Theory of Mercantilism: Role in Providing Insight Into Economic Reality
Over the course of history, the topic of economics has been talked about and discussed in great detail. With brilliant minds such as those of Aristotle, Immanuel Kant, and Thomas Mun each contributed their own economic ideas. When studying the History of Economic Thought, It is important to note that different time periods resulted in the development of different economic theories. Thomas Mun’s Mercantilism was first seen in the 16th century, during the rise of the British Empire, and was widely implemented up until the practice of “free trade” in the 18th century. This paper aims to dissect Thomas Mun’s theory of Mercantilism, it’s a practice in Europe, and it’s role in providing us insight into our economic reality.
In order to fully appreciate the effect the theory has on our modern-day economy, we must first understand the ideas of Mercantilism. Mercantilism is defined as the belief in the benefits of profitable trading. It’s the theory that trade generates wealth and is stimulated by the accumulation of profitable balances. This theory was the bedrock of which the British Empire was built upon. Through numerous exports, Britain was able to accumulate large sums of money which allowed them to fund their expansion through colonization in different regions of the world. These colonies would then go on to produce luxury resources of their own, thus eliminating their need for imports and increasing the amount of goods exported. The nation utilized this cycle in becoming the most powerful nation of the 17th and 18th centuries. One person who was at the forefront of it all was Thomas Mun.
Thomas Mun led his early career serving his apprenticeship by trading around the Mediterranean Sea. He later went on to work for the East India Company, where he worked as part of the committee and was later elected to be the commissioner of trade. During his time as the commissioner, he wrote several books/pamphlets to address criticisms people had about the company and the frustrations they felt towards their nation’s current economic drought. His literature laid the groundwork for mercantilism by sharing his belief that a nation’s holdings of gold are the main measures of its’ wealth and that the government should regulate trade to increase its gold reserves. Being the first economist to give a clear and vigorous statement of the theory of trade; Thomas Mun is widely known as the father of Mercantilism.
Thomas’ first work was written during his first few years as the commissioner of trade for the East India Company. During this time England was going through a recession, with the shortage of silver largely attributed by the nation importing way more than it was exporting. However, many people shifted the blame towards the East India Company after coming to a realization that they were financing the export of 30,000 euros worth of bullion(silver) despite the nation’s shortage of this particular metal. Being faced with criticism; Mun wrote a pamphlet titled “A Discourse of Trade from England into the East Indies” where he claimed that the profit the company obtained in the trade of bullion was more than the initial amount exported. He went on to state that as long as England’s total exports exceeded its total imports; the export of bullion was not harmful.
Mun also wrote “England’s Treasure by Foreign Trade,” where he went into great lengths to emphasize the importance on the particular trade balances of one country with each other country. Thomas explained that in the end, what really mattered was the overall balance of the trade. Building upon what he mentioned in his first pamphlet, he also stated that the inflow and outflow of gold rely heavily on the country’s trade. It is for this reason alone that the government needs to regulate all trades and maintain a commercial deficit with countries from which raw materials are imported from. Whereas underdeveloped countries would contain more natural resources, countries like England were able to manufacture industrial goods that not only had more utility but also yielded a better profit. It is because of this, that Thomas urges the nation to increase its’ production of those goods and sell them abroad for a high price. This was England’s trump card because of the monopolistic advantages associated with the superior technology to produce such goods.
Some issues that arise with Mercantilism can be seen today. The idea of consuming less and producing more may sound brilliant on paper, but in actuality, it creates several limitations. “They advocated increasing the nation’s wealth by simultaneously encouraging production, increasing exports, and holding down domestic consumption. Thus, the wealth of the nation rested on the poverty of many. The mercantilists advocated low wages in order to give the domestic economy competitive advantages in international trade. Thus, when the goal of economic activity is defined in terms of national output and not in terms of national consumption, poverty for the individual benefits the nation.”. An example of this can be seen today. Many companies go to Asian countries like China to manufacture their industrial goods, this is largely due to the fact that a large portion of China’s population lives beneath the poverty line resulting in cheap labor. The results of this is an increase in production and a drastic decrease in consumption. Other western countries like the United States and England do not have this dramatic gap between the middle and lower classes. The reason this is, is because policies have been made to establish a minimum wage. With the lower class of western countries being significantly more wealthy than those of Asian countries, it is no wonder that their standards of living are also higher. A higher standard of living means that the country will also consume more from poorer countries like China and Thailand.
Although Mercantilism is no longer used in the 21st century, many policies still tend to draw inspiration from this economic system. One such policy is the British adaptation of free trade, where it’s adaptation was namely to maintain a dominance in foreign trade that had been won under much more restrictive trade policies. Instead, capitalism has become the more popular system adopted by many economies around the world. The main difference between capitalism and Mercantilism is that whereas capitalism views wealth creation as the key to economic growth; Mercantilism believes that economic prosperity can be achieved through the extraction of wealth. Although the idea of building a country’s wealth through government-regulated international trading is a practice still seen today, the same results can not be expected to resemble that of the early 18th century. A majority of the world’s nations have since modernized and are largely on par with one another, thus eliminating the act of colonization.
Thomas Mun’s role in modern-day economics is significant. His writings on the value of trade still hold true in the 21st century. And although the practice of Mercantilism is extinct, his theory laid a template for more advanced systems such as that of Capitalism to develop.
Sources
- “Chapter 3 .” History of Economic Thought, by Harry Landreth and David C. Colander, Houghton Mifflin, 2002, pp. 45–57.
- Mun, Thomas, England’s Treasure by Forraign Trade, Oxford Basil Blackwell, 1959.
- Muchmore, Lynn, “A Note on Thomas Mun’s ‘England’s Treasure by Forraign Trade’,” The Economic History Review, New Series, Vol. 23, No. 3. (Dec., 1970), pp. 498-503.
- Supple, Barry E. 'Thomas Mun and the commercial crisis, 1623.' Historical Research 27.75 (1954): 91-94.
- Harris, Jonathan Gil. Sick Economies: Drama, Mercantilism, and Disease in Shakespeare's England. University of Pennsylvania Press, 2004.
