written by | January 25, 2023

Concept of Mercantilism: Brief On History & Mercantilist Ideology

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Table of Content


As per Mercantilism's definition, a nation can generate wealth through increased trade and fewer imports. The positive difference between imports and exports results in acquiring wealth from other nations. It involves the adoption of policies that protect local industries. As a concept, Mercantilism is a form of economic nationalism that seeks to grow the prosperity and power of a nation via restrictive alternative practices.

Did you know? In the 1700s, the dominance of Mercantilism came to an end and it was replaced by democracy and free trade. 

What is Mercantilism?

It is an economic concept that emphasises generating a country’s wealth by supporting and protecting domestic industries and trade. It focuses on increasing exports. 

It is a form of economic nationalism wherein the government focuses on strengthening wealth and power by promoting exports and reducing imports. Mercantilism asserts that the world’s wealth is fixed and countries can prosper only by limiting imports and exporting more. It works on the principle of acquiring wealth from other nations and accumulating it.

The Ideology of a Mercantilist 

The primary goal of mercantilism is to increase exports and reduce imports to increase a nation's wealth and power. The government intervenes by making regulations for international trade and domestic commerce. Here the government exercises complete control over trade. 

Mercantilism is an economic theory that is against the free trade policy. There are two major segments in the mercantilist policies: one is protecting domestic industries, and the other is regulating international trade.  

A mercantilist policy follows a protectionism policy on the domestic level. To support domestic industries, rules and regulations are set up to establish monopolies and subsequently provide subsidies to expand their work.

Also Read: List Of India's Top Exported Products

History of Mercantilism

Mercantilism was the dominant economic system in Europe. It was prominent from the 15th to the 18th centuries. The origin of the concept of nation-states led to the development of mercantilism.

Theoretically, global wealth was considered to be static, and nations were supposed to accumulate as much as they could. It was the era when the wealth of a nation was measured by the amount of gold and silver held by it. 

European countries like Britain, which had low natural resources focused on maximising wealth by increasing exports. Thus, they enacted laws that discouraged the import of foreign goods and provided support and incentives for buyers of British goods. This imbalance in import-export led to a favourable trade balance. 

What are the Characteristics of Mercantilism? 

For international trade, the government imposes tariffs and different taxes on imports and provides subsidies on exports to maintain a favourable trade balance.  

  • Relationship of Principle and Global Wealth

Earlier, rare metals were a measure of wealth. As these metals are limited in quantity, the theory of static wealth was introduced. A country that had large reserves of precious metals was considered wealthy. 

  • Government Controls the Trade

The government plays a major role in making rules and laws to regulate trade. It promotes policies that protect domestic commerce. It provides military assistance to merchants to expand and establish industries.

  • Great Importance of Gold and Silver

Under Mercantilism, gold and silver played a very crucial role. They were an indicator of the country's strength and power. Both these precious metals were used for major motives and activities. These would pay for the maintenance of the military, expansion of country boundaries, and procuring of raw materials from colonies.  

  • Maintaining a Positive Trade Balance

The trade balance is the difference between the exports and imports of a nation. In a positive or favourable situation, exports exceed imports. The countries focused on promoting the sale of their goods and reducing their spending on imports. 

  • Large Population Resource

In the context of mercantilism, a large population could potentially be seen as a resource in that it provides a large market for domestic goods and a source of labour for the production of exports. However, it is not accurate to say that mercantilism is specifically focused on the exploitation of a country's population as a resource.

  • Prioritising Domestic Industries

Mercantilism prioritises domestic industries and trade. To maintain a positive balance of trade, colonies were restricted from purchasing goods from other nations. These restrictions made imports expensive and thus created a monopoly for the particular nation. 

Also Read: How To Make An Import-Export Business Plan : Tips And Tricks

Examples of Mercantilism

Mercantilist policies are designed to promote exports and restrict imports in order to build up a country's supply of gold and other precious metals. Let's look into some historical examples of Mercantilism for a better understanding

  • The Sugar Act of 1764 

The British government enacted the Sugar Act and imposed heavy taxes on sugar and molasses imported by colonies from foreign nations. The taxes made foreign sugar costly, which boosted the sale of British sugar and molasses, thus establishing a monopoly of British sugar growers in the West Indies. 

  • The Navigation Act of 1651

By this law, Britain restricted the activities of foreign vessels on the British coast. Exporters were required to pass through British control before trading in Europe. 

  • The British East India Company

Mercantilism involves a partnership between merchants and the government. Merchants helped in expanding the British empire. 

For example, The British east India company defeated Indian kings. This colonisation provided raw materials and labour and a huge British goods market. This helped strengthen the nation's power and wealth. In return, the government supported the company and made laws that supported export and trade.   

Mercantilism in Present Scenario 

There are many downsides to the Mercantilism theory that scholars have criticised. 

In 1776 Adam Smith criticised Mercantilism in his publication "the Wealth of Nations".

Also Read: List Of Import-Export Business Ideas To Carry Out In India

Shortcomings of the Theory of Mercantilism 

  • First, the world's wealth is not fixed. Wealth can be generated through various activities.
     
  • Fails to consider the benefits of large-scale production.
     
  • When a company specialises in producing a particular product, trade between such countries benefits both.
     
  • Special restrictions on imports were not healthy for international trade.
     
  • The nationalist approach will not serve the long-term interests of the country.
     
  • Due to import restrictions, buyers can access limited goods at higher prices.
     
  • Accumulation of wealth by one nation at the expense of another. 

Eventually, a revised economic policy emerged, driven by demand and supply. This policy is known as the market economy. It supports free trade between nations and does not discriminate between imports and exports. Consumers can access many superior quality goods from different nations at competitive prices.

Countries still apply certain tariffs on their imports to protect domestic manufacturers. This form of mercantilist policies currently in use is referred to as protectionism. 

Conclusion

Mercantilism is considered an outdated theory, but it is nearly impossible to eradicate it. Recent political and economic policies are modified forms of Mercantilism. 

Subsidies to domestic industries and tariffs on imports are forms of protectionism. It is also known as Neomercantilism.

Mercantilist countries frequently engaged in warfare to control resources. Countries operating under a free-trade system prosper through engaging in mutually beneficial trade relations.
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FAQs

Q: What are a few examples of Mercantilism?

Ans:

Here are a few examples of mercantilist policies:

Tariffs and trade barriers: Mercantilist governments often impose high tariffs on imported goods to make them more expensive and less competitive with domestic products.

Export subsidies: Mercantilist governments may offer financial incentives to companies that export their goods, to promote exports and increase the supply of capital.

Q: What is the difference between Mercantilism and a Market economy?

Ans:

Mercantilism involves the accumulation of wealth by increasing exports and limiting imports. It is based on the principle that the world’s wealth is static. 

In contrast, the market economy is based on the forces of demand and supply. It follows a free trade policy, and minimal government intervention. As it is customer-centric, customers have more options when choosing goods.

Q: What are the basic principles of Mercantilism?

Ans:

The basic principles of Mercantilism are:

  • The basic foundation of Mercantilism is that the world's wealth is limited.
     
  • A country with large gold and silver reserves is more powerful.
     
  •  There is a belief that a large population leads to huge wealth.
     
  •  Colonisation is essential for wealth accumulation.

Q: Is Mercantilism still in practice?

Ans:

The system of mercantilism continues to exist, but with a few modifications. Governments still regulate and control international trade and formulate policies to protect domestic industries.

Q: What is Mercantilism's meaning?

Ans:

In simple words, Mercantilism is an economic theory that emphasises building wealth and power through restrictive trade practices. Under mercantilism, protective policies are implemented to protect local industries from foreign competition and subsequently boost exports.

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The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.
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Disclaimer :
The information, product and services provided on this website are provided on an “as is” and “as available” basis without any warranty or representation, express or implied. Khatabook Blogs are meant purely for educational discussion of financial products and services. Khatabook does not make a guarantee that the service will meet your requirements, or that it will be uninterrupted, timely and secure, and that errors, if any, will be corrected. The material and information contained herein is for general information purposes only. Consult a professional before relying on the information to make any legal, financial or business decisions. Use this information strictly at your own risk. Khatabook will not be liable for any false, inaccurate or incomplete information present on the website. Although every effort is made to ensure that the information contained in this website is updated, relevant and accurate, Khatabook makes no guarantees about the completeness, reliability, accuracy, suitability or availability with respect to the website or the information, product, services or related graphics contained on the website for any purpose. Khatabook will not be liable for the website being temporarily unavailable, due to any technical issues or otherwise, beyond its control and for any loss or damage suffered as a result of the use of or access to, or inability to use or access to this website whatsoever.