Sociology Index

What Is Mercantilism?

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. Mercantilism replaced the feudal economic system in Western Europe. Mercantilism was an economic system of trade that spanned from the 16th to 18th century. During this period England was the epicenter of the British Empire but had few natural resources. In order to grow its wealth, England introduced fiscal policies that discouraged colonists from purchasing foreign products, while creating incentives to only purchase British goods.

The Sugar Act of 1764 raised duties on foreign refined sugar and molasses imported by the colonies, in an effort to give British sugar growers in the West Indies a monopoly on the colonial market. These resulted in a favorable balance of trade that increased Britain's national wealth. The British colonies were subject to the direct and indirect effects of mercantilist policy at home.

Mercantilism led to the adoption of enormous trade restrictions, which stunted the growth and freedom of colonial businesses. Defenders of mercantilism argued that the economic system created stronger economies by marrying the concerns of colonies with those of their founding countries.

The Navigation Act of 1651 forbade foreign vessels from trading along the British coast and required colonial exports to first pass through British control before being redistributed throughout Europe. Local markets and supply sources were protected, to support the idea that a nation's economic health heavily relied on its supply of capital.

Mercantilists also believed that a nation's economic health could be assessed by its levels of ownership of precious metals, like gold or silver, which tended to rise with increased new home construction, increased agricultural output, and a strong merchant fleet to provide additional markets with goods and raw materials. Nations frequently engaged their military might under mercantilism.

French Controller General of Finance Jean-Baptiste Colbert studied foreign-trade economic theories and was uniquely positioned to execute these ideas. As a devout monarchist, Colbert called for an economic strategy that protected the French crown from a rising Dutch mercantile class. Colbert also increased the size of the French navy, on the belief that France had to control its trade routes to increase its wealth.

Trade became triangulated between the British Empire, its colonies, and foreign markets, fostering the development of the slave trade in many colonies, including America. The colonies provided rum, cotton, and other products demanded by African imperialists. In turn, slaves were returned to America or the West Indies and traded for sugar and molasses.

Critics of the economic philosophy believed the restriction on international trade increased expenses, because all imports, regardless of product origin, had to be shipped by British ships from Great Britain. This radically spiked the costs of goods for the colonists, who believed the disadvantages of this system outweighed the benefits of affiliating with Great Britain. To reinforce its mercantilist control, Great Britain pushed harder against the colonies, ultimately resulting in the Revolutionary War.

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. Many believed the state should franchise out its leading merchants to create exclusive government-controlled monopolies and cartels, where governments used regulations, subsidies, and even military force to protect these monopolistic corporations from domestic and foreign competition. Citizens could invest money in mercantilist corporations. These citizens were granted "shares" of the company profit, which were, in essence, the first traded corporate stocks.

The most 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. 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. 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 book "The Wealth of Nations," 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.