What is Mercantilism

Mercantilism, a term coined by the historian Gustav Schmoller in the late 19th century, refers to a prevalent economic theory and practice that held sway in Europe from the 16th to the mid-18th century. This economic doctrine was based on the premise that the wealth of a nation was primarily determined by the amount of precious metals, particularly gold and silver, it possessed. The name mercantilism was derived from 'mercante' meaning merchant - an indication of the class that rose to prominence during this period due to their significant role in trade.

Mercantilist policies aimed to ensure a favorable balance of trade for the state, emphasizing exports over imports. States enacted numerous protective measures, including high tariffs on imported goods and subsidies for exported ones, to promote their domestic industries and reduce foreign competition. The result was a highly regulated trade environment designed to bolster the economic power of the state.

National power during the mercantilist era was inseparable from economic strength. Nation-states utilized mercantilist policies to bolster their economies, funding larger standing armies, navies, and investing in infrastructure. Economic power was both a means and an end - a tool to achieve political goals and an indication of the state's overall strength and influence.

Key Principles of Mercantilism

Favorable Balance of Trade

Central to the doctrine of mercantilism was the concept of a favorable balance of trade, meaning a situation where the value of goods exported exceeded the value of goods imported. It was a reflection of the belief that wealth was finite, and therefore international trade was a zero-sum game where one nation's gain was another nation's loss. A favorable balance of trade ensured that more gold and silver flowed into the country than out, thereby supposedly increasing the nation's wealth.

Stockpiling of Bullion

The stockpiling of bullion, primarily gold and silver, was another principle of mercantilism. Since these precious metals were universally recognized as valuable, they were deemed a suitable measure of a nation's wealth. Mercantilist nations aimed to amass these metals through a surplus in the balance of trade.

Role of Colonies

Under mercantilism, colonies played a crucial role in the economic plans of the mother country. Colonies provided raw materials that were not available or scarce in the home country and were seen as markets for the manufactured goods of the mother country. This dependency often led to the exploitation of the colonies.

Protectionism and Navigation Acts

To create and maintain the desired favorable balance of trade, mercantilist nations frequently enacted protectionist measures. These included tariffs, subsidies, and quotas. England's Navigation Acts are a clear example of these measures. The Acts stipulated that only English ships or ships from the country of the goods' origin could import to England, effectively excluding foreign competitors and promoting the growth of England's merchant marine.

Impact of Mercantilism on Global Trade and Economics

Colonial Expansion

One of the most significant global impacts of mercantilism was the fueling of European colonial expansion. With a desire for new sources of raw materials and markets for their goods, mercantilist nations such as England, Spain, and France expanded their territories, establishing colonies across the Americas, Africa, and Asia. This colonial expansion brought profound changes, including the transatlantic slave trade, massive population shifts, and new cultural exchanges.

Impact on Industrial Revolution

The wealth amassed through mercantilist trade practices contributed to the accumulation of capital, a key factor in the onset of the Industrial Revolution, particularly in England. The growth in overseas trade, protectionism, and national policies under mercantilism also created a robust, centralized economy conducive to large-scale industrial production.

Criticisms and Limitations of Mercantilism

Mercantilism faced substantial criticism, particularly from classical economists like Adam Smith. In his seminal work "The Wealth of Nations" (1776), Smith contended that wealth wasn't static but could be grown. He argued against the zero-sum game theory of mercantilism, asserting that trade could be mutually beneficial. Smith promoted the concept of free trade, where market forces, not state interventions, determine trade flows.

The idea of international trade as a zero-sum game, a fundamental principle of mercantilism, has been widely challenged. Modern economic theory suggests that trade can be a positive-sum game, with all participating countries benefiting through the principle of comparative advantage.

Transition from Mercantilism to Classical Economics

The late 18th century witnessed the decline of mercantilist ideas and the rise of classical economics. This transition was triggered by the Industrial Revolution and the evolution of political and economic ideas.

Adam Smith's critique of mercantilism laid the foundation for classical economics. Smith and other classical economists, like David Ricardo, argued for the advantages of specialization and free trade. They contended that wealth comes from productive labor and the efficient use of resources, rather than the accumulation of precious metals.

The ideas of these classical economists informed the policies of the rising capitalist class, which was increasingly influential during the Industrial Revolution. Over time, these new economic ideas led to policy changes that shifted emphasis away from mercantilist protections and towards freer trade - the beginnings of the economic world as we know it today.