What is Mercantilism?

Published by Thomas Herold in Economics, Investments

'Mercantilism' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Mercantilism refers to the main international system of trade which the world utilized in the years ranging from the 1500s to the 1700s. The philosophers behind this trade system held the idea that the world wealth was fixed. This made trade and the acquisition of wealth a zero sum game in which there had to be a loser for every winner. Because of this sincere and inherent belief about trade and economics, it led to several major early “world wars,” especially between England versus France and Spain over those three centuries. These were to protect the trade routes and expand colonies that were really factories for gathering resources and markets to which they would sell finished goods.

These economic and armed struggles culminated in the Seven Years War from 1756 to 1763 (called the French and Indian War in the American colonies). In this truly first global conflict, Great Britain achieved total victory over its principal rivals of France and Spain for a resulting nearly half a century through the rise of Napoleon. The British gained control of trade routes and colonial possessions from the peace settlement that included Canada, India, African colonies, Gibraltar, Caribbean/Central American/South American possessions, and various other island holdings throughout the world.

The ultimate goal of this mercantilism lay in building up the national wealth by enforcing a stringent government regulation which provided a government oversight of all national commercial ventures and interests. The backers of this economic theory argued that an imperial nation could most effectively increase its economic and national power by strictly enforcing and reducing imports through protectionist tariffs all the while increasing and optimizing exports around their colonies (and other countries of the world).

The rise of mercantilism as a popular economic philosophy in Europe occurred in the 1500s. The system arose largely as a reaction to the discovery of new lands in the Western Hemisphere, African continent, and the rediscovery of the Indian Ocean Spice Islands, Indian subcontinent, and Japan/China. Precious metals like silver and gold were highly and ultimately sought after around the globe or through acquisition by trade. This economic system began to replace the earlier feudal economic order which was slowly dying out in Western Europe. It led to what was likely the first major incidence of political control over a national economy since Hellenistic Greek Kingdoms and Roman times.

England represented one of the principal champions of this mercantilism. Its homeland lay at the heart of the British Empire and represented a relatively small and poorly natural resource-endowed country. In order for Britain to expand its limited wealth, it began to introduce some of the world’s earliest fiscal policies. These included the Navigation Acts and Sugar Acts which were intended to steer their colonists away from purchasing foreign made goods and to buying British exports instead. This led to a positive balance of trade, which they believed would build national wealth. Since national wealth was measured by holdings of gold and silver, according to this understanding of wealth it did succeed in its objective, at least for a time.

Examples of these policies included the British based Sugar Act of 1764 that rolled out high tariffs on molasses and sugar imported from anywhere besides England and the British colonies. The Navigations Act of 1651 also came into effect to make certain foreign flagged ships could not trade along the English colonial sea coasts of the 13 colonies in America. All colonial exports were required to come through British control before they could be sold off around Europe. This was not a policy unique to England and the early British Empire though. Portugal, France, Holland, and Spain all competed effectively alongside the British for colonies and trading wealth. At the time, the dominant economic belief was that no powerful nation would be able to function self sufficiently without the resources and trade of its colonies.

Among the key tenets of Mercantilism is that powerful imperial nation states could build up a truly first-in-history world economy through utilizing their military powers to make certain that resource supply centers and local markets were protected from foreign rivals’ competition. Nations were believed to be dependent on their own capital supply while the amount of trade volume in the world was a static conception. This gave rise to the system in economics that mandated nations had to maintain positive balances of trade and constant surpluses in exports.

The weakness underlying mercantilism lay in a simple few economic truths that eventually crushed this global trade system. The first among these is that every nation state can not have an economic export surplus. Many others will require a greater and growing amount of imports in order to boost the growth rates of the successful nations. Besides this, there simply was not enough gold and silver to go around for all countries of the world to be considered wealthy and successful. This system that therefore had to count losers alongside winners internationally was doomed to descend into destructive international conflicts and eventual failure as a result.

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The term 'Mercantilism' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.