Economic system

Definition of Mercantilism (Economic System)

What is commercialism?

Mercantilism was an economic system of commerce that spanned the 16th to 18th centuries. Mercantilism is based on the principle that global wealth was static, and therefore many European nations attempted to accumulate as much of this wealth as possible by maximizing their exports and limiting their imports via tariffs.

Key points to remember

  • Mercantilism was an economic system of commerce that spanned the 16th to 18th centuries.
  • Mercantilism was based on the idea that a nation’s wealth and power were best served by increased exports and therefore involved increased trade.
  • Under mercantilism, nations frequently pledged their military might to ensure that local markets and sources of supply were protected, to support the idea that a nation’s economic health depended heavily on its supply of capital.

history of commercialism

First popularized in Europe during the 1500s, mercantilism was based on the idea that a nation’s wealth and power were best served by increased exports, with the goal of collecting precious metals like 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 colonists from buying foreign goods, while creating incentives to buy only British goods. For example, the Sugar Act of 1764 increased duties 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.

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

Under mercantilism, nations frequently pledged their military might to ensure that local markets and sources of supply were protected, 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 gauged by its levels of ownership of precious metals, such as gold or silver, which tended to increase with increased construction of new homes, l increased agricultural production and a strong merchant fleet to supply additional markets with goods. and raw materials.

Jean-Baptiste Colbert: The mercantile ideal

Arguably the most influential proponent 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 implement 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, convinced that France needed to control its trade routes to increase its wealth. Although his practices ultimately proved unsuccessful, his ideas were extremely popular, until they were eclipsed by market economic theory.

British colonial mercantileism

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

  • Controlled production and marketing: Mercantilism led to the enactment of enormous trade restrictions, which stunted the growth and freedom of colonial enterprises.
  • 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 provided rum, cotton and other products demanded by the African imperialists. In turn, the slaves were sent back to America or the West Indies and traded for sugar and molasses.
  • Inflation and taxation: The UK government has required trading to be conducted using gold and silver bullion, always seeking a positive balance of trade. Colonies often did not have enough bullion to circulate in their markets, so they issued paper money instead. Mismanagement of printed money has led to periods of inflation. Moreover, as Britain was in a near-constant state of war, heavy taxes were needed to sustain its army and navy. The combination of taxes and inflation caused great colonial discontent.

Mercantilism of the American Revolution

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

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

After a costly war with France, the British Empire, eager to replenish its revenue, raised taxes on the colonists, who rebelled by boycotting British goods, thus reducing imports by a good third. This was followed by the Boston Tea Party in 1773, where Boston settlers disguised themselves as Indians, attacked three British ships and dumped the contents of several hundred chests of tea into the harbour, in protest at 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 beginning 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 franchise its major merchants to create exclusive government-controlled monopolies and cartels, where governments used regulations, subsidies, and (if necessary) military force to protect these monopolistic companies 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 received “shares” of the company’s profits, which were, in essence, the first corporate shares traded.

The most famous and powerful mercantilist societies were the British and Dutch East India companies. For over 250 years, the British East India Company maintained the exclusive, royally granted right to 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 profit and loss.

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 compel the inhabitants to follow the laws of the dominant countries. One of the most striking examples of the relationship between mercantilism and imperialism is Britain’s establishment of the American colonies.

Free trade versus profiteering

Free trade offers several advantages over commercialism for individuals, businesses and nations. In a free trade system, individuals enjoy a greater choice of affordable goods, while commercialism restricts imports and reduces the choices available to consumers. Fewer imports means less competition and higher prices.

While mercantilist countries were almost constantly engaged in warfare, fighting over 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 allowed businesses to specialize in producing the goods they made most efficiently, leading to higher productivity and greater great economic growth.

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 toward Japan and negotiated voluntary export restrictions with the Japanese government, which limited Japanese exports to the United States.