Mercantilism

What is Mercantilism? Meaning, Theory, Key Points, and Criticisms

What is Mercantilism?

Mercantilism emerged, came into practice, and developed between 1500 to 1770 AD it was systematically developed by an Italian Economist, Antonio Serra. Mercantilism is an economic theory as well as an international business/trade theory.

Mercantilism is the starting point of the development of the international business which was initially originated in French as “Mercantile” and “Marchant” meaning a general currency system. During the mercantilism period, treasure, usually gold and silver were the only currency of trade between the countries.

By mercantilism theory, a country should increase exports and restrict imports to generate wealth and strengthen power. The government must maintain their export greater than the imports. A country’s best interest should be to maintain a trade surplus, encourage exports through subsidies, and reduce imports through tariffs, quotas, and non-tariff barriers.

Mercantilism argues countries should accumulate treasure, gold, and silver on which a nation’s wealth depends. The more such treasure a nation has the more powerful the nation is. It believes gold and silver and precious metals are the nation’s wealth, it creates a nation strong and powerful and helps to get international prestige.

It is a government interventionist theory, the state power is desirable to mobilize resources with the help of trade to satisfy their citizens’ desires and create national wealth.

Mercantilism stayed for nearly 300 years (1500-1770) but in the early 18th century French thinkers called physiocrats argued governments do not interfere in trade and other matters. Later on, Adam Smith 1976, further added the concept of free trade, it was not immediately accepted but again in the 20th century John Maynard Keynes and his followers influenced the concept.

Key Points of Mercantilism

Mercantilism represents the beginning of national regulations of world business and its basic mercantilist mindset is quite prevalent in the economic system of most the countries of today.

Following are the main points of mercantilism theory that can be pointed out.

Export Oriented

The mercantilist theorists hold the view that a country’s wealth is determined by how much the country exports. A country should maintain a position of having exports greater than imports.

Export is the means to earn wealth for the country, doing so a nation earns more gold and silver. Imports results in an outflow of the nation’s treasure to other countries. It advocates that a government should encourage exports and restricts imports which help to get a result in a favorable balance of payments or trade surplus.

To encourage exports – favorable commercial policies should be made, exports should be incentivized and subsidized and restrictions should be applied to imports.

Government Interventionist Theory

Mercantilism is the government interventionist theory that is controlled by the government of the nation. Trade, commercial policies, resource mobilization, and business across borders all are controlled by the government.

The government has total control over the trade of the nation. Businesses are bound to work under government regulations. Businesses have to follow the state rules and wealth creation is also dependent on the government as such the wealth could be achieved by the government’s commercial policies of export promotion with incentives and import restriction with barriers, which results in a favorable trade surplus.

Zero-Sum Game

The concept of a zero-sum game is introduced by mercantilist theorists. A zero-sum game means a loss to a country is an equal benefit to another country. By this, a country’s profit is equal to the loss of another country with which the trade is conducted.

As a result, one nation’s wealth could only be increased at the expense of another. Because gold is limited, a trade balance that raises one nation’s gold or silver supply must inevitably diminish the supply of another. As a result, there was intense trade competition.

Bullionism

In mercantilism, bullionism means the state on having the trade is based on billions i.e. gold, silver, and precious metals. The slogan was the more gold and silver as well as valuable metal a nation has, the more powerful and wealthy the nation is.

At that time, gold and silver were the only means to exchange in trades (national and international). To increase the gold and silver the exports were highly encouraged, subsidized, and incentivized since it was the only means to earn more gold and silver from the next nations.

Balance of Payment through Specialization

Mercantilism is also determined to get a positive balance of payments and trade surplus through the specialization in what resources it has. This means that governments should produce products for which the nation has sufficient natural resources.

The view is that every nation should grow with its resources. It holds the view that only through effective mobilization of resources with the help of trade a nation’s people’s desires are satisfied, the effective mobilization also adds to productivity, more exports, and a positive balance of payments.

Critisisms of Mercantilism Theory

After understanding, what mercantilism is, what do you think mercantilism theory is still desirable in today’s globalized economy? In this globalized economy, mercantilism may not best fit the market as free trade, privatization, liberalization, and globalization are highly assumed.

As I mentioned above, let’s further explain, that a powerful group of French thinkers known as the physiocrats pushed governments not to intervene in trade and other things in the 18th century. They believed that if commerce was left alone, it would self-regulate to its best benefit. The laissez-faire philosophy became the movement’s watchword.

The evolution of what we now refer to as a “Free Market Mechanism” began with laissez-faire. In French, laissez-faire means “let go.” It underlined that the private sector should be allowed to operate independently and that the government should not have intervened in the market.  This may cause lawlessness, as it’s ‘too free’.

Adam Smith, a Scottish economist, released his classic book “The Wealth of Nations” in 1776. Smith agreed with the physiocrats’ laissez-faire ideals, stating that government intervention should only be used to safeguard unproductive industries from being replaced by more productive ones.

As such, Smith attempted to destroy the philosophy of mercantilism by introducing systematically the concept of “Free Trade” saying that “let the people trade as they saw fit”. He further added, “Everything should be left to the individual as the government is less efficient in the economy making than individuals”.

Although Smith’s theories were not instantly embraced, they were influential in the long-term evolution of economics and presented an argument against mercantilism. Surprisingly, with the influence of John Maynard Keynes and his associates, mercantilism saw a remarkable rebirth in the twentieth century. Keynes’ work became known as ‘Keynesian Economics’ later on.

Hence, mercantilism theory or philosophy began to lose its popularity around the end of the 18th century because of the reasons like.

  • Limited availability of precious metals.
  • Natural resources, infrastructure, banking services, money. etc were considered the real wealth of a country but this theory has ignored them.
  • Individual freedom was favored as the best option for resource integration and economic growth.
  • Gradual technological revolution.
  • Economic and political liberalization led to the outgrowth of industries and the rise of individual capitalist classes.
  • Strong capitalist classes influences the government and as a result, the state-controlled philosophy of mercantilism declined gradually.

In addition, Adam Smith’s theory of absolute advantage is also a critical review of mercantilist theory.

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