What is Mercantilism?
An economic system is a resource allocation mechanism in a country. The economic systems of today have passed through a process of evolution throughout history. Starting from the ancient times of hunters and gatherers involved in the barter trade to the current mixed economic systems, the world has seen many different types of economic systems. Mercantilism is one such economic system that prevailed mainly in Europe during the 17th and 18th centuries.
Mercantilism refers to an economic system that is involved in the accumulation of wealth in the form of precious metals through a favourable balance of trade. The focus was to store gold and silver by exporting the maximum possible quantity of the products while importing as little as possible, thus maintaining a balance of trade surplus. The governments used to regulate the economies and trade with the objective of promoting domestic industries. That is why mercantilism is considered a form of economic nationalism. Mercantilism was involved in increasing the stock of gold and silver, protecting the domestic industries through restrictive imports, and increasing exports as much as possible.
Mercantilism is the opposite of the theory of free trade, which advocates that the economic wellbeing of a country can be improved through the reduction of trade barriers and the promotion of free international trade through laissez-faire economics. Mercantilism, the mercantilist system or the mercantile system believed that the economic wellbeing and power of a country could be improved through regulated and restricted trade and trade protectionism.
History of Mercantilism
The term ‘mercantilism’ was populated by the Scottish economist ‘Adam Smith’ in 1776 in his famous book ‘The Wealth of Nations’. Mercantilists believed that a nation’s wealth was measured in terms of its reserves of gold and silver. In the 16th century, countries wanted to maximise wealth and power through the accumulation of reserves of gold and silver, fueled by restrictive trade and colonisation. This is called bullionism.
Mercantalism replaced feudalism in Western Europe. In feudalism, the ownership of the land and the agricultural produce were the main focus. However, in mercantilism, the greater focus was on trade and exports to gain wealth and power.
During the 17th and 18th centuries, the European governments developed colonies to withdraw precious resources and build suitable markets for their manufactured goods. These colonies were developed and expanded for the benefit of the mother country or the british empire, which wanted a favourable balance of trade. The colonies were controlled by using the military power and were used to ship natural resources and raw materials to the mother countries, while the mother countries used to sell their finished goods to the colonies. It was believed that the colonies were needed as the markets for the products of the mother countries; otherwise, their products could not be sold.
In 1651, England used the Navigation Act, which stopped foreign vessels from engaging in coastal trade. All the exports from colonists had to pass through England before going to Europe. India was restricted and was allowed to import salt from the UK only. The objective was to accumulate wealth for the mother country (Great Britain) through a favorable balance of trade.
In many countries, the government intervened in trade by implementing policies such as high tariffs or quotas, subsidies, and monopolies to accumulate wealth and power. In this way, governments promote economic nationalism in many countries.
Transition to Free Trade
But in the 18th century, mercantilism shifted towards free trade due to the ideas of Adam Smith and the Industrial Revolution. In this way, countries focus on the advantages of specialisations.
Characteristics of Mercantilism
The following are some major characteristics of mercantilism, which are explained as follows:
Economic nationalism is a main characteristic of mercantilism. It focuses mainly on the importance of a country’s economic interests and the aggregation of resources, wealth, and power.
Favourable Balance of Trade
To maintain a favourable balance of trade, mercantilist policies promote exports at the international level but restrict imports by imposing high tariffs at the state level to promote self-sufficiency.
The government imposes policies like providing subsidies, economic monopolies, and laws to support domestic industries and enhance economic growth.
Colonisation and Exploitation
Another main characteristic of mercantilism is colonisation and exploitation. For example, England established British colonies, which were the source of raw materials for the mother country. These colonies also created captive markets for manufactured goods of the mother country.
Bullionism means building reserves of precious metals such as gold and silver. During mercantilism, mother countries built reserves of gold and silver to finance powerful armies.
Modern mercantilism is the new name for traditional, outdated mercantilism, in which the economic practices and policies are similar to the traditional ones. It refers to the idea of taking care of own economic interests by exploiting international trade, currency exchange rates, and investment flows to earn advantages over other nations. Examples of modern mercantilism include trade protectionism, currency manipulation, and government supported industrial policies.
Theories of Mercantilism
Main theories of mercantilism include a favourable balance of trade, bullionism, and economic nationalism. The theory of a favourable trade balance gives importance to maintaining a trade surplus by increasing exports and reducing imports. This theory considers that a country’s wealth and power are related to more exports and less imports leading to a favorable balance of trade. The theory of bullionism emphasised accumulating precious metals like gold and silver. It was believed that by owning these metals, the country’s wealth and power would increase. Another theory is economic nationalism, which explains that the country imposed government regulations to protect domestic industries to support national economic interests and promote self-sufficiency.
Examples of Mercantilism
Many European countries can be considered as the examples of mercantilism. These countries include England, France, Spain, Portugal and the Dutch. Let's explain some of the examples:
England implemented policies, such as Navigation Acts, which require colonial goods to be transported on English ships and sold in English markets. The aim of the British government was to control colonial trade and make sure that wealth flowed back to England.
France implemented a mercantilist policy of Colbertism, named after Jean-Baptiste Colbert, the finance minister to Louis XIV. This policy involved strict government intervention in the economy to promote domestic industries. The aim was to increase exports in order to generate reserves of gold.
Spain practiced mercantilism through the use of a policy called the “Mercantilist monopoly”. Through this policy, the Spanish merchants were granted exclusive trading rights in their colonies. The aim was to exert maximum control over resources in order to build wealth and power.
Mercantilism vs. Capitalism
The following table compares the key features of mercantilism and capitalism.
Criticisms of Mercantilism
The following points explain the criticism of mercantilism:
Mercantilism was involved in putting high trade barriers in place to restrict imports in the form of tariffs and quotas. Restricted imports from the mother country mean reduced exports from other countries. This means a reduced volume of international trade. The counterargument says that there should be free trade between countries to promote efficiency and welfare.
Misunderstanding of Wealth
In mercantilism, the source of national wealth was considered to be accumulating precious metals such as gold and silver. Modern economists argue that real success and prosperity lie in the well-being of citizens residing in their respective countries. Well-being also includes access to goods and services and a sustainable living standard.
Zero-sum View of Trade
In mercantilism, it was believed that one country could benefit from the gains of international trade only at the expense, loss, or cost of another country. This is called a zero-sum game. Critics argue that trade can be profitable for both parties involved in it.
Neo-mercantilism is the modern version of traditional outdated mercantilism. Neo-mercantilism aims to protect domestic industries, promote exports, limit imports and keep the balance of trade surplus. Many countries protect domestic industries through trade barriers to promote self-sufficiency, protect domestic jobs and avoid balance of trade deficits.
In conclusion, mercantilism is an economic theory of the seventeenth and eighteenth centuries in which countries aimed to gain wealth and power through the accumulation of precious metals and balance of trade surplus. Mercantilism failed due to industrial revolution and its own limitations on account of restricted trade policies.