In my first article, I talked about how a unified country can contribute to the prosperity of commercial activities. In this article, I』ll try to explain how mercantilism helped Europe accumulate wealth, stimulate the formation of middle class and finally lay the foundation for industrial revolution.
First, let me clarify something. I do not support mercantilism. It is a system that emphasizes import of money as top priority. In this system, earning money is the most important thing, not productivity. This system also requires the government to impose protective tariffs in order to benefit domestic merchants. The government should also subsidizes vital industries. All of these are against modern economics which states that free market economy is the most efficient and ethical system. I do believe that free market economy is the final goal, but I think that mercantilism probably is the best economic system that a country should use before complete industrialization.
The whole story of modern European history began when Columbus first voyaged to the American continent. Since then, Spain and Portugal started to rob gold and silver from the new world. Many people still believe that it is a symbol of the cruelty of capitalism….. Well from economic perspective, it had profound effects on Europe. The tremendous influx of gold and silver can be seen as an expansionary monetary policy (Although the effect is not made intentionally). If you have learned economics before, you will understand that a tremendous increase of money can give producers more incentives to produce. This can promote the growth of the whole economy. At that time, capitalism, which was recently born, got its first basket of gold from the increase of money (gold and silver). From that day on, later industrialized mercantilism countries, like England and Holland, began to make money from Spain and Portugal.
Now, some people will ask if the increase of money can have such an amazing effect, why not every country begins printing money without rest? Well, from economic perspective, if increase of prices does not correspond to an increase in productivity, the whole economy will collapse due to hyperinflation. So there must be other factors that contribute to the prosperity of Europe. The enclosure movement was one of them. Through the enclosure act (England), the middle class and nobles used military forces and laws to take the land that was originally shared by peasants. This seemed cruel, but the result is significant. By incorporating lands, the nobles and landowners could cultivate crops much more effectively than by many peasants. Peasants who did not have work to do were enforced to enter cities or ports to do business or become workers. This movement improved the productivity of land, mills and trade significantly, which eliminates the negative effect of the increase of money.
However, the influx of money was still too much that people aspire more productive energy sources. Water mills as well as wind mills were invented but they are not reliable enough. Finally, James Watt improved the steam engine and the first industrialization began. This corresponded to the time when mercantilism reached its climax. In England, middle class and nobles lead by Calvinist Cromwell founded a new republic. Although later been destroyed, the legacy remained: The Cavalier parliament. This parliament is dominated by the two parties: Tory and Whigs. Tories were mainly made up of nobles while Whigs were mainly made up of middle class( merchant class). This at least showed that middle class began to play important roles in governing the country. The following events like the issue of habeas corpus ( requiring just cause for imprisonment) and the Glorious Revolution further strengthened the power of middle class or merchants. If merchants came to power, they would naturally adopt mercantilism. Britain imposed high tariffs on the textiles made by French and gave a lot of subsidies to domestic textiles. (Textile industry is the main industry during the first industrial revolution). Also, parliament imposed the Navigation Act on colonies which meant that no colonies can trade with other nations without the consent of the mother nation. By doing these,Britain accumulated tremendous amount of wealth while industrialization was strongly promoted. Later, Britain became the strongest country in the world and lasted for almost 200 years. Prussia which began industrialization later than England was almost enforced to adopt mercantilism. At that time, industrial products across Europe was dominated by England. If Prussia opened its market, it would never be able to have its own industry because British products were much cheaper than those of Prussians. So Frederick the Great made a trade union called Zollverein that allowed German states to unify their effort on industrialization. By imposing high tarrifs on foreign goods and promoting industrialization within, Prussia finished industrialization with a surprising speed and finally surpassed England in industrial production. French economy which was supported by the mercantilism system built by Cardinal Richelieu and Cardinal Mazarin thrived during the ruling of Louis XIV.
So what can we learn from the development of economy in Europe? From my perspective, there are a few points in which all points are related to mercantilism. The first one must be a good monetary policy carried by national banks. Although we do not have so much gold as we did during 15th century, we can instead print more paper money or issue national debt to increase money supply. This can serve as a catalyst to the economy to increase production.
The second one is to free labors. In agricultural societies, people are bounded to lands and rely on lands for food, clothes and almost everything they need. But for industrial societies, factories need to be established. Mass production by factories need people to focus on one or a few things that they can do the best to achieve division of labor. So it is important to make land reformation that can encourage more people to search for jobs in factories, and at the same time allow people who are especially good at farming to buy land. This can increase the efficiency of farming that gives more people the opportunity to go to factories or companies to work. Thus, land reformation can provide necessary labors for industrialization.
The third one must be the core of mercantilism which many people might argue against meprotective tariffs and subsidies on vital industries. Many scholars now believe that free market economy which means low or no tariffs and no subsidies can promote competition among firms so that it can benefit consumers and give domestic firms more incentives to work hard. I do agree with this point of view, but I think the world is not as simple as they think. If a country is trying to industrialize itself, the most important thing is to establish manufacturing industry. However, if the government opens the market without imposing or imposing very low tariffs, domestic goods will have no place in the market. Because the country that has already established a mature industry system can produce almost any kind of goods cheaper than you because mass production brings lower cost. That means your market will be naturally monopolized by the goods of other countries. Even from the economic view we can see that monopoly will bring low efficiency. If Frederick the Great opened the market for British goods to get in freely, the German industry would be totally destroyed by cheaper British goods. Germany would never become as strong as it was during 19th and 20th centuries. From political perspective, the collapse of local industry will effect political stability in that new middle class will be totally disappointed by the government which will cause revolt or at least go back to agricultural society. But with government subsidies, domestic industries which have natural advantage can thrive. So later, when the government cancels the subsidies, these industries can still be prosperous. Also, some kind of government supervision can prevent foreign capitals from intentionally taking advantage from domestic economy. When a country’s economy is still weak, some strong foreign capitals will try to make money from it by doing speculations to destroy the economy. If they succeed, the economy will immediately go back to the original point. For example, during Yeltsin’s reign, Russia’s economy was completely open to foreign investment. Soon, Russia’s economy was controlled by foreign capitals and finally collapsed during the final years of Yeltsin’s presidency. The collapse of economy was a direct cause for the authoritarian rule of Putin. Also, the collapse of economy will cause the government to lose support from people which might cause violent communist movement.
In the end, I want to say that mercantilism can only be a temporary method for the development of economy. When the country has built its advantageous industry and almost completed the industrialization, open the market and let domestic goods and capital to search for bigger markets worldwide will be better for the economy. Thus, free market economy is the final goal, but mercantilism can be the best way, from my perspective, to get the golden apple.