Economic Ideas: Mercantilism as Monarchy’s Planned Economy

Published October 27, 2016

The Feudal System had resulted in the disintegration of the unity that much of Western, Southern, and Eastern Europe had known under the Roman Empire. Following the fall of Rome, Europe was divided into local and regional political and economic entities, each politically functioning and economically surviving in high degrees of isolation from each other.

However, beginning in the fifteenth and sixteenth centuries, forces came into play that began to reverse this. Kings and princes were determined to concentrate power in their own hands as “absolute” rulers, which meant reducing the power and authority of the nobility at the local and regional levels.

Mercantilism developed in the emerging nation-states under the kings, especially, in France and Spain and in Great Britain, as a set of economic tools to assist in bringing about the centralization of political power and control.

The process worked its way out in different ways and to different extents in these countries. In Spain and France, the monarchies became nearly “absolute” to the extent that methods and technologies of the time permitted this concentration of power in the hands of kings. In Great Britain, a long history of resistance by the nobility against losing their “traditional” rights and privileges prevented this from happening to the degree experienced in these other nations.

The Key Elements of Mercantilism

The famous Swedish economic historian, Eli Heckscher, in his classic study, Mercantilism(1935), summarized the elements of the Mercantilist system of economic planning and intervention under five headings:

Mercantilism as a System of Political Unification
Mercantilism [was] primarily an agent of unification . . . Its first object was to make the state’s purposes decisive in a uniform economic sphere and to make all economic activity subservient to considerations corresponding to the requirements of the state and to the state’s domain regarded as uniform in nature.

Mercantilism as a System of Power
What was the object of mercantilism in using economic forces in the interests of the state? The answer is primarily that it wanted to . . . strengthen the state authority itself; it concentrated on the power of the state . . . Primarily to the state’s external power, in relation to other states.

Mercantilism as a System of Protection
The attitude of mercantilism towards the means of supplying the wants of human beings, i.e., towards commodities, was the theory of the danger from which economic policy was chiefly to protect a country lay in having too many goods [imported from other countries].

Mercantilism as a Monetary System
The connection between money and goods in the mercantilist conception of economics was represented in the balance of trade theory . . . Ideas on the balance of trade and the significance of money undoubtedly occupy a central position in mercantilism.

Mercantilism as a Conception of Society
Mercantilism revealed a fairly uniform conception of general social phenomena in the field of economics, and this, too, reacted in many ways on the nature of economic policy [as a conception of society in which all interests were to be made obedient to the monarch captured in the famous phrase of the French king, Louis XIV – ‘I am the State’].

The Duty of the King to Protect Production, Jobs, and State Revenue

In the Mercantilist conception of the nation-state and of society in general it was taken for granted that the king’s government had both the right and responsibility to control and direct the economic activities of the sovereign’s subjects. The lands and the people in these countries were viewed as the property of the king, to use and dispose of in any manner that he considered most beneficial to his interests.

To the extent that the monarch took an interest in the most immediate wellbeing of his subjects, it was only as a necessary means to the end of his own betterment. Antoine de Montchrestien (1575-1621) expressed this in his book, A Treatise on Political Economy (1615), addressed to the king and queen of France, in which he warned of the danger of permitting foreign sellers to compete in the French market.

First of all, I point out to your Majesties that all the implements, the manufacturing of which you are in charge, both in and out of the kingdom, not only in cities but in entire provinces, can be made abundantly and at a very good price in your Lordship’s country.

And further, that allowing in and receiving foreign-made goods here means to take away the life of the several thousands of your subjects to whom this industry is an inheritance and the source of their income; it means reducing your own wealth which derives from and increases through the wealth of the people.

Montchrestien offered a conclusion to the monarchs: “Let us therefore, relish in the fruits of our own labor, that is to say, let us rely on ourselves.”

The Mercantilist the idea was that trade with other countries was a source of national disaster, including loss of jobs and falling incomes. It undermined the commercial traditions that were considered the “inheritance” of the people, and it reduced income and wealth for the government by lowering tax revenues.

A Positive Balance of Trade to Gain “Treasure”

However, there could be gains from trade, the Mercantilist’s argued, if the value of goods imported from other countries was minimized and the value of goods exported to other countries was maximized. Hence, the Mercantilists argued for the government to control and direct foreign trade to assure a “positive” balance of trade.

Thomas Mun (1571-1641) articulated this idea in his posthumously published work, England’s Treasure by Foreign Trade (1628):

Although a Kingdom may be enriched by gifts received or by purchase taken from some other Nations, yet these are things uncertain and of small consideration when they happen. The ordinary means therefore to increase our wealth and treasure is by foreign trade, wherein we must ever observe the rule; to sell more to strangers yearly than we consume of theirs in value.

For suppose that when this Kingdom is plentifully served with Cloth, Lead, Tin, Iron, Fish and other native commodities, we do yearly export the [surplus] to foreign countries to the value of twenty two hundred thousand pounds; by which means we are enabled beyond the Seas to buy and bring in foreign wares for our use and consumptions, to the value of twenty hundred thousand pounds;

By this order duly kept in our trading, we must rest assured that the Kingdom shall be enriched yearly two hundred thousand pounds, which must be brought back to us in so much Treasure; because that part of our stock which is not returned to use in wares must necessarily be brought home in treasure.

For the Mercantilists, the greatest and most valuable form of wealth (“treasure”) was money, in the form of gold and silver. With a large “war chest” of gold and silver, the monarch would be able to acquire at home and aboard all the real goods and services that might ever be needed to win in the conflicts and combats that the Mercantilists considered inevitable and inescapable among the nations of the world in the “great game” of international political survival. Said Thomas Mun:

A King who desires to lay up much money must endeavor by all good means to maintain and increase his foreign trade, because it is the sole way not only to lead him to his own ends, but also to enrich his Subjects to his farther benefit . . .

The Gain of their foreign trade must be the rule of laying up their treasure, which although it should not be much yearly, yet in the time of a long continued peace, and being well manage to advantage, it will become a great sum of money, able to make a long defense, which may end or divert a war.

A corollary of this policy was a conscious attempt to be as self-sufficient as possible, and if imports were needed to try to limit them to raw materials that could be worked up into manufactured goods at home; this would “stimulate” domestic employment, meet certain national economic needs, and have a greater value for re-export so to acquire a net in-flow of gold and silver to add to the King’s “treasure.”

The Mother Country and a Dependent Colonial Empire

Mercantilism also called for the “mother country” to possess valuable colonies around the world. Colonial territories meant that the “mother country” could have control of useful resources and raw materials that may be essential for its economic development, and secure for it an essential supply during times when at war with other nation-states.

This also required the “mother country” to keep and maintain its colonial territories in a subservient position. Thus, for instance, the British government attempted to limit the development of manufacturing in its thirteen American colonies.

That way, their dependency on the “mother country” for manufactured finished goods in exchange for colonial raw materials would make it more difficult for such colonies to become economically independent of the “mother country. It also assured that the “mother country” could make a net gain – a “positive” balance of trade” – even with its own colonial dependencies.

The Domestic Planned Economy under Mercantilism

To prevent the king’s subjects from freely trading with buyers and sellers in other countries the power of the state was used to prohibit transactions of which the king disapproved, and to compel manufacturers to produce what the monarch deemed desirable and to sell them at prices that the king considered “just” and “fair.”

Royal France, perhaps, was the most determined in imposing and enforcing the Mercantilist economic commands. The famous French classical liberal and advocate of free enterprise, Charles Dunoyer (1786-1862), explained the extent and form of many of these government controls and regulations in his book, The Passage to Liberty (1845):

The State exercised over manufacturing industry the most unlimited and arbitrary jurisdiction. It disposed without scruple of the resources of manufacturers; it decided who shall be allowed to work, what things it should be permitted to make, what materials should be employed, what processes followed, what forms should be given to production.

It was not enough to do well, to do better; it was necessary to do according to the rules . . . Not the tastes of the consumers, but the commands of the law must be attended to. Legions of inspectors, commissioners, controllers, jurymen, guardians were charged with its execution.

Machines were broken; products were burned when not conformable to the rules. There were different sets of rules for goods destined for home consumption and for those intended for exportation. An artisan could neither choose the place in which to establish himself, nor work at all seasons, nor work for all customers.

There exists a decree of March 30, 1700, which limits to eighteen towns the number of places where stockings might be woven. A decree of June 18, 1723, enjoins the manufacturers of Rouen to suspend their works from the 1st of July to the 15th of September, in order to facilitate the harvest.

Louis XIV, when he intended to construct the colonnade of the Louvre, forbade all private persons to employ workmen without his permission, with a penalty of 10,000 livres, and forbade workmen to work for private persons, on pain for the first offense, of imprisonment, and for the second, of the galleys.

There was also the testimony of Monsieur Roland, who lived in the French city of Rouen, about the treatment of businessmen and merchants accused of violating the rules and regulations imposed by the government under Mercantilism, quoted in Jerome-Adolph Blanqui’s History of Political Economy in Europe (1846):

The manufacturers were summoned, tried, and condemned; their goods were confiscated; copies of their judgment of confiscation posted in every public place; fortune, reputation, credit, all lost and destroyed.

And for what offense? Because they had made of worsted a kind of cloth called shag, such as the English used to manufacture, and even sell in France, while the French regulations stated that that kind of cloth should be made of mohair.

I have seen other manufacturers treated in the same way, because they had made camlets [the collars on women’s blouses] of a particular width, used in England and Germany, for which there was a great demand from Spain, Portugal, and other countries, and from other parts of France, for which the French regulations prescribed other widths.

But one of the best descriptions of just how pervasive the Mercantilist regulations and controls extended into every corner of French society is to be found in Alexis de Tocqueville’s (1805-1859) The French Revolution and the Old Regime (1856) and is worth quoting as length:

The government had a hand in the management of all the cities in the kingdom, great and small. It was consulted on all subjects, and gave decided opinions on all; it even regulated festivals. It was the government that gave orders for public rejoicing, fireworks, and illuminations . . .

You have neither Parliament, nor estates, nor governors; nothing but thirty masters of   requests [i.e., the heads of the bureaucratic planning agencies in Paris], on whom, so far as the provinces are concerned, welfare, misery, plenty or want entirely depend . . .

Under the old regime, as in our own day, neither city, nor borough, nor village, nor hamlet, however small, nor hospital, nor church, nor convent, nor college could exercise a free will in its private affairs, or administer its property, as it thought best. Then, as now, the administration was the guardian of the whole French people . . .

A very extensive machinery was requisite before the government could know everything and manage everything in Paris. The amounts of documents filed were enormous, and the slowness with which public business was transacted was such that I have been unable to discover any case in which a village obtained permission to raise its church steeple or repair its presbytery in less than a year. Generally speaking, two or three years lapsed before such petitions were granted . . .

Ministers are overloaded with business details. Everything is done by them or through them, and if their information be not coextensive with their power, they are forced to let their clerks act as they please, and become the real masters of the country [i.e., authority was delegated to a permanent bureaucracy] . . .

A marked characteristic of the French government, even in those days, was the hatred it bore to everyone, whether noble or not, who presumed to meddle with public affairs without its knowledge. It took fright at the organization of the least public body that ventured to exist without permission. It was disturbed by the formation of free society. It could brook no association but such as it had arbitrarily formed, and over which it presided. In a word, it objected to people looking over their own concerns, and preferred general inertia to rivalry . . .

Government having assumed the place of Providence, people naturally invoked its aid for their private wants. Heaps of petitions were received from persons who wanted their petty private ends served, always for the public good . . .

Nobody expected to succeed in any enterprise unless the state helped them. Farmers, who, as a class, are generally stubborn and indocile, were led to believe that the backwardness of agriculture was due to the lack of advice and aid from government . . .

Sad reading, this: Farmers begging to be reimbursed the value of lost cattle or horses; men in easy circumstances begging for a loan to enable them to work their land to more advantage; manufacturers begging for monopolies to crush out competition; businessmen confiding their pecuniary embarrassments to the intendant [the local bureaucrat], and begging for assistance or a loan. It would appear that the public funds were liable to be used in this way . . .

France is nothing but Paris and a few distant provinces that Paris has not yet had time to swallow up.

The Smuggler as Free Trade’s Heroic Reformer

The more the government’s Mercantilist policies attempted to restrict and divert manufacturing, commerce, and trade into directions different from how individuals in the market may have wanted to direct their own activities, the more it created incentives for “smuggling” – black markets – to get around the controls.

The liberal economists of the nineteenth century understood and often emphasized the reality that misplaced, distortive, and restrictive regulations that suppressed freer and more open trade within and between nations necessarily brought forth its own corrective reaction in the form of black marketeers who went over, under and around the commands of the state. Explained Jerome-Adolph Blanqui:

It is in the nature of bad institutions never to be respected, and to give birth to protests that end in bringing about reform; smuggling was to the exclusive system [mercantilism] the constant and the most expressive of these protests . . .

It is as exact in its deliveries as the most scrupulous merchant; it braves the seasons and defies the best-guarded lines of customhouses, to such a degree that assurance companies, which protect it, count upon fewer losses than any other.

Smuggling is, in fact, the only means that remains to the various industries to procure for themselves the prohibited products whose use is indispensable for them . . .

It is owing to smuggling that commerce did not perish under the {Mercantilist] regime . . . While savants discuss and commerce entreats, contrabandage acts and decides on the frontier; it presents itself with the irresistible power of actual facts, and freedom of trade has never won a victory for which smuggling has not prepared the way.

Indeed, the black marketeer was considered by Nassau Senior (1790-1864), a prominent British economist of the nineteenth century, as an important element moving the economic system in the direction of free market reform. In his Three Lectures on the Transmission of the Precious Metals from Country to Country, and the Mercantile Theory of Wealth (1828), Senior argued:

The smuggler is a radical and judicious reformer. The smuggler is essential to the well being of the whole nation. All external commerce depends on him.

[However] I am far from thinking that the direct effect of his [the smuggler’s] exertions in giving us a free trade in those commodities which, from their bulk and value, fall within his province, are any compensation for the crime, misery and the public expense [of the mercantilist system].

In the middle and later decades of the eighteenth century arguments began to be made questioning the Mercantilist conception of society and the economy. Two leading centers for this change in ideas were France and Scotland. These ideas undermined the rationales for government regulation and control of economic activities in society.

In its place there arose a conception and vision of a free society based on individual liberty, free trade, and market-based and directed prosperity. In France, these new thinkers were known as the Physiocrats, and in Great Britain the Scottish Moral Philosophers.