MercantilismMercantilism As a school of thought, this was around a couple centuries before Smith’s Wealth. (It was well established by 1600.) As a phenomenon, it remains quite strong today.

MercantilismMercantilism Objective: Gold for the kingdom If alchemists are not successful, this can be viewed as a practical alternative.

MercantilismMercantilism Policy approach: Run a positive balance of trade The inflow of gold would follow if in-payments exceeded out-payments. Gold, the common medium of exchange in Europe at the time, could be had from other kingdoms in payment for the export of a country’s commodities.

MercantilismMercantilism Policy approach: Run a positive balance of trade Imports had to be purchased with gold, so imports were discouraged or restricted through policy measures (various taxes and proscriptions). One hoped to keep domestic prices low to promote exports.

Refutation of the Doctrine Thinkers quite early began to attack the mercantilist doctrine.  Adam Smith said that not gold but productive activities were creative of the real “Wealth of Nations.”  That book was, first and foremost (if not exclusively), an attack on the wrong- headedness of mercantilist thought.  To Smith, goods and services for the common citizen represent real wealth.

Refutation of the Doctrine Free trade was favored because of Smith’s division and specialization of labor doctrine. Trade barriers, if utilized extensively and over a significant period of time, would surely lead to retaliation and trade wars.

Refutation of the Doctrine David Hume’s “specie-flow mechanism” X > M  gold inflow, but also  few goods and poor consumers Gold inflow  inflation (more money chasing fewer goods)

Refutation of the Doctrine David Hume’s “specie-flow mechanism” Inflation  fewer exports (foreigners search for better bargains), and  more imports (nationals search for better bargains abroad. So the attempt to pursue mercantilist gold was self-defeating.

Does mercantilism persist in commercial practice today?