From Mercantilism to the Wealth of Nations

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May 1999
From Mercantilism to The Wealth of Nations

By Michael Marshall
The Age of Discovery gave rise to an era of international trade and to arguments over economic strategies that still influence the policies of commerce.

Michael Marshall is executive editor of The World & I.
We live in an era when continual economic growth is almost considered a birthright, at least in the developed world. It has become the benchmark of the health of a society, guaranteeing an ever-expanding prosperity. The current president of the United States even finds that his extensive misbehavior is overlooked by a majority of Americans because he happens to be presiding over an extended period of economic growth and optimism. If annual growth drops below about 2 percent, planners and politicians start to get nervous, while a recession (negative growth) is considered a serious crisis. Where will it all end? Can such growth continue-with periodic setbacks, of course-indefinitely? We do not know and usually do not care to ask.

One thing is clear, however. It was not always so. For most of human history it has not been so. In western Europe in the period 1500--1750, output increased by a mere 65 percent, by one estimate, or an average of 0.26 percent a year, even though the population grew about 60 percent. For most of this period, 80 percent or more of the population worked the land. Studies of wage rates in England and France suggest that the working poor had to spend a full four-fifths of their income on food alone.

So this was not an economically dynamic society. There was relatively little disposable income, that being enjoyed by the prosperous elite of landed aristocracy and, increasingly in this period, merchants. Consequently, there was no prospect of creating a mass domestic market for new products. Most wealth was still tied up in the relatively static commodity of land, and agriculture was the major measure of a country's wealth.

Yet in the period from the voyages of discovery in the late fifteenth and early sixteenth centuries [see "Columbus and the Age of Exploration," The World & I, November 1998, p. 16] up till the Industrial Revolution there occurred what has been called a "commercial revolution."

The story of that revolution, which I will tell here, weaves together a number of significant themes. The upshot of the Age of Discovery was the emergence of a network of global trade. The consequences of that trade, and the measures taken by increasingly centralized European governments [see "The Ascent of the Nation-State," The World & I, March 1999, p. 18] to control and direct it, produced the system later labeled, most notably by Adam Smith, mercantilism. This was the practice of imperial rivalry between European powers over global trade, and it gave impetus to the disagreements between Britain and its American colonists that led to the American Revolution. Critical consideration of these issues gave birth to Smith's theoretical study of economics, which culminated in the publication of his masterwork The Wealth of Nations.

Protecting Bullion Reserves

Smith wrote: "The discovery of America and that of a passage to the East Indies are the two greatest and most important events recorded in the history of mankind." No doubt he exaggerated, but nothing was more important in the unfolding of this story. The Spanish conquistadores went to the New World in search of El Dorado. They found little gold but plenty of silver at Potosi in Peru and in northern Mexico. This silver became the lubricant of the machinery of an emerging global economy.

It flowed into Spain, from where much of it went to the rest of Europe, especially Holland, to pay the debts the Hapsburg rulers had incurred through the religious and dynastic struggles in their German possessions and in the Spanish Netherlands. Some of it then flowed to the Baltic to pay for the timber, rope, and other shipbuilding materials that the region supplied,...
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