MERCANTILISM
“An economic theory that emphasizes self-sufficiency through a favorable balance of trade.’’
Mercantilism is an economic theory that advocates government regulation of international trade to generate wealth and strengthen national power. Merchants and the government work together to reduce the trade deficit and create a trade surplus.
Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century. Mercantilism is based on the principle that the world's wealth was static, and consequently, many European nations attempted to accumulate the largest possible share of that wealth by maximizing their exports and by limiting their imports via tariffs.
Meaning of ‘Mercantilism’:
Adam Smith, the ‘Father of Economics’ first used the word ‘Mercantilism’ in his famous book ‘Wealth of Nations ’. Mercantilism means-“Governmental regulation of economic affairs, especially, trade and industry”. The exponents of Mercantilism opined that Commerce is the key to the progress of every country and it can be achieved at the cost of the interest of other countries. Although they put emphasis on the economy, they never wanted intervention in politics.
Mercantilism, The ‘Commercial Revolution’ which took place between 1450 and 1750 brought a revolutionary change in the economy of Europe.
Many countries of Europe encouraged the intervention of the state in commercial activities for the increase of national wealth and power.
This gave birth to ‘Mercantilism’ which played a vital role in the economic prosperity of a country. This Mercantilism created a milestone in the field of European Economy.
History of Mercantilism
Originating in 16th-century Europe, mercantilism began with the emergence of the nation-state. The dominant economic theory was that the global supply of wealth was finite, and it was in the nation’s best interest to accumulate as much as possible. During that time, wealth was measured by a country’s quantity of silver and gold. To accumulate more wealth, European countries, such as Britain and France, would focus on maximizing their exports and minimizing imports, which resulted in a favorable balance of trade.
For countries with a negative trade balance with a mercantilist country, the difference would be paid back in silver or gold. To maintain a favorable trade balance, the early mercantilist countries would enact imperialist policies by setting up colonies in smaller nations.
The aim was to extract raw material to send back to the home country, where it would be refined into manufactured goods. The goods would then be resold to the colonies, allowing early mercantilist nations to accumulate wealth through a positive trade balance.
Mercantilist Ideology
As an economic theory, mercantilism relies on government intervention to regulate international trade and protect domestic industries. Mercantilist policies involve the protection of domestic corporations through regulations and the promotion of trade surpluses. In the context of international trade, a favorable trade balance is achieved through government regulations, such as tariffs and restrictions on imports.
On the domestic side, mercantilist policies support domestic industries by establishing monopolies and allocating capital to encourage growth. Such policies are a form of economic protectionism meant to encourage self-sufficiency and directly oppose the free-market economics of trade and globalization.
Causes of the Rise of Mercantilism:
Mercantilism grew due to several reasons. At first, the Renaissance did not accept the religious doctrine of Medieval Europe. It explained ‘Materialism’ as one of the mediums of human happiness. So, everybody dreamt to lead a happy and prosperous life. This gave birth to Mercantilism.
Secondly, the Fall of Feudalism was another cause for the rise of Mercantilism. With the fall of feudalism, the fate of agriculture was doomed. This encouraged the small-scale industries. The towns and guilds wanted the increase these industries. They wanted to export the surplus of these productions. This led to the rise of Mercantilism.
Thirdly, the Reformation Movement encouraged the merchants. The results of the Reformation Movement carried on by Martin Luther in Germany and Henry VIII in England were far-reaching. They condemned the unnecessary intervention of the Pope in Political and Economic affairs except in religion.
Martin Luther opposed the Pope so much so that he was issued ‘The Bull of excommunication by the Pope. However, Luther did not bend before it. In a similar vein, Henry VIII of England did not obey Pope and brought reformation to the Church of England.
All these activities encouraged the merchants to take up their business independently. This encouraged Mercantilism.
Fourthly, the Guilds and Banking System gave great impetus for the growth of Mercantilism. The guilds acted as distribution centres and exported the surplus to outside countries. This encouraged international trade which was well-regulated by the banking system. Thus, Mercantilism grew out and out.
Fifthly, the Geographical Discoveries encouraged Mercantilism. The sea voyage of Columbus, Vascodagama, Magellan and others encouraged Mercantilism.
Sixthly, Political Patronage established Mercantilism on sound footing. The kings wanted to reduce the power of the feudal Lords and Barons. So, they encouraged the merchants for trade. Henry, ‘the Navigator’ of Portugal and Henry VIII and Queen Elizabeth of England patronised sailors. Their patronage established Mercantilism on sound footing.
At last, Scientific Invention and Discoveries helped a lot in the growth of Mercantilism. The telescope invented by Galileo helped the merchants in their journey. The Mariner’s Compass also helped the merchants a lot to determine the direction inside the deep sea. These inventions made merchants confident in maritime trade which galvanized Mercantilism.
Characteristics of Mercantilism:
Mercantilism had many characteristics. It was seen mostly in European countries. Among those countries, England, France, Germany, Italy, etc. were prominent.
The characteristics of Mercantilism were as such:
Foreign Trade:
At first, the merchants put emphasis on foreign trade. They knew that gold and silver are not plentily available in many countries. They wanted to procure gold and silver from other countries by sailing their own products to them. This was in fact, one of the great characteristics of Mercantilism.
Emphasis on Money:
Money, ‘brighter than sun-shine and sweeter than honey’ was another feature of Mercantilism. The merchants had understood that for the development of trade, money is needed. So, they discarded ‘barter’. They had felt that “Money is what money does”. So money economy galavanised Mercantilism.
Profit and Interest:
Moon, a notable economist had advised to charge interest on principal when money was lent. It increased the amount of money inside a country. On the other hand, it also inspired a trader to work hard for the repayment of money that he had borrowed and also encouraged him to be rich. Thus, profit and benefit became two sides of Mercantilism.
Population:
Mercantilism put emphasis on population. Devenant had opined that the real power of a country is its population. The presence of more population helps in the growth of the industry which leads to more production. Samuel Fortre had advised that in case of need, the refugees are to be employed in different factories and given shelter in the country for more production.
Medium of Production:
The exponents of Mercantilism put emphasis on ‘land’ and ‘labour’. In the language of Peltti, “Labour is the father…. as lands are the mother”. So, Mercantilism delivered a message that a country should be economically prosperous. By this, a country should be self-sufficient in production.
Regulation of Trade and Commerce:
The merchants of Europe had devised means to regulate trade and commerce of a country. Every European Country framed laws to regulate its trade and commerce. By these laws, it was not possible to import goods from outside countries. This helped in exporting the surplus of the country.
Encouragement to Capitalism:
Mercantilism was meant to encourage capitalism. The capitalists invested their capital and made mercantilism more mobile. It was difficult on the part of Mercantilism to thrive without capital. This helped in the growth of trade and commerce.
The Golden Principles:
The ‘Golden Principles’ of Mercantilism contained its chief characteristics. Those principles were self-dependency, industry, mine, commerce, naval power, colony, unity, etc. Being guided by these principles, colonialism reached the pinnacle of success.
From Mercantilism to the Market Economy
By the end of the 18th century, scholars, such as Adam Smith and David Hume, began to evaluate and critique the merits of mercantilist theory. Contrary to established beliefs, the scholars realized that wealth was not finite, but could be created through the productive allocation of labor.
Mercantilist policies also failed to account for the benefits of trade, such as comparative advantage and economies of scale. When countries specialize in the production of goods for which they enjoy a comparative advantage, trade can result in mutually beneficial deals. Such a realization resulted in the emergence of the market economy, where prices and means of production were driven by the forces of supply and demand.
Under a mercantilist system, the restriction of imports meant consumers obtained access to fewer goods at higher prices. Under a system of free trade, consumers benefit from lower prices due to increased competition and greater access to goods from across the world.
Present-Day Mercantilism
Although mercantilism is mostly viewed as an outdated economic theory, there has been an emergence of mercantilist policies in recent times. Present-day mercantilism typically refers to protectionist policies that restrict imports to support domestic industries. It can sometimes be referred to as neomercantilism.
Modern mercantilist policies include tariffs on imports, subsidizing domestic industries, devaluation of currencies, and restrictions on the migration of foreign labor. Mercantilist policies can also explain the recent escalation of tariffs and trade restrictions between the US and China.
Merchants and Mercantilism
By the early 16th century, European financial theorists understood the importance of the merchant class in generating wealth. Cities and countries with goods to sell thrived in the late middle ages.
Consequently, many believed the state should franchise out its leading merchants to create exclusive government-controlled monopolies and cartels, where governments used regulations, subsidies, and (if needed) military force to protect these monopolistic corporations from domestic and foreign competition. Citizens could invest money in mercantilist corporations, in exchange for ownership and limited liability in their royal charters. These citizens were granted "shares" of the company profit, which were, in essence, the first traded corporate stocks.
The most famous and powerful mercantilist corporations were the British and Dutch East India companies. For more than 250 years, the British East India Company maintained the exclusive, royally granted right to conduct trade between Britain, India, and China with its trade routes protected by the Royal Navy.
Mercantilism is considered by some scholars to be a precursor to capitalism since it rationalized economic activity such as profits and losses.
Mercantilism vs. 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 foist mercantilism on less-developed regions, in campaigns to make inhabitants follow the dominant countries' laws. One of the most powerful examples of the relationship between mercantilism and imperialism is Britain's establishment of the American colonies.
Free Trade vs. Mercantilism
Free trade provides several advantages over mercantilism for individuals, businesses, and nations. In a free trade system, individuals benefit from a greater choice of affordable goods, while mercantilism restricts imports and reduces the choices available to consumers. Fewer imports mean less competition and higher prices.
While mercantilist countries were almost constantly engaged in warfare, battling over resources, nations operating under a free-trade system can prosper by engaging in mutually beneficial trade relations.
In his seminal book "The Wealth of Nations," legendary economist Adam Smith argued that free trade enabled businesses to specialize in producing goods they manufacture most efficiently, leading to higher productivity and greater economic growth.
Today, mercantilism is deemed outdated. However, barriers to trade still exist to protect locally entrenched industries. For example, post World War II, the United States adopted a protectionist trade policy toward Japan and negotiated voluntary export restrictions with the Japanese government, which limited Japanese exports to the United States.
0 Comments