Mercantilism the Viewpoints of Adam Smith and Jean-Baptiste Colbert
The term ‘mercantile system’ was coined between 1770 and 1780 by Adam Smith and gained widespread use in the subsequent years. Adam Smith, who was a classical economist and laid foundation to several concepts of the modern economy, used the term to describe political and economic policies put in place in Western European countries to enrich their nations (Smith, Cannan, & Lerner, 1937). The model of mercantilism described by Adam Smith is said to be international mercantilism, experienced especially in England, according to which a country seeks economic development and dominance over competitors and trading partners. Mercantilism was widely applied between the 16th and 18th centuries. Nation states tried to attain a favorable balance of trade against its trading partners, which was meant to lead to accumulation of gold and silver at the expense of its rivals. Many classical economists expounded on this system: all of them had varied views concerning its ability to continuously enrich their economies. The terms used by these economists varied, but the description of the concepts was similar. Their common belief was that their economies would be enriched by buying less in value and volumes, and selling more, thus leading to a sustained accumulation of gold (Smith & Skinner, 1982).
This paper will look into the works and the viewpoints of Adam Smith and Jean-Baptiste Colbert, two classical economists, concerning the mercantile system. It will also analyze and compare how each viewed mercantilism. Adam Smith described the idea of mercantilism towards the end of the 18th century, while Jean-Baptiste had described a system called Colbertism earlier in France; he applied this system as the French Minister for Finance. Colbertism is a national mercantilism in which the state concentrates on developing its industry and manufacturing to minimize exports and export surplus, and maintain a favorable balance of trade. Colbertism did not seem to seek regional dominance, and the collusion between the government and the business class seen in mercantilism is also absent. This paper will show that the ideas developed and applied by Jean-Baptiste are similar in essence to what Adam Smith described as mercantilism. However, the paper will also describe how their views of mercantilism varied, especially with regard to suitability of each system to further develop their national economies. It is important to note that Jean-Baptiste Colbert did not directly use the term ‘mercantilism’ as its definition would be developed later after his death. However, he defined and described a concept close to mercantilism which some could argue was a precursor to the mercantile system.
Adam Smith’s View of Mercantilism
Adam Smith observed that mercantilism was rather a political movement that was mostly motivated by economic gains of states. The real meaning and definition of the term is not clear-cut as it is seen to represent a school of thought rather than a political system. Adam Smith dedicates many pages of his book defining and describing the term. The earliest documented meaning and description of this term is seen in the work done by Victor Riqueti and Marquis Mirabeau and compiled in 1763. Later on in 1776, Adam Smith organized all the concepts and observations about the economic policies made by other researchers in Western Europe around this time period. For this reason, the modern understanding of the term is derived from Adam Smith’s work. This section of the paper will describe Adam Smith’s view of mercantilism (O'Rourke & Smith, 2007).
In England, the first policies that signified the onset of mercantilism were between 1558 and 1603 in the era of Queen Elizabeth. The issue of ‘balance of trade’ appeared as the government started taking concerted efforts to sell more than it bought. By so doing, the government was avoiding being impoverished by its trading partners. It also developed naval and merchant capabilities aimed at challenging the trade dominance by the Spaniards. The idea was to prepare to sell more in the international market, buy less, and as a result, accumulate treasure in the form of gold and silver. Over the same period of time and afterwards, there was a race to control international waters and subsequently the movement of merchant vessels (Magnusson, 2015).
Spain in the mercantile era enhanced navigation and acquired colonies in the New World, the same as Portugal. As a result, the two countries obtained large reserves of gold and silver: other countries tried to follow suit. In the 16th and 17th centuries, England increased and enhanced its navy and merchants capabilities (Negishi, 1994). From the early1660s to the early 1680s, France raised duties charged on foreign merchant vessels accessing its ports and used the income obtained to incentivize shipbuilders (Negishi, 1994). The whole idea was to increase its merchant fleet and hence exports; relative to imports, this would boost the country’s participation in the international trade. Earlier on, England had passed a law requiring that all imports to the country be delivered using their vessels or vessels from the country of origin of the imported goods. This was done to ensure that the Netherlands and other nations that had highly developed sea transport would not benefit from England’s trade. The law was extended to direct that all trade between England be done using its ships or those of its colonies. England also required that all exports from colonies to other European destinations be delivered to England before being re-exported to the final destination. Policies similar to those utilized in England were also employed by other Western European powers (Magnusson, 2015).
Following the observations that Adam Smith had about the political and economic policies of Western European nations, he described mercantilism as having the following characteristics. It was used to enhance the economic power of states through building wealth, an important measure of which was precious metals, especially silver and gold. It led to massive and rapid unification of control of countries under strict economic and political policies, in sharp contrast with what was observed under feudalism. As a result, the countries involved developed economic nationalism. The countries aggressively sought to have a favorable balance of trade by selling more than they imported so as to have surplus of precious metals and accumulate it over time. By so doing, they believed that they continuously accumulated purchasing power, net worth, and thus their wealth. This was done in order to increase production and create employment at home (Huberman, 1936).
Unlike previous systems where farmers, peasants, and smiths could get employment opportunities in the economy, the mercantile system fell short of availing such opportunities. The government was seen to be in some form of collusion with large merchants who paid taxes used to build and maintain naval fleets. The internal economy was also controlled; the areas where people could engage in production and industry were governed; generally, this gave monopoly to large firms. This limited the choices available to the masses. Government also took an active role in trade and production, especially by providing the capital needed by new industries and giving them tax breaks to encourage them to develop (Ricardo, 1817). In England in particular, new firms were exempted from guild rules. In order to encourage production for export, successful producers were rewarded with pensions and grant titles. Tariffs and quotas were used to discourage imports in an attempt to further protect the home industry, which allowed local manufacturers to thrive. Governments also ensured that their competitors and trading partners did not gain the production and manufacturing capabilities used at home. In order to achieve this, European powers prohibited the export of capital equipment and technology as well as emigration of certain classes of labor to competitors and even colonies. Each nation state protected its technology and manufacturing capabilities so as to remain competitive (Lowe, 1984).
In this era, diplomats were charged with the responsibilities of convincing foreign producers to move to the diplomats’ country. It was believed that having foreign producers establish their production in the country would increase exports as well as bring the desired technology and capabilities from abroad. It was observed that under the mercantile system, nations were always on the verge of armed conflicts as each tried to drain the other of the valuable resources. Large firms thrived under mercantilism due to large and effective protection offered by their governments. The merchant fleets were also seen to operate closely with naval fleets. There was generally stiff competition for resources; the States were keen to remain competitive in terms of trade, often leading to armed conflicts. This also led to acquisition and scramble for colonies outside Europe. The ultimate result of mercantilism was growth in trade and industry, while the importance of agriculture as an economic activity declined. Interstate trade significantly improved and became greatly diversified. A standard of exchange in terms precious metals was developed and adopted; this effectively replaced barter transactions (Ricardo, 1817).
Adam Smith described the mercantile system as having all of the above characteristics. He also observed that it was not freely initiated and did not bring benefits to both parties. He refuted the general notion that the wealth of a nation could be measured by the country’s treasury. Through his book, Adam Smith illustrated that a freely conducted trade was much better than the mercantile doctrine as it would contribute to both parties. He also developed the concept of specialization. According to Adam Smith, specialization would lead to development of economies of scale. This would create efficiency with the ultimate effect of achieving sustainable growth. The collusive relationship between the government and the business class observed in the mercantile system was detrimental to the citizenry as it denied producers the opportunity to engage in trade in the areas other than those supported by the government (Meek, 1954).
Creation of monopolies denied the population access to a variety in quality and prices. The mercantile system itself prevented the population from participating effectively in production. Smith was in support of a system that allowed for liberalization which would pave the way for a freely initiated trade and engage the maximum possible number of people. This would bring benefits to both parties and lead to further development of all participants in the long run. These were the proposals made by Adam Smith that led to the development of doctrines of laissez fair that subsequently paved the way for free markets. Smith demonstrated that the free market would translate into an all-encompassing economic development in a significantly wider sense than mercantilism.
Jean-Baptiste Colbert’s View of Mercantilism
Jean-Baptiste was a French statesman who lived between 1616 and 1683 and served in many positions in the French government. The most important events for this paper happened between 1665 and 1683 when he was the French Minister of Finance (Spengler, 1977). He was disturbed that France held a very significant diplomatic position in Europe but was weak economically. He proposed programs aimed at constructing the economy to compete effectively in the European economy. Jean-Baptiste used the term ‘mercantilism,’ but he described and supported a similar system that played a crucial role in boosting the economy after the French industry had been ravaged by religious wars. He proposed ways of reviving it and saving the country’s economy from bankruptcy (Spengler, 1977).
He adopted economic policies that would increase the country’s exports and reduce imports so that it could accumulate precious metals to be distributed to all provinces to boost industry and thus provide more taxes to the government. He is credited with having revived French manufacturing in order to reduce imports and also export the surplus. He directed the governmental support to the establishment of glass manufacturing industries to replace glass imported from Venice and export the surplus. He also boosted the manufacture of cloth and tapestry. Moreover, he raised tariffs and encouraged public work projects to create an enabling environment for French producers (Jeck, 1993).
Jean-Baptiste was also conscious about the quality of products being imported. In some instances, he ensured that French firms, such as the French East India Company, could effectively access the foreign markets. This was important and helped the country obtaine raw materials cheaply without having to reduce its reserves of precious metals. Some of the materials acquired by such companies included coffee, fur, cotton, sugar, and dyes. They would be processed for the local market or sold in case of excess to earn precious metals. France also got many overseas colonies in his tenure. Colonies were very important under mercantilism as they helped the country obtain raw materials cheaply. Additionally, all the colonies were used as ‘compulsory’ trading partners to the country, while it also ensured that the trade with the colonies by some other countries happened through the French territories: this assisted them in achieving a favorable balance of trade. In other instances as described earlier, he imposed tariffs on sea vessels accessing French ports and used the amount collected to pay bounty for French ship makers with an aim of increasing the countries dominance in the international trade. Due to the important role that merchant fleets played in the international market, the French government established marine merchant fleets that would aid in exportation, which made the whole process more efficient. This eliminated the need for hiring transport, which would stem the outflow of precious metals. All these policies introduced in his tenure were meant to minimize imports and maximize exports aimed at creating a favorable balance of trade (Spengler, 1977).
The above descriptions show a system that Jean-Baptiste believed could be used to enrich France. The system was in use in many of the Western European countries. Like any other policy maker in this region, he measured the strength and the wealth of their economies, using the reserves of precious metals that their countries had. This was considered to constitute the affluence of the state, according to which the amount of gold and silver in the country reserves was equivalent to raising its purchasing power. The long-term effects of Colbertism resulted in impoverished trading partners, while France would become wealthier. Such policies were also applied to all its colonies so that precious metals would always flow from colonies to France. Additionally, trade regulations in the colonies were designed to contribute to France. The country also tried to ensure as much as possible that only the minimum imports came in while increasing the amount and the value of exports. The precious metals obtained by the French government were used to develop and maintain merchants and navy fleets. The French government also used much of this income in wars, meaning that it did not get wealthy. Jean- Baptiste’s system, although called Colbertism, was very similar in concept and application to mercantilism described by Adam Smith almost a century after Jean- Baptiste’s death: the only difference being the nomenclature (Buchanan, 1929).
Comparison between Adam Smith’s and Jean-Baptiste’s View of Mercantilism
The two classical economists had a similar description of mercantilism as a school of thought. Both of them viewed this system as a form of economic nationalism that would be established by creation of strong central regulation by the government, which presented a shift from the previous system of feudalism. There are many similarities and differences in the views of mercantilism described by each of the specialist. Additionally, there is a major difference in how the two classical economists viewed mercantilism as a measure of a country’s wealth as well as its ability to lead to further and sustained economic development to their countries in both short and long run (Jeck, 1993).
In descriptions, the form of mercantilism described by Jean-Baptiste focused on distributing all the wealth obtained in the economy to all provinces and in turn raising the amount available for taxation; it is the national mercantilism. On the other hand, other European powers of the time, especially England, had a form of collusion with the business class, particularly the merchants, to enlarge their reserves of precious metals through exports, which fostered regional economic dominance; it is the international mercantilism. Both of them described a school of thought where the government’s main aim of controlling the economy was to establish and maintain a favorable balance of trade through increasing the volume and value of exports relative to import. According to both economists’ description of mercantilism, the most acceptable measure of a country’s economy was its accumulated reserves of precious metals. Nation states placed lots of importance on development of merchants and naval fleets (Jeck, 1993).
On the contrary, the two classical economists had some strikingly different positions in their views of mercantilism. Two pertinent areas where their views on mercantilism varied was the use of precious metal reserves by each country as the measure of the country’s wealth and the strength of the economy. They also disagreed on whether the system was adequate to continuously lead to economic development in the short and long run and the long-term sustainability of mercantilism in the nation state as well as the international economy.
Jean-Baptiste held the opinion that maintenance of a favorable balance of trade and accumulation of gold and silver in the country’s reserves made the country wealthy and translated into the economy being stronger. In this sense, the amount of reserves of precious metals would be seen as the measure of the wealth held by a nation state. On the other hand, Smith did not believe that the strength of the economy was equivalent to the precious metals in the country’s reserves. In his book The Wealth of Nations, Smith describes that the true measure of the wealth possessed by a given nation is the output generated by the capital possessed by the country at a given time. This principle became the basis for free economy and laissez-faire in the 19th century. In other words, the economy would gain more if all the capital available was used in production without directing the trade (Genberg, Salemi & Swoboda, 1987). This would in turn increase the freely initiated trade, and more people would be engaged in production than in mercantilism.
The other difference in the two specialists’ views of mercantilism was the sustainability of the system in the long run and in the international market. Jean-Baptistes’ policies envisaged a system established to indefinitely increase the reserves of precious metals even despite it almost leading to armed conflicts and draining of the competitors resources. On the other hand, Smith explained many reasons why mercantilism was not sustainable in the international market in the long run (Skinner, 1993). He demonstrated that only the business class participated effectively in the economic productivity under mercantilism. Additionally, the citizenry was denied a variety in both the products and production activities. He also demonstrated how trade would not be possible in the long run when all the trading partners’ resources depleted. He introduced the concept of the comparative advantage in which every state would produce only the products that present the comparative advantage in terms of costs, resources, and skills, which would lead to a short and long-term sustained trade (Marx, 1847, 1865). According to Adam Smith, free trade was more beneficial and sustainable in a much broader sense than mercantilism (Landes & Rogers D. Spotswood Collection, 1998).
As seen throughout the paper, Jean-Baptiste and Adam Smith had similar understanding of what mercantilism was. The description given by Jean-Baptiste about the political economic school of thought referred to as Colbertism is very similar to the mercantile system that would be described almost a century afterward by Adam Smith. Jean-Baptiste proposed and implemented policies that constituted Colbertism; therefore, it can be argued that he played a part in the development and description of mercantilism. While defining and describing mercantilisms, Adam Smith builds on the descriptions and concept that had been described in Colbertism. Additionally, Adam Smith’s descriptions of mercantilism as a school of thought was based on the observations of policies applied in Western European economies since the 16th century, including the ones made by Jean-Baptiste. It can therefore be seen that Jean-Baptiste’s work was ground-breaking and mercantilism is a refined model of Colbertism. Although the works of Jean-Baptiste and Adam Smith are related as far as the perspectives on mercantilism are concerned, the two specialists had different views, especially concerning its long-term sustainability. Additionally, Adam Smith disputed the view that a nation’s wealth could be determined by its reserves of precious metals as Colbert had suggested; he stated that the best way to determine a nation’s wealth was to evaluate the output of its capital assets at a given time.