What is Mercantilism?

Mercantilism is an economic system promoting the idea that government regulation of international trade leads to the creation of wealth to restore or increase domestic power.

In this economic system, merchants and the government combine forces to reduce the trade deficit by maximizing exports and limiting imports.

How Does Mercantilism Affect Trade

Mercantilism promotes the idea that there is a fixed amount of money available. Mercantilist policies pushed countries to focus on the accumulation of wealth for their nation. With that, the goal of mercantile policies was to maximize exports and minimize imports.

One way that governments sought to institute mercantile policies was to impose tariffs on imported goods.

However, governments did not stop there. In many cases, mercantilism was tied to military protections for selected merchants. Military protections allowed the nation's merchants to operate more safely in trade routes around the world.

Additionally, governments sought to establish relationships with particular companies which led to monopolies in various industries. The industries that the government sought to support through mercantilist policies included private companies focusing on entrepreneurship, capital goods, natural resources, and labor.

A boost from the government was provided to companies deemed to have national importance in the form of established monopolies, pension grants, and tax-free opportunities.

Mercantilism Example

The English Navigation Act of 1651 is a prime example of mercantilism. Under this law, all colonial exports to European nations had to pass through England. With that, the English could line their pockets by becoming middlemen for their colonial goods.

Mercantilism in History

Mercantilism was most prevalent as a form of economic nationalism in Europe throughout the 16th and 18th centuries. While many European nations applied the theory, France's 17th-century adoption was the most notable as it was the most important state economically in Europe at that time.

The rise of French mercantilism is intimately connected with Jean-Baptiste Colbert. He was a French politician who served as the Minister of Finances of France from 1661 to 1683 under King Louis XIV. He was so closely involved and such an advocate for the theory that French mercantilism is sometimes called Colbertism.

Under Jean-Baptiste Colbert, the French government became entangled in the economy to boost exports. To ensure a means to their end goal, the French put systems into place that restricted imports and supported the export of goods and services. The French government went so far at that time to dictate exactly how a good should be produced, taking all control of the factors of production often to suit their nation's inherent resources.

Another nation that embraced the idea of mercantilism was Great Britain. Although the country lacked abundant natural resources, it amassed great wealth in the form of stored silver and gold through the export of manufactured goods.

Mercantilism in US History

As a large colonial power, Great Britain, 'encouraged' exports by creating trade restrictions that forced its colonists to buy British goods and to market their own resources primarily through Great Britain.
These policies brought an influx of wealth to the British government. However, American colonists were not happy about the arrangement that precluded the growing colony from gaining wealth for itself through other trade arrangements.

In 1773, the American colonists made a memorable statement that they were unhappy with the mercantilist policies that led to an increase in taxes on tea and a monopoly for the East India Company. The Boston Tea Party went down in history as an expensive protest against an increase in taxes resulting from mercantile policies.
Eventually, tensions centered on the economic treatment of the colonists escalated into the Revolutionary War. At that point, the fledgling nation broke away from the mercantilist policies forced on them by Great Britain.

How are Mercantilism and Colonialism Related

Mercantilism pushed nations to establish more colonies to support their national economic interests. Typically, the economic policies surrounding new colonies lead to more goods, and subsequently money, flowing through the mother country.

Essentially, the colonies were unable to trade with other nations. Although it may lead to negative impacts on the colony, mercantile policies were designed to support the increase of wealth for the mother country.

How Mercantilism and Capitalism are Different

Mercantilism is now considered to be largely extinct, while many economies have adopted capitalism over the world.

Mercantilism promotes the idea that government regulation of international trade will create wealth and that net exporters retain the most national power.

Capitalism views wealth creation as the solution to economic growth and encourages a competitive business landscape with a more limited role for government.

How Mercantilism Ended

In 1776, Adam Smith argued for free trade in The Wealth of Nations, which was soon followed by the revolt of the British colonies in North America. This influx of democracy and free trade led to the demise of mercantilism.
Although mercantilism lasted into the 19th century, it became a lesser alternative to the free trade policies we know today.

Mercantilism Today

Mercantilism has faded away to some degree. But the core ideas of nationalism and protectionism live on.

In the modern world, China is the nation that institutes the most mercantile policies. However, other countries such as Russia and India also engage in mercantilism to some degree.