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Mercantilism
Theory
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this theory is that gold and silvers are the backbone of the economy and
are essential for business. During the 16th century, gold and silvers are
used as the currency and the trade between countries was carried as the
transaction of goods and services in return for gold and silver. The
countries used to earn gold and silver by exporting goods. In the same
gold and silvers was the main motive of countries during that century. The
main theme of this theory is that the country should maintain its trade
best interest of the country would be accumulating more wealth i.e. gold
and silvers.
materials like tea, coffee, cotton, tobacco, and rubber were shipped into the
earned huge profit by buying raw materials at cheap price and selling the
export and putting restrictions on import hits citizen in both ways. Export
game is the condition in which the gain by one country results in loss to
incentives and subsidies they receive from the government. Similarly, the
accumulate wealth. Factors like skilled labor force, natural resources, the
Despite being highly criticized, the theory is still practiced in the world in
exports.
What is 'Mercantilism'
Mercantilism was the primary economic system of trade used from
the 16th to 18th century. Mercantilist theorists believed that the amount of wealth in
the world was static. Thus, European nations took several strides to ensure their
nations accumulated as much of this wealth as possible. The goal was to increase a
nation's wealth by imposing government regulation that oversaw all of the nation's
commercial interests. It was believed national strength could be maximized by
limiting imports via tariffs and maximizing exports.
The Sugar Act of 1764 introduced high customs for sugar and molasses imported
from outside of England and the British colonies. Similarly, the Navigations Act of
1651 was implemented to ensure foreign vessels would not be able to engage in
trade along its coast, and also required colonial exports to first pass through British
control before being redistributed throughout Europe.Great Britain was not alone in
this line of thinking. The French, Spanish and Portuguese competed with the British
for wealth and colonies; it was thought, no great nation could exist and be self-
sufficient without colonial resources.
The Underlying Principles of Mercantilism
Mercantilism is based on the idea that strong nation-states had the opportunity to
create a world economy by using a state's military power to ensure local markets and
supply sources were protected. Advocates of mercantilism believed the prosperity of
a nation was reliant on its supply of capital, and global volume of trade was static.
The result was a system of economics that required a positive balance of trade, with
surplus exports. However, since it is impossible for every country or nation-state to
have a surplus of exports, with many needing increased imports to fuel growth, the
basis of mercantilism ensured it was doomed for eventual failure.
Advocates of mercantilism also saw that agriculture was important and should be
promoted so a nation could reduce the need to import foods. They suggested a
strong nation-state needed colonies and a merchant fleet, both of which could
provide additional markets for goods and raw materials. Mercantilists also believed a
large population was integral to the domestic labor force of a nation.
One of the most powerful examples of the relationship between mercantilism and
imperialism is Britain's establishment of the American colonies.
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2.1 MERCANTILISM It was only after the publication of The Wealth of Nations by Adam Smith in
1776, the subject of economics emerged in an organized scientific form. Prior to that 28 during the
17th & 18th centuries in Europe a group of men like merchants, bankers, traders, government
officials and philosophers, wrote essays and pamphlets on international trade that advocated an
economic philosophy known as mercantilism. The term mercantilism first acquired significance at
the hands of Adam Smith. Mercantilism, as the term implies is closely associated with trade and
commercial activities of an economy. Mercantilist theory was highly nationalistic in its outlook and
favoured state regulation and centralization of economic activities including foreign trade. The
mercantilists believed that a nations wealth and prosperity is reflected in its stock of precious
metals (also known as specie), namely, gold and silver. At that time, as gold and silver were the
currency of trade between nations, a country could accumulate gold and silver by exporting more
and importing less. The more gold and silver a nation had, the richer and more powerful it was. They
argued that government should do everything possible to maximize exports and minimize imports.
However, since all nations could not simultaneously have an export surplus and the amount of gold
and silver was limited at any particular point of time, one nation could gain only at the expense of
other nations. In other words, mercantilists believed that trade was a zero sum game (i.e. ones gain
is the loss of another). For mercantilists, the objective of foreign trade was considered to be
achievement of surplus in the balance of payments. Hence, they advocated achieving as high trade
surplus as possible. In this context, Blaug (1978) points out that The core of mercantilism, of
course, is the doctrine that a favourable balance of trade is desirable because it is somehow
productive of national prosperity. When mercantilist authors speak of the surplus in the balance of
trade, they mean an excess of exports, both visible and invisible, over imports, calling either for an
inflow of gold or for granting of credit to foreign countries, that is 29 capital exports. In other words,
they were roughly thinking of what we would now call the current account as distinct from the
capital account in the balance of payments. 1 The mercantilist ideas were strongly criticized in the
18th century by economists like David Hume, Adam Smith and David Ricardo. For instance, Adam
Smith criticized mercantilists on the ground that the mercantilists falsely equated money with
capital, and the favourable balance of trade with the annual balance of income over consumption.
Thus, Blaug (1978) critically points out that - The idea that an export surplus is the index of
economic welfare may be described as the basic fallacy that runs through the whole of the
mercantilist literature. 2 Another flaw of mercantilism is that it they viewed trade as a zero sum
game. This view was challenged by Adam Smith and David Ricardo who demonstrated that trade was
a positive sum game in which all trading nations can gain even if some benefit more than others.
From the above analysis it is seen that the concept of balance of payments or balance of trade was
evolved for the first time in the writings of mercantilists. As pointed out earlier, at that time
economics was not yet developed in an organized form, so the concept of balance of payments /
balance of trade was evolved in a vague form. In spite of various flaws in the ideology, due credit
may be given to the mercantilist writers in the development of the concept of balance of payments /
balance of trade.
Mercantilism
This theory was developed in the sixteenth century and is considered to be the oldest
theory of International Trade. According to this theory, a countrys wealth could be
determined by the amount of its gold and silver holdings. This group of theorists believed
that every country should increase its gold and silver holdings by increasing its exports and
reducing imports. During that point of time, gold and silver had the status of currency. The
countries should focus on having a trade surplus i.e. value of exports should be greater than
the value of imports. Trade deficit is to be avoided.
It was Adam Smith who coined the term Mercantile System. Under such a system, the
economies try to enrich the wealth of the nation by restraining imports and encouraging
exports. Adam Smith was also the one who heavily criticized this theory. He argued that free
trade benefits both the parties i.e. the exporter and the importer. He also argued that Mercantile
System proved harmful to the population in general as the consumers received the goods at a
higher price.
This theory flourished during the 17th and the 18th century as imperialism was being promoted
by colonial empires. The countries used raw materials to manufacture goods and sell them,
thereby promoting exports. However, advocates of free trade believe that mercantilism
promoted protectionism. Import restrictions were imposed by countries that ultimately led to
higher prices and severely affected the consumers. The biggest promoters of this theory
were British, Dutch and Spanish Empires.
Even today this theory is being followed to some extent by export economies like Germany,
Japan, and Singapore etc. Some have dubbed the policy of these countries to be a kind of neo-
mercantilism.