Mercantilism is the first great school of economic thought we shall study in detail. Mercantile thought is concerned with what is important if a country is to be successful. Written in a time when many European countries (England, Holland, Spain, France etc..) were rivals and involved in war "mercantile" writing is concerned with questions of competition. A trade surplus is very important for a country because it gives that country power and wealth. Being able to save a lot of silver and gold (because of competitive foreign trade) reduces the amount of silver and gold (and power) possessed by other countries.
To achieve these goals, the mercantilists felt, governments should intervene in economic activity. Governments should protect their home industries. In England agriculture, therefore, began to be protected by the Corn Laws . In France, companies were established and helped by government. Governments wanted to earn and save as much foreign money as possible. The wish to earn and save as much foreign money as possible easily led to government supported monopolies in trade such as the East India Company.
Thomas Mun
Mun was the son of a London merchant in the time of Queen Elizabeth I. He enjoyed the advantages of wealth and education and was involved in trade in the Mediterranean region, especially in Italy.
In 1615, as a well-known merchant, he was elected a member of the East India Company. From that time on he was active in promoting the interests of the company. In 1621 Mun published a book titled A Discourse of Trade, from England unto the East-Indies . The purpose of this book was to meet the growing criticism of methods employed by the East India Company and, in particular, to defend the right of the company to export bullion. This period was one in which the "bullionists" were very powerful. The reigning economic doctrine was that money, if not the chief form of wealth, was at least its chief embodiment, and that the wealth of a country was best represented by the amount of coin and bullion ( gold or silver in sold bars ) within its borders. In support of this doctrine the English government had legally prohibited the exportation of specie and had attempted to control not only international exchange but also the individual transactions of merchants in their commerce with foreign nations.
Thomas Mun argued that the government policy was based on false assumptions. The East India trade he argued, was profitable to England because it brought into the country necessary and useful materials and goods which could be purchased elsewhere only at a higher cost. He maintained that a large proportion of these goods were re-exported at a profit so that the net result was an inflow rather than an outflow of bullion. The ensuing debate - the first important economic controversy in England - involved Gerard de Malynes. Malynes, a "bullionist", attacked Mun's argument.
Mun's second and best-known book, England's Treasure by Foreign Trade was written about 1630 but was not published until after his death. In it Mun disagreed with bullionist doctrines and laid the foundations for what was coming to be known as the mercantilist position. The mercantilists were nationalists in an era in which the emergence of nations was all-important. They were called mercantilists because they held that England's prosperity was bound up in the possibilities of foreign commerce or merchandising. What they sought to achieve was a system of industrial protection that would develop to the utmost national resources.
For Mun, as for every mercantilist the index of prosperity was to be found not in a "balance of bargain" (based on the regulation of individual transactions) but in a "balance of trade" which would encourage exports and restrict imports. Mun declares in England's Treasure that the object of national policy should be "to sell more to strangers yearly than we consume of theirs in value." He compares the prudence of a kingdom with that of a private person, and argues that just as an individual can get rich only by spending less than his income, so also a nation can get rich only if it spends (imports) less than it sells (exports).
Mun advises England to cultivate its wastelands, to reduce consumption of foreign wares and avoid frivolous changes of fashion, to be clever in selling to foreign nations, and to ship only in English ships. He recommends that taxes be removed from raw materials used in the manufacturing of later exports, and is confident that this advice, if followed, "will turn to the profit of the kingdom in the balance of trade, and thereby also enable the King to lay up the more treasure."
I have modernized the spelling of old English words that might confuse students in the reproduction below of England's Treasure.