Economics 493/593
Winter 2012
Homework 1
1. List and briefly explain the major tenets of the mercantilist school.
They are:
They believed gold and silver are the most desirable forms of wealth. They also believed that the wealth of a nation depended upon the quantity of gold and silver in its possession. To achieve this, countries should maintain a positive balance of trade (with every country in the early years, but in later years they thought that an overall positive balance of payments was the goal, not a positive balance with every country you trade with).
They promoted nationalism. Since everyone cannot have a positive trade balance - they saw trade as a zero-sum game - a country needs to be powerful in order to compete effectively. This led to a desire for a strong military, a strong navy in particular.
They promoted protectionism in all its guises to maximize exports and minimize imports.
They supported colonization. This was a source of cheap raw materials, and a captive market to sell the finished goods. This essentially creates monopoly power since they did not let other countries trade with their colonies.
They believed in free trade within a country, but monopolies on external trade so as to be as powerful as possible in trade negotiations.
They favored a strong central government to enforce regulation of business (regulation was widespread and used to try to maintain the quality of goods so they would be in high demand on international markets)
They believed a strong central government would also help with another goal, that of maintaining a large, hard-working, poorly paid labor force (e.g., they had maximum wage laws) . The point of focus was the nation, not the individual, and this helped to keep goods cheap, made them competitive, and hence helped with the accumulation of gold and silver. They did not tolerate idleness, and forced children into the workforce as soon as they were able.
2. Choose a country that is currently attempting to use economic policy to affect their trade balance and interpret those policies from a mercantilist perspective. In what way do the policies fit the mercantilist framework? In what way are they different?
I suspect many people will choose China, so I will too. In a lot of ways, China pursues a mercantilist philosophy. There is an emphasis on a positive trade balance, they use a strong central government and policies such as export subsidies and currency pegs to try to manipulate the trade balance, nationalism is promoted, and while there isn't direct colonization, they have certainly worked to promote strong ties with resource producing countries in Africa and elsewhere. I'd argue they also place more emphasis on the welfare of the individual household than the mercantilists did, though I'm not sure everyone would agree.
But I would argue there is an important difference, and that is in the goal of the balance of payments policy. For mercantilists, the accumulation of gold and silver was an end in and of itself, that was the point. But it is not the point in China, a positive trade balance is a means to an end (one of which is building reserves to protect against currency speculation and other problems). They are pursuing what they believe is an effective development strategy, but they understand what Adam Smith understood, that the wealth of a nation is in its technology and productive capacity, not in the quantity of gold and silver in it possession. Thus, China is using its development policy to try to acquire the technology it needs to be more than a simple assembly-line country (as many of its industries now are), and in that respect is very different from what a typical mercantilist would have advocated. For example, many of the deals they sign with companies have element of technology transfer, and this is a deliberate strategy.
3. What was Thomas Mun's most notable contribution to mercantilist thought? Explain.
Mun's most important contribution was to show that a nation should aim for an overall positive balance of trade, not a positive balance with each and every country if it want to maximize the inflow of gold.
Mun was a director of The East India Company, which relied upon imports, so he needed to provide a defense of the company's activities since imports resulted in gold flowing out of the country. He argued that a country could import raw materials from one country (and hence run a negative trade balance), process the goods, and then sell them to another country for more than they paid for the raw materials. Thus, by allowing a negative balance with the resource producing country, more gold flowed in than if only positive balances were allowed.
4. Why did mercantilists try to achieve full employment?
Mercantilists such as Thomas Mun believed that idle labor and idle land should be brought together and used to produce goods for export, whatever those goods might be (i.e. there was little thought of comparative advantage). In doing so the nation would be come stronger because the exports would cause gold to flow into the country. The goal wasn't so much a social concern for the plight of the unemployed, the focal point of analysis was the state as a whole, not the individual. It was the additional strength that the state would get from the inflow of gold that mattered. Thus, the goal of the mercantilists was to have a large, but poorly paid working class (e.g. through maximum wage legislation). They wanted to protect the working class, but keep them in their place. A telling example of how the mercantilists wanted to put all the labor they could find to work (to make the state stronger) can be found in Colbert's 1668 decree that all children must be employed in the lace industry by the age of 6 or else their families must pay a penalty. So the key to understanding why the mercantilists wanted full employment is the focus on the state rather than the individual - they believed it would make the state stronger and that's what mattered most.
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