Definition of mercantilism (economic system)


What is commercialism?

Mercantilism was an economic system of commerce that extended from the 16th to the 18th century. Mercantilism is based on the premise that global wealth was static, and as a result, many European countries attempted to accumulate as much of that wealth as possible by maximizing their exports and limiting their imports through tariffs.

Key points to remember

  • Mercantilism was an economic system of commerce that extended from the 16th to the 18th century.
  • Mercantilism was based on the idea that the wealth and power of a nation were best served by increasing exports and therefore implied increasing trade.
  • Under commercialism, nations frequently engaged their military might to ensure the protection of local markets and sources of supply, to support the idea that a nation’s economic health depended heavily on its supply of capital.

History of mercantilism

First popularized in Europe during the 1500s, mercantilism was based on the idea that a nation’s wealth and power were best served by increasing exports, with the aim of collecting precious metals as the ‘gold and silver.

Mercantilism replaced the feudal economic system in Western Europe. At the time, England was the epicenter of the British Empire but had relatively few natural resources. To increase its wealth, England introduced tax policies that discouraged settlers from buying foreign goods, while creating incentives to buy only British goods. For example, the Sugar Act of 1764 increased tariffs on foreign refined sugar and molasses imported by the colonies, with the aim of giving British sugar producers in the West Indies a monopoly in the colonial market.

Likewise, the Navigation Act of 1651 prohibited foreign ships from trading along British coasts and required that colonial exports first come under British control before being redistributed throughout Europe. Programs like these resulted in a favorable trade balance which increased Britain’s national wealth.

Under commercialism, nations frequently engaged their military might to ensure the protection of local markets and sources of supply, to support the idea that a nation’s economic health depended heavily on its supply of capital. Mercantilists also believed that a nation’s economic health could be assessed by its levels of ownership of precious metals, such as gold or silver, which tended to increase with increasing construction of new homes, l ‘increased agricultural production and a strong merchant fleet to provide additional markets with goods and raw materials.

Jean-Baptiste Colbert: The merchant ideal

Arguably the most influential supporter of mercantilism, the French Comptroller General of Finance Jean-Baptiste Colbert (1619-1683) studied the economic theories of foreign trade and was uniquely positioned to execute these ideas. As a staunch monarchist, Colbert called for an economic strategy that protected the French crown from a rising Dutch merchant class.

Colbert also increased the size of the French navy, out of the belief that France should control its trade routes to increase its wealth. Although his practices were ultimately unsuccessful, his ideas were extremely popular, until they were eclipsed by market economy theory.

British colonial mercantilism

The British colonies suffered the direct and indirect effects of the internal mercantilist policy. Below are several examples:

  • Controlled production and trade: Mercantilism led to the adoption of huge trade restrictions, which hampered the growth and freedom of colonial businesses.
  • The expansion of the slave trade: Trade was triangulated between the British Empire, its colonies and foreign markets, favoring the development of the slave trade in many colonies, including America. The colonies supplied rum, cotton and other products demanded by the African imperialists. In turn, the slaves were sent back to America or the West Indies and exchanged for sugar and molasses.
  • Inflation and taxation: The UK government has demanded that trade be done with gold and silver bars, always striving for a positive trade balance. The colonies often did not have enough bullion to circulate in their markets, so they issued paper money instead. The mismanagement of printed money has resulted in periods of inflation. Moreover, as Britain was in a near constant state of war, heavy taxes were required to support its army and navy. The combination of taxes and inflation caused great colonial discontent.

American Revolutionary Mercantilism

Defenders of mercantilism have argued that the economic system created stronger economies by marrying the concerns of the colonies with those of their founding countries. In theory, when settlers create their own products and obtain others from the trade of their founding nation, they remain independent of the influence of hostile nations. Meanwhile, the founding countries benefit from the receipt of large quantities of raw materials from the settlers, necessary for a productive manufacturing sector.

Critics of economic philosophy believed that restricting international trade increased spending, as all imports, regardless of the origin of the product, had to be shipped by British ships from Britain. This drastically increased the costs of goods for the settlers, who believed that the disadvantages of this system outweighed the advantages of affiliation with Great Britain.

After a costly war with France, the British Empire, eager to replenish its income, raised taxes on settlers, who rebelled by boycotting British goods, reducing imports by a third. This was followed by the Boston Tea Party in 1773, where Boston colonists disguised themselves as Indians, attacked three British ships and threw the contents of several hundred tea chests into the harbor, in protest against British taxes. on tea and the monopoly granted to the East India Company. To strengthen its mercantilist control, Britain pushed harder against the colonies, which ultimately resulted in the War of Independence.

Merchants and mercantilism

At the start of the 16th century, European financial theorists understood the importance of the merchant class in the creation of wealth. Cities and countries with goods for sale flourished in the late Middle Ages.

Therefore, many believed that the state should allow its major merchants to create exclusive government-controlled monopolies and cartels, where governments used regulations, subsidies, and (if necessary) military force to protect these monopoly corporations from harm. domestic and foreign competition. Citizens could invest money in mercantilist companies, in exchange for ownership and limited liability in their royal charters. These citizens received “shares” of the company’s profits, which were, in essence, the first commercial actions traded.

The most famous and powerful mercantilist companies were the British and Dutch East India companies. For over 250 years, the British East India Company maintained the exclusive and royal right to trade between Britain, India and China with its trade routes protected by the Royal Navy.

Mercantilism is considered by some researchers to be a precursor of capitalism because it rationalized economic activity such as profits and losses.

Mercantilism versus imperialism

Where mercantilist governments manipulate a nation’s economy to create favorable trade balances, imperialism uses a combination of military force and mass immigration to impose mercantilism on less developed regions, in campaigns to force the inhabitants to follow the laws of the dominant countries. Britain’s establishment of the American colonies is one of the most powerful examples of the relationship between mercantilism and imperialism.

Free trade against mercantilism

Free trade offers several advantages over commercialism to individuals, businesses and nations. In a free trade system, individuals benefit from a greater choice of affordable products, while commercialism restricts imports and reduces the choices available to consumers. Less imports mean less competition and higher prices.

While mercantilist countries were almost constantly engaged in war, fighting for resources, nations operating under a free trade system can prosper by engaging in mutually beneficial trade relationships.

In his seminal book “The Wealth of Nations”, legendary economist Adam Smith argued that free trade allows companies to specialize in producing the goods they manufacture most efficiently, resulting in higher productivity and growth. more important economic.

Today, commercialism is considered outdated. However, trade barriers still exist to protect locally based industries. For example, after World War II, the United States adopted a protectionist trade policy towards Japan and negotiated voluntary export restrictions with the Japanese government, which limited Japanese exports to the United States.