Mercantilism: An Unintended Incubator for American Capitalism

The following is a paper I recently wrote for my American Economic History class on the importance of trade and shipping on the economic development of the American colonies.  I thought it was good enough to post, so here it is:

The English colonies began as commercial ventures, though not quite resembling what most of us would consider “commerce” today.  Adam Smith would not define the underpinnings of capitalism for almost another 200 years.  The commerce of the day occurred under the principles of mercantilism, a system that basically extracted the resources of colonies to enrich the mother country; in this case, England.  The scheme went as follows: the colonists farmed, fished, and extracted whatever raw materials they could find and shipped them to and through England; in return, the colonists received finished products they needed and could not (or were not allowed to) produce themselves.  This was not a healthy recipe for the economic development of the colonies.  It would have been tough for colonists to develop a variety of marketable skills, and trade was restricted significantly by the Navigation Acts.  It is ironic, then, that the colonies did develop, and the majority of that development is due to the one industry in which the colonies had a true competitive advantage in the English mercantilist trade: shipping.

There certainly were other colonial industries which made Americans some of the most comfortably wealthy people in the world at the time.  Southern tobacco was king.  It made many plantation owners rich, and trade was plentiful in the southern colonies, but this is not tantamount to economic development.  The people engaged in the work – indentured servants and, later, slaves – were expected to develop only the skills necessary to do the jobs landowners required of them.  If trading partners disappeared or tobacco plants developed a devastating virus or suddenly became worthless, the South and its servants and slaves had little else it could replace it with other than alternative cash crops, which were subject to the same risks.  It is telling that the South developed no important cities in the colonial period.  Cities required merchant creativity and opportunism, often-messy and inefficient entrepreneurial values (which the southern gentry despised), and a good deal of diverse ideas and skills.

The middle and northern colonies were in the same boat, at least on paper.  Wheat and corn brought in a little cash, fishing and timber industries did fairly well, and the shipbuilding industry was very lucrative.  The difference was the port cities, situated in strategic harbors throughout the coastal regions of the middle and northern colonies.  This is where large-scale trade actually happened.  In a sense, the ports of Boston, New York, New Haven, Newport, Philadelphia, and Baltimore all became important cities because the product they traded was trade itself.  They did not grow or extract much within city limits, but they helped connect buyers with sellers through the shipping and receiving occurring in their ports.  Port city merchants became the richest (perhaps next to southern landowners), most influential, and most highly skilled colonists.  Those skills would become very valuable when the French and Indian War came to an end and England went looking for ways to force American colonists to pay back the war debt.

Since England’s sole purpose for recognizing the existence of the American colonies was to extract economically from them, it did not bother England much to use heavy-handed measures to suppress the economic activities of the colonies in order to pay for the recently-finished war with France.  New taxes were showing up everywhere.  The age-old Navigation Acts were not much changed but, instead, heavily enforced, and this put a strain on nearly all colonial industries in some fashion.  All, that is, except for the colonial shipping industry, which both colonists and England had every incentive to make sure operated efficiently.  The sale of shipping services was the greatest source of foreign exchange earnings the colonists could use to offset their trade deficit with England, so efficiency mattered greatly.  Shipping costs fell by half in the century before Independence.  Trade was heavily restricted to benefit England, but trade still occurred, and because timber was cheap in the north, it occurred on colonial-built ships with largely colonial crews in colonial ports, in cooperation with colonial city merchants.

History has shown that policies intended to accomplish one thing often end up laying the groundwork for its opposite.  In foreign affairs, countries that take an interventionist approach to depose of leadership not friendly to them sometimes find that their actions destabilize the region they are trying to stabilize.  Cities that attempted to renew themselves after World War II by demolishing old but vibrant neighborhoods and replacing them with isolated towers and parks soon found themselves in sharp decline as each city’s main stakeholders no longer found the city they knew and moved away for good.  It may be that England’s mercantile policies – intended to enrich the motherland at the expense of the colonies – directly led to the development of the more diverse and vibrant economic system that would very soon displace mercantilism for good.  Capitalism was incompatible with English mercantilism, yet mercantilism’s heavy reliance on shipping provided an incubator for American capitalism (and merchant capitalists) to cut its teeth and develop.  This irony may have provided the greatest source of economic confidence to the colonists when they opted for independence.

This idea fits in well with the historical and economic framework that I often use, this concept of oversuccess, which I’ve already defined.  Perhaps mercantilism was so successful that it created the seeds (American capitalism, in its infancy in the form of colonial shipping services) of its own competitive demise.  It is clear to me that this process occurs not just within particular industries but also in macro-scale systems, such as economies.  So, this begs the questions: Will capitalism come to suffer from oversuccess?  Has it begun to do so already?  And what will come along to usurp it?

I think the answers to the first two questions are yes, and yes.  If natural and human history are even slightly good indicators of what is to come, then I think we can say with confidence that capitalism will not last forever as humanity’s economic system of choice.  We can already see capitalism, at least in its original form, on the decline.  There is growing outcry against the people and collective interests who gain the most from the current system.  At best, capitalism has been evolving for almost a century into an economic package of free enterprise tempered with socialistic safety nets that are intended to round off some of the sharp edges.  But, as alluded to in my paper, the interesting part will be how well what is intended will translate into what will actually happen.  There is no guarantee the economic system that will eventually replace capitalism will make the majority of people better off.  The only guarantee is that it will make someone better off – someone powerful.  Otherwise, the change will never have occurred in the first place.