Mercantilism is an economic theory and policy system that was prevalent in Europe from the 16th to the late 18th century. This system believes that a nation’s wealth and power are directly related to the amount of gold and silver it possesses. Mercantilism advocates for extensive state intervention in trade and industry to strengthen the national economy and increase the state’s wealth.
Basic Principles of Mercantilism
- Accumulation of Gold and Silver: Mercantilism holds that the greatest measure of a nation’s wealth is the amount of gold and silver it has. Therefore, countries sought to create a trade surplus to attract these precious metals into their economies.
- Trade Surplus: Mercantilist policy promotes exports while limiting imports. By creating a trade surplus, a country ensures an influx of gold and silver.
- Protective Tariffs: High tariffs on imports are used to protect domestic industries and reduce imports. This makes it difficult for foreign goods to enter the market, thereby encouraging local production.
- State Intervention: The state actively intervenes in various sectors of the economy. This includes trade policies, production quotas, and state-sponsored monopolies.
Historical Development of Mercantilism
Mercantilism developed during and after the Age of Exploration in Europe. Geographic discoveries, new trade routes, and the establishment of colonies led to increased competition among European states, resulting in the adoption of mercantilist policies. Countries like England, France, Spain, and the Netherlands heavily implemented these policies.
Economic and Social Effects of Mercantilism
- Industrial and Trade Development: Mercantilism contributed to the development of industrialization and international trade. State-supported industrial and trade policies accelerated the economic growth of countries.
- Colonialism: Mercantilist policies led to the establishment of colonial empires by European countries. These colonies provided raw materials to the mother countries and served as markets for manufactured goods.
- Social Change: Mercantilist policies increased class differences in society and led to the rise of the commercial bourgeoisie. This resulted in significant changes in the economic and social structure.
Criticisms and Decline of Mercantilism
By the late 18th century, mercantilism began to face criticism. Classical economists like Adam Smith argued that mercantilist policies restricted the economy and that free market mechanisms were more efficient. Smith’s work “The Wealth of Nations” was a fundamental critique that contributed to the decline of mercantilism. By the 19th century, free trade and liberal economic policies had replaced mercantilism.
Conclusion
Mercantilism is a historical economic system that advocated for extensive state intervention to increase a nation’s economic power and wealth. Accumulation of gold and silver, trade surplus, protective tariffs, and state intervention are the basic principles of mercantilism. While historically significant, mercantilism also contributed to the development of modern economic thought.
