What exactly is mercantilism?
Mercantilism was a commercial economic system from the 16th to the 18th centuries. Mercantilism was founded on the idea that the world’s wealth was static, so governments had to restrict commerce to increase their wealth and national authority. Many European countries strove to capture the lion’s share of the income by increasing exports and limiting imports through tariffs.
Recognizing Mercantilism
Mercantilism was a type of economic nationalism that aimed to promote a country’s economy and power through restrictive trade practices. Its purpose was to improve a state’s gold and silver supply through exports rather than drain it through imports. It also aimed to promote domestic employment.
Mercantilism defended the interests of merchants and manufacturers (such as England’s East India Company and the Dutch East India Company).
Mercantilism had several distinguishing features.
- The Belief in Wealth’s Static Nature
Because of the scarcity of precious metals, financial prosperity was thought to be limited. Nations seeking prosperity and power are required to amass as much wealth as possible at the expense of other countries.
- The Need to Increase Gold Supply
Gold symbolizes prosperity and power. It may fund warriors, nautical exploration for natural resources, and empire expansion. It could also provide defense against invasion. A lack of gold marked a country’s demise.
- The Importance of Keeping a Trade Surplus
This was critical to accumulating money. Countries must prioritize selling their products (and collecting the related money) over overspending on imports (and sending gold out of the country).
- The Value of a Large Population
Population density represented prosperity. Increasing a country’s population was critical for supplying labor, sustaining domestic commerce, and maintaining armies.
- Colonies as a Source of Wealth
Some nations required colonies for raw materials, labor, and a means of keeping riches under control (by selling colonies the things their raw resources helped to make). Colonies essentially increase a nation’s wealth-building power and national security.
Protectionism in Action
Protecting a country’s ability to generate and maintain trade surpluses included preventing colonies from trading with other countries and placing tariffs on imported goods.
The Evolution of Mercantilism
Mercantilism, which first appeared in Europe during the 1500s, was founded on the concept that growing exports and limiting imports benefit a nation’s riches and power. In Western Europe, mercantile economic systems superseded feudalism. England was the hub of the British Empire at the time, although it possessed little natural resources.
England implemented fiscal policies to increase its riches that prevented colonists from purchasing foreign goods and established incentives for them to purchase only British items. For example, the Sugar Act of 1764 increased levies on foreign refined sugar and molasses imported by the colonies. The purpose of the additional taxation was to give British sugar planters in the West Indies a monopoly on the colonial market.
Similarly, the Navigation Act of 1651 prohibited foreign ships from trading along the British coast and mandated that colonial commodities transit through British authority before being redistributed throughout Europe.
Programs like this resulted in a favorable trade balance, which improved the national income of the United Kingdom.
Under mercantilism, states frequently used their military force to preserve local markets and supply sources. Mercantilists also believed that the ownership of precious metals such as gold or silver could be used to gauge a country’s economic health. Their levels tended to rise in response to increased new home construction, higher agricultural output, and a mighty merchant ship that supplied goods and raw materials to extra markets.
Mercantilism in France
Jean-Baptiste Colbert (1619–1683), the French Controller General of Finance, was arguably the most influential proponent of mercantilism. He was in a unique position to put mercantilist theories into action. Colbert, a passionate monarchist, advocated for an economic strategy to safeguard the French throne against a burgeoning Dutch mercantile elite.
Colbert also raised the strength of the French navy, believing that to grow its wealth, France needed to control its trade routes. Although his techniques were ultimately ineffective, his concepts were trendy. Free-market economic theory eventually eclipsed them.
Mercantilism in British Colonialism
The British colonies bore the direct and indirect consequences of mercantilist policy at home. Here are a few examples:
- Controlled production and trade: Mercantilism resulted in severe trade restrictions, stifling the expansion and freedom of colonial firms.
- Slave trade expansion: Trade became triangulated between the British Empire, its colonies, and foreign markets. This aided the growth of the slave trade in many colonies, including America. The colonies supplied rum, cotton, and other goods sought by African imperialists. In exchange for sugar and molasses, enslaved people were repatriated to America or the West Indies.
- Inflation and taxation: The British government insisted on trading in gold and silver bullion, always seeking a positive trade balance. Because the colonies frequently had inadequate bullion to circulate in their marketplaces, they printed paper currency to replace it. Inflationary periods came from the mismanagement of printed currency. Furthermore, because Britain was in a near-constant state of war, substantial taxation was required to support its army and navy. The combination of taxation and inflation sowed seeds of discontent among the colonists.
Mercantilism in Colonial America
Defenders of mercantilism contended that it strengthened economies by uniting colonial concerns with those of their parent countries. In theory, when British colonists developed their products and acquired others through trade with their founding nation, they were free of the influence of hostile nations.
Meanwhile, Great Britain benefited from the enormous amounts of raw materials that colonists provided, which were necessary for a thriving industrial industry. Because British ships had to deliver all imports, regardless of their country of origin, mercantilist critics claimed that the restrictions on foreign trade increased costs. This significantly increased the cost of products for colonists, who considered that the disadvantages of this system outweighed the benefits of affiliating with Great Britain.
After a costly war with France, the British Empire, desperate for income, hiked taxes on colonies, who revolted by boycotting British products, resulting in a one-third reduction in imports. The Boston Tea Party, in 1773, saw Boston colonists masquerading as Indians raid three British ships. They dumped several hundred chests of tea into the harbor to protest British tea duties and the East India Company’s monopoly. Great Britain increased its pressure on the colonies to strengthen its mercantile authority. As a result, the Revolutionary War broke out.
Mercantilism and Merchants
By the early 16th century, European financial thinkers recognized the merchant class’s importance in generating wealth. Cities and countries with things to sell boomed in the late Middle Ages.
As a result, many people believed that the government should allow its leading merchants to form exclusive government-controlled monopolies and cartels. Governments utilized rules, subsidies, and (if necessary) military action to defend these monopolistic enterprises from domestic and foreign competition.
Citizens could put money into mercantile firms in exchange for ownership and restricted liability under their royal charters. These citizens were given a portion of the company’s profits. These were the first publicly traded company stocks.
Britain’s East India Company and the Dutch East India Company were the most well-known and influential mercantile companies. The British East India Company held the sole, royally granted right to conduct trade between Britain, India, and China for over 250 years. The Royal Navy patrolled its commerce routes.
Imperialism vs. Mercantilism
Mercantilist regimes exploit a country’s economy to achieve favorable trade balances. Imperialism imposes mercantilism on less-developed regions through military power and mass immigration. Military campaigns compelled residents to obey the laws of the dominant countries. Britain’s establishment of American colonies is one of the most powerful illustrations of the link between mercantilism and imperialism.
Capitalism vs. Mercantilism
Individuals, corporations, and governments all benefit from capitalism over mercantilism. Thanks to capitalism’s free-trade framework, individuals profit from a broader range of affordable items. Mercantilism, on the other hand, restricts imports and reduces consumer choices. With fewer imports, there is less competition and higher pricing.
Mercantilist countries routinely engage in warfare to control resources. Nations that practiced free trade thrived by engaging in mutually beneficial economic relations.
Legendary economist Adam Smith argued in his seminal book The Wealth of Nations that free trade encouraged enterprises to specialize in producing the things they could manufacture most efficiently. This resulted in increased productivity and economic prosperity.
Today’s Mercantilism
Today, mercantilism is considered obsolete. The devastation of World War II highlighted the dangers of nationalistic policies. It also encouraged global business and connections as a means of combating them.
However, mercantilism is challenging to avoid. For example, trade restrictions were still implemented after the war to safeguard regionally established businesses. The US developed a protectionist trade policy toward Japan and negotiated voluntary export limitations with the Japanese government, limiting Japanese exports to the US.
Because it works so well with their types of governments, Russia and China continue to adopt a mercantilist system today. They have greatly valued their ability to manage foreign trade, balance of payments, and foreign reserves. They have also attempted to make their exports more appealing by lowering their prices.
Many nations and their people have lost income, control, and reputation as a result of the effects of globalization. This has increased the attraction of mercantilism’s nationalism. It aided in the election of Donald Trump in the United States and Narendra Modi in India. President Trump put tariffs on Chinese goods in 2018, sparking a trade war that continues today.
What were the main mercantilist beliefs?
The original foundation of mercantile beliefs included beliefs that the world had limited wealth in the form of gold and silver, that nations had to build their gold stores at the expense of others, that colonies were important for supplying labor and trading partners, and that armies and navies were critical to protecting trade practices. That protectionism was required to guarantee trade surpluses.
What is the distinction between capitalism and mercantile capitalism?
One distinction is the role of the state. Capitalism advocates for minimal government intervention and for private companies and individuals to own capital, trade, and industry. State control and regulation are involved in mercantile behavior. According to some, capitalism encourages individual liberty. Mercantile behavior is believed to suppress it.
Is mercantilism still in use?
Yes, it exists to some degree in countries where governments attempt to preserve control over property ownership, trade, and wealth creation.
Conclusion
For three centuries, mercantilism reigned supreme as the predecessor to free trade economic philosophy. The notion of mercantile riches and state power encouraged the use of protectionism to raise export revenue and discourage imports. It started an age of exploration and colonization to obtain raw materials, controllable trading partners, and a net wealth transfer. Capitalism and free trade doctrine have largely replaced mercantilism in many parts of the world. However, it can still be evident in tariffs imposed by governments seeking a fair (or unjust) trade balance with other countries.
