competitive advantage for a certain industry, which could be beneficial for a specific nation in the long term (Krugman, 1986) However, against... nation–states throughout history Instead, I would argue that it is more fruitful and revealing to undertake a more historical reading of what mercantilism really was Hence, in a historical sense, it was a discussion that emphasized the role of trade and manufacture in economic growth and modernization However – in the sense in which Adam Smith and others have tended to interpret it over the past two . ideas. As we have seen, many of them were preoccupied with the importance of trade and payment balances, defined either as a positive balance of trade theory or as a positive balance of labor theory mercantilism as the theory and practice of state-making. Rather than being a shallow camouflage of private rent- seeking – as envisaged by Smith – mercantilism was a reflection of the modern state. For example, Heckscher’s synthesis was aimed at propagating liberal and free trade ideas against protec- tionism, and against the economic nationalism that was so characteristic of the interwar