Finally, all trade between England and its colonies had to be carried in either English or colonial vessels. The Staple Act of extended the Navigation Act by requiring that all colonial exports to Europe be landed through an English port before being re-exported 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 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. 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. While the publication of The Wealth of Nations is generally considered to mark the end of the mercantilist era, the laissez-faire doctrines of free-market economics also reflect a general disenchantment with the imperialist policies of nation-states.
The Napoleonic Wars in Europe and the Revolutionary War in the United States heralded the end of the period of military confrontation in Europe and the mercantilist policies that supported it.
Despite these policies and the wars with which they were associated, the mercantilist period was one of generally rapid growth, particularly in England. This is partly because the governments were not very effective at enforcing the policies they espoused. While the government could prohibit imports, for example, it lacked the resources to stop the smuggling that the prohibition would create. In addition, the variety of new products that were created during the industrial revolution made it difficult to enforce the industrial policies that were associated with mercantilist doctrine.
By England had removed the last vestiges of the mercantile era. Industrial regulations, monopolies, and tariffs were abolished, and emigration and machinery exports were freed. In large part because of its free trade policies, England became the dominant economic power in Europe.
Protectionism remained important in the interwar period. World War I had destroyed the international monetary system based on the gold standard. A country could simultaneously lower the international prices of its exports and increase the local currency price of its imports by devaluing its currency against the currencies of its trading partners.
The invisible-hand theory is often presented in terms of a natural phenomenon that guides free markets and capitalism in the direction of efficiency, through supply and demand and competition for scarce resources, rather than as something that results in the well-being of individuals. For Smith, an institutional framework is necessary to steer humans toward productive pursuits that are beneficial to society.
This framework consists of institutions like a justice system designed to protect and promote free and fair competition. However, there must be competition undergirding this framework. For Smith, competition is the 'desire that comes with us from the womb, and never leaves us, until we go into the grave. The ideas promoted by the "The Wealth of Nations" generated international attention and were a motivating factor in the evolution from land-based wealth to wealth created by assembly-line production methods made possible by the division of labor.
Smith used the example of the labor required to make a pin to illustrate the effectiveness of this method. If one person were to undertake the 18 steps required to complete the tasks, they could only make a handful of pins per week. However, if the 18 tasks were completed in assembly-line fashion by 10 individuals, production would jump to thousands of pins per week.
Smith argues that the division of labor and resulting specialization produces prosperity. The ideas in "The Wealth of Nations," provided the genesis for the concept of gross domestic product GDP and transformed the importing and exporting business.
Prior to the publication of the "The Wealth of Nations," countries declared their wealth based on the value of their gold and silver deposits. However, Smith was highly critical of mercantilism; he argued that countries should be evaluated based on their levels of production and commerce.
This concept was the basis for the creation of the GDP metric for measuring a nation's prosperity. At the time that "The Wealth of Nations" was published, many countries were hesitant to trade with other countries. Smith argued that a free exchange should be created because both countries are better off from the exchange.
Smith also argued for legislation that would make trading as easy as possible. Smith's most prominent ideas—the "invisible hand" and division of labor—are now foundational economic theories. He died on July 19, , at age 67, but the ideas he popularized live on in the classical school of economics and in institutions like the Adam Smith Institute, Britain's leading free market neoliberal think tank. Internet Encyclopedia of Philosophy.
Adam Smith Institute. Accessed March 1, University of Groningen. Encyclopedia Brittanica. Foundation for Economics Education. Mark Skousen. Smith opposed mercantilist policies that required Americans to export certain products like fur pelts only to England.
The Americans also had to ship their exports on British ships. Regulations prohibited transporting woolen products from one colony to another. Laws made it illegal for Americans to operate steel-making furnaces. Government-licensed monopolies like the East India Company held the exclusive right to sell goods like tea to the Americans.
According to Smith, these and hundreds of other restrictions benefited British special interests. Smith concluded that to achieve economic growth and social betterment, Britain should sweep away its network of government economic privileges and restrictions.
Let the "free market mechanism" operate on its own without government intervention, Smith advised. Adam Smith advocated a limited role for government. But he recognized significant areas where only it could act effectively. Smith saw the first duty of government was to protect the nation from invasion.
He argued that a permanent military force, rather than citizen militias, was necessary to defend any advanced society. Next, he supported an independent court system and administration of justice to control crime and protect property. Smith favored "public works" to create and maintain an infrastructure to promote the free flow of commerce. These works included such things as roads, bridges, canals, harbors, and a postal system that profit-seeking individuals may not be able to efficiently build and operate.
The following is a simplified version of the economic system Adam Smith believed would emerge once governments ended their oppressive mercantilist policies. A man builds a cloth-making factory, hires workers, and divides their labor into many specialized operations.
The factory owner is motivated by self-interest, profit, maybe even greed. Others, however, are also building factories to make and sell cloth. They all have to compete for the money of the buyers whose self- interest is to buy cloth at the best price. Buyers bid up the price of the cloth when the supply of cloth is low and their demand for it is high. But when there is an oversupply, the buyers can pick and choose and refuse to purchase high-priced cloth.
The factory owners then have to reduce their prices to attract more buyers. Economists call this the "law of supply and demand. Additional innovative divisions of labor, maybe brought on by new machinery, motivate others to invest in more factories. But they must compete to hire more workers. The "law of supply and demand" applies here, too, and wages go up. Higher wages lengthen the lives of workers and their children. The population grows, which increases the supply of workers.
Wages then stop rising. But, soon another division of labor wave occurs, producing more economic growth and the need for even more workers. Wages go up again. The cycle repeats itself. Families now can afford to buy demand more cloth and lots of other products. The factory owners make more profits.
Everybody wins and society as a whole improves. Under mercantilism, nations frequently engaged their military might to ensure local markets and supply sources were protected, to support the idea that a nation's economic health heavily relied on its supply of capital.
Mercantilists also believed that a nation's economic health could be assessed by its levels of ownership of precious metals, like gold or silver, which tended to rise with increased new home construction, increased agricultural output, and a strong merchant fleet to provide additional markets with goods and raw materials.
Arguably the most influential proponent of mercantilism, French Controller General of Finance Jean-Baptiste Colbert studied foreign-trade economic theories and was uniquely positioned to execute these ideas.
As a devout monarchist, Colbert called for an economic strategy that protected the French crown from a rising Dutch mercantile class. Colbert also increased the size of the French navy, on the belief that France had to control its trade routes to increase its wealth.
Although his practices ultimately proved unsuccessful, his ideas were hugely popular, until they were overshadowed by the theory of free-market economics.
The British colonies were subject to the direct and indirect effects of mercantilist policy at home. Below are several examples:. Defenders of mercantilism argued that the economic system created stronger economies by marrying the concerns of colonies with those of their founding countries. In theory, when colonists create their own products and obtain others in the trade from their founding nation, they remain independent from the influence of hostile nations.
Meanwhile, founding countries benefit from receiving large amounts of raw material from the colonists, necessary for a productive manufacturing sector. Critics of the economic philosophy believed the restriction on international trade increased expenses, because all imports, regardless of product origin, had to be shipped by British ships from Great Britain. This radically spiked the costs of goods for the colonists, who believed the disadvantages of this system outweighed the benefits of affiliating with Great Britain.
After a costly war with France, the British Empire, hungry to replenish revenue, raised taxes on colonists, who rebelled by boycotting British products, consequently slashing imports by a full one-third. This was followed by the Boston Tea Party in , where Boston colonists disguised themselves as Indians, raided three British ships, and threw the contents of several hundred chests of tea into the harbor, to protest British taxes on tea and the monopoly granted to the East India Company.
To reinforce its mercantilist control, Great Britain pushed harder against the colonies, ultimately resulting in the Revolutionary War. By the early 16th century, European financial theorists understood the importance of the merchant class in generating wealth. Cities and countries with goods to sell thrived in the late middle ages. Consequently, many believed the state should franchise out its leading merchants to create exclusive government-controlled monopolies and cartels, where governments used regulations, subsidies, and if needed military force to protect these monopolistic corporations from domestic and foreign competition.
Citizens could invest money in mercantilist corporations, in exchange for ownership and limited liability in their royal charters. These citizens were granted "shares" of the company profit, which were, in essence, the first traded corporate stocks. The most famous and powerful mercantilist corporations were the British and Dutch East India companies. For more than years, the British East India Company maintained the exclusive, royally granted the right to conduct trade between Britain, India, and China with its trade routes protected by the Royal Navy.
Mercantilism is considered by some scholars to be a precursor to capitalism since it rationalized economic activity such as profits and losses.
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