What is Mercantilism? Examples and Theory

Mercantilism was controversial because it promoted government intervention in the economy. Critics of mercantilism argued that it caused economic hardship for consumers and businesses and was not necessary for long-term prosperity. Mercantilism has been replaced by free market economics as the dominant economic theory in most developed nations. However, some countries, such as China, continue to use mercantilist policies.

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System of mercantilism

The system of mercantilism encourages the government to promote exports in order to create wealth and increase the country’s overall wealth. It is based on the idea that a country’s wealth and power are best maintained by accumulating and trading resources such as gold, silver, copper, and other precious metals and minerals while discouraging imports. Mercantilists believed that this would create jobs and increase wealth for the country’s citizens.

Mercantilists believed that a country’s trade surplus (exports minus imports) was an indication of its economic strength. A country with a trade surplus was thought to be able to buy goods and services from other countries at lower prices than they were selling, and thus gain an advantage over its competitors. The purpose of mercantilism was to promote the growth of a country’s economy by increasing its gold and silver reserves.

The mercantilist system in action

The primary goals of mercantilism are to increase the country’s gold and silver reserves, create a competitive edge over other countries, and maintain high levels of employment.

The mercantilist system was first developed in the 16th century by Spanish merchants. In this system, the government sets regulations regarding how much gold and silver can be exported, creating an artificial demand for these metals. This demand allows Spanish merchants to profit from international trade while keeping prices high. Mercantilism was later adopted by other European countries, including England and France.

Today, mercantilism is no longer a widespread political or economic system. However, it remains an important part of history, as it was responsible for many of the advances made in Europe during the Renaissance period.

Mercantilism theory

Mercantilism theory was developed in the 17th century and held that a country’s wealth was based on its exports and imports. In practice, this meant that countries with more resources (such as gold and silver) would hoard these substances, while countries with fewer resources would have to buy them from their rich mercantilist neighbors; this mercantilism theory of international trade is biased and favors exports but does not encourage imports. While the system of mercantilism has been largely discredited, examples of mercantilist systems still exist today.

Characteristics

1. Development of colonies
2. Accumulation of gold, silver, and other precious metals.
3. Static wealth
4. Wars were common
5. Promotion of local products

Development of colonies

In order to accumulate more wealth than other countries, there was a strive for colonizing other countries and mining their resources in order to enrich the mother country. There was also absolutism (a system where one country has absolute power over another). The mother country prevents their colonies from manufacturing and makes the colonies depend on them for manufactured products. Therefore, the mother country exports more and imports less.

Accumulation of wealth

One of the characteristics of the mercantile system (as used by Adam Smith) was dominated by the accumulation of wealth by restricting imports and encouraging exports. It sought to gather more wealth by the accumulation of gold and silver as more wealth means more economic power.

Static wealth

The system of mercantilism believes the wealth of the world is static; that is, there is a fixed amount of resources, and therefore, whoever has the highest amount of accumulated precious metals is the wealthiest. This idea promoted colonialism in an effort to accumulate more wealth and power over other nations.

Wars

As each nation seeks to accumulate more wealth for itself; armies were formed to guard borders and vessel routes and to increase territories, with the sole aim of gathering more gold and silver.

Promotion of local products

The governments restricted the export of tools, machines, or even skilled labor to prevent competition in manufacturing. In order to promote local producers of goods and services, the government exempts them from taxes, places the successful producers on pensions, and even provides capital for new companies.

In order to promote local products and restrict foreign products, many countries enacted various ACTS, rules, and regulations.

1. Jean-Baptiste Colbert, who was the finance minister in France increased port duties on foreign ships
2. The Navigation Act of 1651 in England prevented foreign ships from trading in the coastal areas of England.
3. The Staple Act of 1663 in England made it mandatory that all foreign goods should pass through the ports of England before being shipped to American colonies and other parts of Europe.
4. The Molasses Act of 1733 increased indirect taxes (duties) on French West Indian sugar in order to promote the British British West Indian Company that produces sugar that was costlier than that of the West Indian company. This even angered the Americans because they were forced to buy the expensive British West Indian sugar.

Mercantilism in the colonies

Mercantilism is often associated with the development of colonies, as merchants sought to gain an advantage over their competitors by increasing the amount of silver and gold they had available; the countries do this by increasing the number of their colonies. The mercantilists encouraged governments to build up their armies and navies in order to protect their trade routes and assets from enemy interference. They also urged them to expand their territories by colonizing new areas, as this would provide additional sources of silver and gold.

Mercantilists believed that countries should run trade surpluses (more exports than imports) in order to benefit their country with more wealth. Mercantilism follows the principle that a colony is meant to buy from the mother country; the colonies were prevented from manufacturing; the mother country can mine and extract precious metals from their colonies; all in a bit to increase their wealth and power. The colonizers were responsible for taking control of the resources in order to benefit the mother country (a practice called neo-colonialism).

Some critics of mercantilism argue that it led to widespread inflation and economic instability. Others contend that it was responsible for the development of the modern world economy, as it helped spur the growth of industry and commerce. However, it was not limited to the colonies – it played a role in many European countries as well.

Mercantilism examples

Great Britain had many colonies, some of which were the Boston colonies. After the British and France war, Britain increased taxes on its colonies to replenish its revenue. This led to the American revolution as the colonist tried to cut their imports from Britain to protest against the raised taxes; in order to maintain control, Britain became more strict and a revolutionary war broke out after a series of events.

Examples of mercantilism in the modern world

Today, mercantilist policies are rare, but they can still be found in countries like China and Russia. Russia today is battling for land and control over Ukraine. China and India were at war over land.

Most countries have some elements of mercantilist policies such as increasing tariffs on imported products to promote domestic production, providing subsidies for certain domestic products, and devaluation of currencies. These modern mercantilist policies can best be described as neo-mercantilism.

Imperialism vs mercantilism

Imperialism is more aggressive in always forcing weaker countries to relinquish their resources to the stronger nations. In imperialism, there is a combined use of force through the military and mass immigration to force the weaker nations to release their resources and do the bidding of the mother country. Mercantilism is not always forceful but may impose higher tariffs for importation in order to discourage imports.

Mercantilism vs free trade

When comparing mercantilism vs free trade in terms of their benefits to consumers; free trade makes products affordable and available because it encourages imports which increases supply and therefore reduces the cost of goods; compared to mercantilism which prevents imports, thereby making goods scarce and their prices costly because there is no competition.

Mercantilist countries are frequently at war in order to gain resources or colonize other countries; this is completely different from free trade which encourages mutual benefits between countries in which one country exports what it has an absolute advantage and imports what it lacks.

Mercantilism vs capitalism

1. Mercantilism emphasizes acquiring gold and silver as a means of accumulating wealth. This can be contrasted with capitalism, which emphasizes producing goods and services for sale in order to make profits.
2. The mercantilist system favors restrictive trade policies, such as high tariffs, in order to restrict imports and increase exports. This can be contrasted with free trade, which is advocated under capitalism. In fact, advocates of laissez-faire capitalism are strongly against mercantilism because they believed that both trading countries can benefit from each other without one country growing rich at the expense of another.
3. Mercantilism is based on the idea that countries are naturally competitive and that any gain by one country must be offset by a loss by another country. This can be contrasted with the concept of free markets, which supposes that everyone benefits from free trade.

Mercantilism and capitalism are both focused on wealth accumulation and encourage trade.

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Conclusion

Mercantilism is a theory and practice of economic policy that stresses the importance of exports and imports for economic growth and stability. Mercantilists believed that a country’s wealth was principally derived from its gold, silver, or other precious metals reserves. This led mercantilists to advocate policies designed to increase the country’s gold and silver holdings, such as high tariffs on imported goods and a vigorous printing of money to buy foreign assets.

Mercantilism began to decline in popularity around the end of the 18th century as industrialization made it more difficult for countries to rely on their precious metal reserves for national security.