Economic theories, like economies themselves, tend to run in cycles, and nowhere is this more apparent than in the arguments about free trade and protectionism. Today, with free trade firmly established as orthodoxy among economists, policy makers and business leaders, it seems hard to understand why protectionism ever seemed a good idea in the first place. But economic ideas, like most ideas, are products of their time and place. To understand why protectionism emerged--and why it might become prominent again--it is important to understand the context that produced the idea.
From the late 16th Century, protectionism was a central feature of the economic philosophy known as mercantilism. The term 'mercantilism' is something of a misnomer, as it was coined in the 18th Century and used by advocates of free trade, notably Adam Smith, as a derogatory label for protectionist and statist policies. However, economists still use the term to describe orthodox economics in the period from the end of the Middle Ages until the mid-18th Century.
The central features of mercantilism were: (1) the creation of a favourable balance of trade, (2) the stimulation of domestic manu-facturing industries to encourage exports, (3) protectionist measures to discourage imports, especially of goods which competed with domestic industries, (4) the need for a strong money supply, and (5) a competitive view of international trade which held that national economies could only improve their trading position by winning trade from their rivals. This in turn necessitated a strong army and navy to fight the inevitable trade wars that would result from this policy.
The alternative to this zero-sum approach was the creation of colonies, which would allow the mother country and the colonies to trade within a closed economic unit, without necessarily disrupting the trade of other countries.
Of course there were variations on these themes across time and place. In England and Scotland, the spiritual homes of mercantilism, the emphasis was on the balance of trade and money supply. In The Netherlands the emphasis was more on national income, while France under Louis XIV and Colbert focused on stimulating industry. Nor did all the so-called mercantilist thinkers and policy makers agree with these ideas and there were lively debates over issues such as money supply, the national debt and protectionism, especially within England and Scotland. Because it was in the British Isles that the ideas of mercantilism originated, this article will focus on English and Scottish thinkers and writers.
State of the nation
The 16th and 17th Centuries were a time of social and economic turmoil in England and Scotland (the two kingdoms were ruled jointly from 1603, but were not formally united as Great Britain until 1707). The Reformation and the dissolution of the monasteries, the enclosure movement and the consequent depopulation of the countryside, the political chaos of the early 17th Century culminating in the English Civil War, combined to weaken the English economy.
In the late Middle Ages the economic strength of England in particular had rested on the production of woollen cloth, one of the most important commodities of the medieval and early modern period. By the late 17th Century, this industry was in near terminal decline. Low-cost offshore producers, particularly in France, had undercut English manufacturers and driven them out of the market. England's balance of trade was sharply negative. Overseas trading companies such as the English East India Company and the Scottish Royal African Company were making the situation worse; these companies imported commodities and luxury goods into England, but exported money to pay for them.
By around 1670, England and Scotland both were suffering from a severe shortage of money, and in 1696 the London merchant William Hodges estimated that nearly half of England's circulated coinage had gone overseas in recent years. …