Editing Mercantilism (section)

==End of mercantilism==
[[Adam Smith]], [[David Hume]], [[Edward Gibbon]], [[Voltaire]] and [[Jean-Jacques Rousseau]] were the founding fathers of anti-mercantilist thought. A number of scholars found important flaws in mercantilism long before Smith developed an ideology that could fully replace it. Critics such as Hume, [[Dudley North (economist)|Dudley North]] and [[John Locke]] undermined much of mercantilism and it steadily lost favor during the 18th century.

In 1690, Locke argued that prices vary in proportion to the quantity of money. Locke's ''[[Two Treatises of Government|Second Treatise]]'' also points towards the heart of the anti-mercantilist critique: that the wealth of the world is not fixed, but is created by human labor (represented embryonically by Locke's [[labor theory of value]]). Mercantilists failed to understand the notions of [[absolute advantage]] and [[comparative advantage]] (this idea was only fully fleshed out in 1817 by [[David Ricardo]]) and the benefits of trade.<ref>{{Harvnb|Spiegel|1991}}, ch. 8.</ref><ref group= "note">For instance, imagine that Portugal was a more efficient producer of wine than England, yet in England, cloth could be produced more efficiently than it could in Portugal. Thus if Portugal specialized in wine and England in cloth, ''both'' states would end up ''better off'' if they traded. This is an example of the reciprocal benefits of trade (whether due to [[comparative advantage|comparative]] or [[absolute advantage]]). In modern economic theory, trade is ''not'' a zero-sum game of cutthroat competition because both sides can benefit from it.</ref>

[[File:AdamSmith.jpg|thumb|upright|left|Much of [[Adam Smith]]'s ''[[The Wealth of Nations]]'' is an attack on mercantilism.]]

Hume famously noted the impossibility of the mercantilists' goal of a constant positive balance of trade.<ref>{{cite book |last=Dutta|first=Bholanath|title=International Business Management Text Cases |year=2010 |publisher= Excel Books|isbn=978-81-7446-867-3}}</ref> As bullion flowed into one country, the supply would increase, and the value of bullion in that state would steadily decline relative to other goods. Conversely, in the state exporting bullion, its value would slowly rise. Eventually, it would no longer be cost-effective to export goods from the high-price country to the low-price country, and the balance of trade would reverse. Mercantilists fundamentally misunderstood this, long arguing that an increase in the money supply simply meant that everyone gets richer.<ref>{{Harvnb|Ekelund|Hébert|1975|p=43}}.</ref>

The importance placed on bullion was also a central target, even if many mercantilists had themselves begun to de-emphasize the importance of gold and silver. Adam Smith noted that at the core of the mercantile system was the "popular folly of confusing wealth with money", that bullion was just the same as any other commodity, and that there was no reason to give it special treatment.<ref name="Magnusson 2003 46"/> More recently, scholars have discounted the accuracy of this critique. They believe Mun and Misselden were not making this mistake in the 1620s, and point to their followers Josiah Child and [[Charles Davenant]], who in 1699 wrote, "Gold and Silver are indeed the Measures of Trade, but that the Spring and Original of it, in all nations is the Natural or Artificial Product of the Country; that is to say, what this Land or what this Labour and Industry Produces."<ref>Referenced to Davenant, 1771 [1699], p. 171, in {{Harvnb|Magnusson|2003|p=53}}.</ref> The critique that mercantilism was a form of rent seeking has also seen criticism, as scholars such as [[Jacob Viner]] in the 1930s pointed out that merchant mercantilists such as Mun understood that they would not gain by higher prices for English wares abroad.<ref>{{Harvnb|Magnusson|2003|p=54}}.</ref>

The first school to completely reject mercantilism was the physiocrats, who developed their theories in France. Their theories also had several important problems, and the replacement of mercantilism did not come until Adam Smith published ''[[The Wealth of Nations]]'' in 1776. This book outlines the basics of what is today known as [[classical economics]]. Smith spent a considerable portion of the book rebutting the arguments of the mercantilists, though often these are simplified or exaggerated versions of mercantilist thought.<ref name="Niehans1990p19"/>

Scholars are also divided over the cause of mercantilism's end. Those who believe the theory was simply an error hold that its replacement was inevitable as soon as Smith's more accurate ideas were unveiled. Those who feel that mercantilism amounted to rent-seeking hold that it ended only when major power shifts occurred. In Britain, mercantilism faded as the Parliament gained the monarch's power to grant monopolies. While the wealthy capitalists who controlled the House of Commons benefited from these monopolies, Parliament found it difficult to implement them because of the high cost of [[group decision making]].<ref>{{Harvnb|Ekelund|Tollison|1981|p=}}.</ref>

Mercantilist regulations were steadily removed over the course of the 18th century in Britain, and during the 19th century, the British government fully embraced free trade and Smith's [[laissez-faire]] economics. On the continent, the process was somewhat different. In France, economic control remained in the hands of the royal family, and mercantilism continued until the [[French Revolution]]. In Germany, mercantilism remained an important ideology in the 19th and early 20th centuries, when the [[historical school of economics]] was paramount.<ref>{{Harvnb|Wilson|1963|p=6}}.</ref>