Mercantilism and the Balance of Trade

It is commonly believed that mercantilists defined national wealth as precious metals, but this is a limited and distorted view of their approach to the theory of wealth. As early as the 1620s, most mercantilists did not regard precious metal as wealth in itself.² Mercantilism could well accept a definition of wealth in terms of commodities, as was the case from Thomas Mun onward.

Money could even be exported, if this were a way to improve the trade balance and then to increase English treasure (see ibid., 14). The level of interest rates and the strength of the domestic currency have no direct influence on the wealth of a nation. Interest rates may influence the cost of the circulating capital and hence the competitive­ness of domestic products on international markets.

Of course, the mercantilists tried to show that the “balance of trade theory” would benefit all social classes, above all the landlords and the sovereign, not only the merchants.

Mercantilism has often been defined as the political economy of the merchants, but the merchants became producers and entrepreneurs, and this fact led to the development of the “cottage industry” (see Rubin, 1979, 31). In the sixteenth century, the role of a merchant and of a capitalist-entrepreneur coexisted in the same person, as the story of the English clothing industry shows. The merchant-producers asked the government to protect domestic industry from foreign competitors, and this led to the emergence of the protectionist variation of mercantilist thought.

However, the emergence of a class of producers that was separate from that of the merchants, together with the strengthening of competition in international markets, led to conflicting interests between the merchants on the one side and the landowners and producers (the clothiers) on the other (see Appleby, 1978, 190-94).

The merchants’ gain derives from buying cheap and selling dear (see Mun, 1623, 26; Appleby, 1978, 161), and national wealth is the outcome of the country’s successes at the expenses of her trading partners. During the seventeenth century, this analytical frame­work successfully interpreted and guided the growth of the English and Dutch econo­mies, thus proving to be an adequate paradigm for explaining the economic successes of the two countries.

The balance of trade theory of wealth was not unanimously accepted throughout the seventeenth century. As early as 1623, Edward Misselden wrote that “trade hath in it such a kind of natural liberty in the course and use thereof as it will not induce to be forced by any If you attempt it, it is a thousand to one that you leave it worse than you found it” (quoted in Hutchison, 1988, 22). Toward the end of the century, authors like Nicholas Barbon, Douglas North and Henry Martyn praised the role of large markets and of consumption expenditures in increasing the wealth of a nation. Not only did they regard wealth as commodities and not as an amount of precious metal, but they also believed these commodities were designed to satisfy people’s needs and to make their life more enjoyable and were not necessarily geared toward the export markets.

However, these critiques did not lead to the abandonment of the “balance of trade theory” of wealth. The early free trade views that emerged between 1696 and 1713 were defeated also because of the role played by John Locke during the debate on the value of money (see Appleby, 1978, 230-32 and 248-52). Appleby’s explanation is quite convincing, but there is also the fact that in the early eighteenth century no the­ory of wealth capable of being an alternative to the “balance of trade theory” had yet emerged.

The definition of wealth began to change during the course of the seventeenth cen­tury, but by itself this modification did not lead to the abandonment of the “balance of trade theory” of wealth.

3.