Definition
Mercantilism is an economic theory prevalent from the 16th to 18th century that advocates government regulation of economic activities to benefit the state. It asserts that national wealth is accrued by maximizing exports and minimizing imports, creating a favorable trade balance. Under this system, colonies often provide raw materials to the mother country which in return sells manufactured goods, maintaining economic dominance.
Key Takeaways
- Mercantilism is an economic system existing from the 16th to the 18th century and is based on the belief that a country’s wealth and power were best served by increasing exports and collecting physical gold and silver.
- The principle of Mercantilism encourages protectionism; through implementing high tariffs on imports and offering subsidies to industries and manufacturers, it aims to achieve a positive trade balance.
- Mercantilism has influenced many economic theories and policies; however, it has largely been replaced by free-trade theory. It is criticized for its focus on accumulating wealth rather than enhancing societal welfare.
Importance
Mercantilism is a significant finance term as it refers to an economic theory that was prevalent during the 16th to the 18th centuries, integral to the development of modern economic theory.
It held that a country’s wealth and power were best served by increasing exports and collecting precious metals like gold and silver.
This belief drove the global exploration and colonial expansion of this era, shaping the framework of international trade relations.
Mercantilism also emphasized the role of the state in regulating the economy and promoting domestic industry and development.
Understanding this theory is critical, as it provides a historical context for the evolution of economic thought and the move towards contemporary free-market systems.
Explanation
Mercantilism is an economic theory that guided many nations’ economic policies from the 16th to the 18th centuries. It focuses primarily on the strategy of maximizing a nation’s wealth by promoting exportation and minimizing importation, leading to a favorable balance of trade. It is built on the belief that national wealth and power are directly correlated to the accumulation of a nation’s treasure or wealth, primarily in the form of gold and silver.
In other words, countries aimed to export more goods than they imported, thereby increasing their net revenue in the form of precious metals from other countries. The purpose and use of mercantilism was to enhance national prestige and power. This was achieved by creating an environment that encouraged domestic production, thereby reducing the need for imported goods.
Through high tariffs, subsidies, and other state-controlled measures, the government aimed to protect home industries, promote domestic production, and lend stability to the national economy. Hence, mercantilism gave birth to a heavily-regulated economy, with government playing a substantial role in economic planning and regulation. It’s worth noting that while the tenets of mercantilism helped to develop many nations, they did so at the cost of hindering global economic interaction and free trade.
Examples of Mercantilism
Colonial Era: One of the most famous examples of mercantilism is the British colonial era. Britain implemented a policy to increase its wealth where the American colonies were strongly enforced to only trade with Britain. The British believed that the colonies’ wealth would directly contribute to the mother country’s wealth; a key principle in mercantilism.
Spanish Empire and its Colonies: The Spanish Empire in the 16th to 18th centuries practiced mercantilism through its colonies in South and Central America. It exploited the large amount of gold and silver found by conquistadors in these colonies, and trade was highly regulated and controlled so that maximum wealth would flow back to Spain.
China in the 13th to 15th Centuries: The Ming dynasty in China practiced mercantilism, though not in the exact sense as defined today. The state closely managed trade and tried to keep gold and silver within the country, and it imposed duties on goods and monopolies on certain products. These activities align with the philosophy of mercantilism where national economic policy is aimed at maximizing exports and minimizing imports to accumulate as much wealth as possible.
Mercantilism FAQ
What is mercantilism?
Mercantilism is an economic theory and a system of trade that dominated in Western Europe, particularly in the 16th to 18th centuries. It advocates the idea that government regulation of a nation’s economy is intended to augment state power at the expense of rival national powers.
What are the main principles of mercantilism?
Mercantilism is driven by the belief that a nation’s wealth is based on the amount of gold and silver it possesses. Imported goods must be paid using these precious metals which flow out of the country. Thus, mercantilists tend to support exports and discourage imports to prevent this outflow.
How does mercantilism affect the economy?
As a protectionist system, mercantilism encourages exports and discourages imports through the use of tariffs. This can lead to trade imbalance and stimulate domestic industries, but may also lead to trade wars and can detriment consumer interest due to lack of competition and high prices.
Is mercantilism used today?
While pure mercantilism isn’t practiced in the modern world, elements of the theory remain in today’s economic policies. Many countries still carry out protectionist measures to safeguard their industries, although the theory has evolved to focus more on a balance of trade rather than the accumulation of precious metals.
What replaced mercantilism?
The economic theory of capitalism largely replaced mercantilism. Capitalism focuses on free-market equilibrium, self-interest, and limited government interference, which is a contrast to the heavy state interference and protectionism seen in mercantilist theory.
Related Entrepreneurship Terms
- Balance of Trade
- Economic Nationalism
- Bullionism
- Colonialism
- Protectionism
