Decline of the Mercantilist Economy

In the second half of the 17th century, Mercantilism had proved an immense success. States like France and England, by strongly reducing the share of Dutch trade, were abke to secure a much larger share of the market for their domestic businesses. New businesses were introduced; the French, for instance, could secure a huge share in the world market for sugar and coffee; Europe's population expanded.
A hundred years later, in the second half of the 18th century, mercantilist policy was an old hat. The policy had been adapted by numerous European states, even the smaller ones implementing some of it's policies. The Dutch market share had successfully been reduced and there was limited room for growth.

Worse, the basis of mercantilist economy - lots of privileges and a number of monopolies - now proved detrimental to the economic development.
Mills, for instance, in most cases owned privileges forcing all farmers in the respective district to bring their corn there. Late in the 18th century, many privileged mills used outdated technology, and were often run down; the farmers, by law, were prevented from bringing their corn to a modern mill erected closer to their farm.
In the cities, GUILDS owned privileges securing the market - for their specific product or service - exclusively for them; they made sure that outsiders hardly had a chance to enter their ranks, and they limited the competition amongst themselves by limiting the number of shops (they simply would not permit additional apprentices to pass the master craftsman's examination).
Companies enjoying a monopoly had little incentive to invest in improving their facilities. Iceland's long economic decline is partially due to the fact that a Helsingborg trading company had a monopoly on the Iceland trade, and thus could charge high prices. The various European colonial companies all had charters granting them a monopoly.
During the 17th century, companies such as the V.O.C. (Dutch East India Company), W.I.C. (Dutch West India Company). later the E.I.C. (English East India Company) were economic giants, ran Empires by themselves. By the end of the 18th century, many such companies were heading for bankrupcy.

Symptoms for the economic crisis was a rising willingness to disregard the law. The larger part of the tea imported by the Danish and Swedish East India Companies was smuggled into England (violating the privilege the E.I.C. enjoyed, circumventing the Navigation Act and English taxation on tea). The modern mill mentioned above could not have existed if the farmers obeyed the mill privilege.
In addition, the production process underwent a change. Production shifted more and more from the craftsmen's shops to FACTORIES where goods were produced by a combination of MANUFACTURE and water-powered machinery. Many of these factories were built were water power was available, outside of the old centers of production, and often outside of the old system of privileges.

Economic competition thus was a fact (although, to a great extent, illegal under the valid law of those days) and the structure of the old economy in a great need of change, when ADAM SMITH wrote his famous book "The Wealth of Nations" (1776), in which he proposed to abolish privileges altogether and permit market forces to function; the market would regulate the economy in everybody's best interest.

REFERENCE Adam Smith, The Wealth of Nations : An Inquiry into the Nature and Causes, Reprint 1994

This page is part of World History at KMLA
Last revised on February 16th 2002

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