This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.
The system of mercantilism needed no high-flown "theory" to get launched. It came naturally to the ruling castes of the burgeoning nation-states. The king, seconded by the nobility, favored high government expenditures, military conquests, and high taxes to build up their common and individual power and wealth. The king naturally favored alliances with nobles and with cartelizing and monopoly guilds and companies, for these built up his political power through alliances and his revenue through sales and fees from the beneficiaries.
Neither did the cartelizing companies need much of a theory to come out in favor of themselves acquiring monopoly privilege. Subsidy to export, keeping out of imports, needed no theory either: nor did increasing the supply of money and credit to the kings, nobles, or favored business groups. Neither did the famous urge of mercantilists to build up the supply of bullion in the country: that supply in effect meant increased bullion flowing into the coffers of kings, nobles, and monopoly export companies. And who does not want the supply of money in their pockets to rise?
Theory came later; theory came either to sell to the deluded masses the necessity and benevolence of the new system, or to sell to the king the particular scheme being promoted by the pamphleteer or his confreres. Mercantilist "theory" was a set of rationales designed to uphold or expand particular vested economic interests.
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Many 20th-century historians have lauded the mercantilists for their proto-Keynesian concern for "full employment," thus showing allegedly surprising modern tendencies. It should be stressed, however, that the mercantilist concern for full employment was scarcely humanitarian. On the contrary, their desire was to stamp out idleness, and to force the idle, the vagrant, and the "sturdy beggars" to work. In short, for the mercantilists, "full employment" frankly implied its logical corollary: forced labor. Thus, in 1545, the "sturdy beggars" of Paris were forced to work for long hours, and two years later, "to take away all opportunity for idleness from the healthy," all women able but unwilling to work were whipped and driven out of Paris, while all men in the same category were sent to the galleys as slave labor.
The class basis of this mercantilist horror of idleness should be instantly noted. The nobility and the clergy, for example, were scarcely concerned with their own idleness; it was only that of the lower classes that must be ended by any means necessary. The same is true of the privileged merchants of the third estate. The thinly veiled excuse was the necessity of increasing "the productivity of the nation," but these classes constituted the ruling elite, and such forced ending of idleness, whether on public works or in private production, was a boon to the rulers. It not only increased production for the latter’s benefit; it also lowered wage rates by adding to the supply of labor by coercion.
Thus, at the meeting of the states general, the parliamentary body of France, in 1576, all three estates united in their call for forced labor. The clergy urged that "no idle person be allowed or tolerated." The third estate wanted "sturdy beggars" to be put to work, whipped or exiled. The nobles urged that "sturdy beggars and idlers" be forced to work and whipped if they refused to comply.
The same Estates-General made their special pleading all too painfully clear in the matter of protective tariffs. The estates called for the prohibition of imports of all manufactured goods and the export of all raw materials. The purpose of both measures was to throw a wall of monopoly protection around domestic manufactures and to force producers of raw materials to sell their goods to those domestic businesses at an artificially low price.
The excuse that such measures were necessary to "keep bullion" or money "at home" would seem patently absurd to any objective person. For if French consumers are to be prevented from buying imports in order to safeguard "their bullion," what might happen otherwise? Was there really any danger of Frenchmen sending all their bullion abroad and keeping none for themselves? Clearly, such an event would be absurd, but even if it happened the worst-case scenario there is an evident hard maximum limit to any outflow of bullion from home. For where are the consumers bent on further importation going to get more bullion? Clearly, only by exporting other products abroad.
Consequently, the "keeping money at home" argument is patently fraudulent, whether in 17th-century France or in the 20th-century United States. The Estates-General were interested in protecting certain French industries, period.
The "keeping money at home" argument was also a convenient stick to beat foreign businessmen or financiers who could outcompete natives. Thus the prospect of German bankers and Italian financiers flourishing in France gave rise to paroxysms of fury at the "ill-gotten gains" of foreigners, taking money out of the country, fury that was of course fed by the typically mercantilist egregious "Montaigne fallacy" that one man’s (or one nation’s) gain on the market was ipso facto another man’s (or nation’s) loss. These disgruntled Frenchmen often suggested that foreign financiers be expelled from the country, but the kings were typically too bogged down in debt to afford such counsel.
Reprinted from Mises.org.