What is mercantilism and how does it work

what is mercantilism and how does it work

What Is Mercantilism and How Does It Compare To Capitalism?

Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century. Mercantilism was based on the idea that a nation's wealth and power were best served by. Mercantilism is an economic practice by which governments used their economies to augment state power at the expense of other countries. Governments sought to ensure that exports exceeded imports and to accumulate wealth in the form of bullion (mostly gold and silver). In mercantilism, wealth is viewed as finite and trade as a zero-sum game.

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Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century. 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. First popularized in Europe during the s, mercantilism was based on the idea that a nation's wealth and power were best served by increasing exports, in an effort to collect precious metals like gold and silver.

Mercantilism replaced the feudal economic system in Western Europe. At the time, England was the epicenter of the British Empire but had relatively few natural resources. To grow its wealth, England introduced fiscal policies that discouraged colonists from buying foreign products, while creating incentives to only buy British goods. For example, the Sugar Act of raised duties on foreign refined sugar and molasses imported by the colonies, in an effort to give British sugar growers in the Eoes Indies a monopoly on the colonial market.

Similarly, the Navigation Act of forbade foreign vessels from trading along the British coast and required colonial exports to first pass through British control before being redistributed throughout Europe. Programs like these resulted in a favorable balance of trade that amd Great Britain's national wealth. Under mercantilism, nations frequently engaged their military might to ensure 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. Arguably the most influential proponent of mercantilism, French Controller General of Finance Jean-Baptiste Colbert studied foreign-trade economic theories and was uniquely positioned to execute these ideas.

As a whag 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 iit trade routes to increase its wealth.

Although his practices ultimately proved unsuccessful, his ideas were hugely popular, until they were overshadowed by the theory of free-market economics. The British colonies were subject to the direct and indirect effects of mercantilist policy at home. Below are several examples:. Defenders of mercantilism argued that the economic system created stronger economies by marrying the mercangilism of colonies with those of their founding countries.

In theory, when colonists create their own products and how to get ypur ex back others in the trade from their founding nation, they remain independent from the influence of hostile nations.

Meanwhile, founding countries benefit from receiving large amounts of raw material from the colonists, necessary for a productive manufacturing sector. 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 what is mercantilism and how does it work colonists, who believed the disadvantages of this system outweighed the benefits of affiliating with Great Britain.

After a costly war with France, the British Empire, hungry to replenish revenue, raised taxes on colonists, who rebelled by boycotting British products, consequently slashing imports by a full one-third. This was followed by the Boston Tea Party inwhere Boston colonists disguised themselves as Indians, raided three British ships, and threw the contents of several hundred chests of tea into the harbor, to protest British taxes on tea and the monopoly granted merccantilism the East India Company.

To reinforce what is mercantilism and how does it work mercantilist control, Great Britain pushed harder against the colonies, ultimately resulting in the Revolutionary War. By the early 16th century, European financial theorists understood the importance of the merchant class in generating wealth. Cities and countries with goods to sell thrived in the mercantiliism middle ages.

Consequently, many believed the state should franchise out its leading merchants to create exclusive government-controlled monopolies and cartels, where governments used regulations, subsidies, and if needed military force to protect these monopolistic corporations from domestic and foreign competition. Citizens could invest money in mercantilist corporations, in exchange for ownership and limited liability in their royal charters.

These citizens were granted "shares" of the company profit, which were, in essence, the first traded corporate stocks. The most famous and powerful mercantilist corporations were the British and Dutch What is mercantilism and how does it work India companies. For more than years, the British East India Company maintained the exclusive, royally granted the 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. Where mercantilist governments what is mercantilism and how does it work 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, in campaigns to make inhabitants follow the dominant countries' laws.

One of the most powerful examples of the relationship between mercantilism and imperialism how to treat bee stings home remedy Britain's establishment of the American colonies. 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.

Fewer imports mean less competition and higher prices. While mercantilist countries were doss 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 seminal book "The Wealth of Nations," legendary 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. Today, mercantilism is deemed outdated. However, barriers to trade still exist to protect locally entrenched industries. For example, post World War II, the Whatt States adopted a protectionist trade policy toward Japan and negotiated voluntary export restrictions with the Japanese government, which limited Japanese exports to the United States.

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Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is Mercantilism? History of Mercantilism. Jean-Baptiste Colbert's Influence. British Colonial Mercantilism. American Revolution Mercantilism. Merchants and Mercantilism. Mercantilism vs. Free Trade vs. Key Takeaways Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century.

Mercantilism was based on the idea that a nation's wealth and power were best served by increasing exports and so involved increasing trade. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. Related Terms Capitalism Hoow is an economic system whereby monetary goods are owned by individuals or companies. The purest form of capitalism is free market or laissez-faire capitalism. Here, private individuals are unrestrained in determining where to invest, what to produce, and at which prices to exchange goods and services.

Laissez-Faire Laissez-faire is an economic theory from the 18th century that opposes any government intervention in business affairs and translates to "leave alone". Tariff How to make mexican cucumber water tariff is a tax imposed by one country on the goods and services imported from another country. Industrialization Industrialization is the process in which a what is black friday history transforms itself from a primarily agricultural society into what is mercantilism and how does it work economy based on manufacturing.

Trade War A trade war arises when one country retaliates against another by raising import tariffs or placing other restrictions on the other country's imports. Multinational Corporation MNC A multinational corporation has its facilities and other assets in at least one country other than its home country. Partner Links.

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Is Mercantilism Back in Vogue?

Mercantilism is an economic theory that advocates government regulation of international trade to generate wealth and strengthen national power. Merchants and the government work together to reduce the trade deficit and create a surplus. Mercantilisma form of economic nationalismfunds corporate, military, and national growth. ? ?? It advocates trade policies that protect domestic . Aug 13, Updated August 13, In general, mercantilism is the belief in the idea that a nation's wealth can be increased by the control of trade: expanding exports and limiting imports. In the context of the European colonization of North America, mercantilism refers to the idea that colonies existed for the benefit of the Mother Country. Dec 15, Mercantilism is a protectionist view of trade that focuses on self-sufficiency and nationalism rather than trade and globalization. It is generally considered an archaic view of economic systems, which leads to inefficiency, conflict, and less value creation. Mercantilism usually refers to any economic policy that is designed to inhibit the importing of foreign goods.

The Cold War polarized poisoned American political, and economic thoughtto the point of absurdity. Basically, to distance ourselves from the USSR, Americans took up antithetical positions: whatever they did, we did the opposite. So since the Soviets were economically authoritarian and isolationist, we pushed for economic liberalism and globalizationregardless of the practical effects.

We abandoned the middle ground. Just like how Soviet bureaucrats had a vested interest in stamping out capitalism, economic globalists want to dismiss mercantile theory.

Finally, it boils down to bad history. Very simply: mercantilism is the body of economic practices and policies that evolved in Europe between the 13th and 17th centuries, when it began to coalesce into a coherent theorybut not a theory in the modern sense.

No one invented mercantilism. Mercantilism remained the dominant, if not only, economic system in Europe until the s, when Great Britain became a free trader. Finally, mercantilism is a form of economic nationalism , which also includes more mildly interventionist trade policies, like protectionism. The goal of mercantile policies was to 1 enrich and 2 empower the nation, both politically and economically.

Mercantilists sought to boost domestic production, particularly of technologically advanced output, by exporting advanced output, in exchange for raw materials. For example, in the s Great Britain exported manufactured goods like weapons and tools in exchange for tobacco from America and cotton from IndiaBritain was the factory, America and India were the resource suppliers.

The purpose of mercantilism was to concentrate industry in the mother country, ensuring she retained the most profitable jobs and industriesand the political power that flowed from said production.

This concentration of industry also artificially stimulated demand for domestic labor, which promoted full employment and high wages. To sum up: the main idea behind the theory of mercantilism is that the interests of individuals and the nation are aligned, so if the nation succeeds, so do its citizens.

Like I said, mercantilism has 2 goals: 1 make the nation as rich as possible and 2 make the nation as powerful as possible. They do this by maximizing the amount, and efficiency, of economic activity occurring within the nations bordersthey concentrate lucrative industries in the country. This is why liberal economic models the Austrian School of economics recommend highly asymmetrical, but mutually advantageous trades eg.

Done right, a mercantile trade regime should result in the country exporting advanced products, and importing raw materials. It also ensures that trading partners remain relatively weak: industry is concentrated in the mercantile nation, whereas resource extraction is delegated to its trading partners.

This creates a relationship of dependency and economic subservience, which relatively increases the power of the mercantile nation. A good example is trade in colonial America the colonies imported manufactured goods from Britaineverything from tools to weapons. This left them helpless and dependent. Luckily, other European rivals mainly France supported the rebels by giving them guns and uniforms.

Camelot trades freely with the surrounding regions, particularly Avalon, to whom it trades wool in exchange for woolen clothit gets cold in Camelot, and they love Avalonian sweaters. In this situation, a liberal economist would say that this trade setup is ideal, since both parties are trading freely, and both are benefiting. Not only does this make it lucrative to set up textile mills in Camelot, but Arthur also decides to reinvest these taxes in Camelot. He builds some roads so the people of Camelot can get their textiles to market easier.

Not only that, but he brings in some weavers from Avalon to teach the people of Camelot how to weave. Pretty soon, Camelot has its own thriving weaving industry and the urban, industrial population that comes with it , which benefits from relatively cheap wool.

Eventually, Camelot replaces Avalon as the weaving capital, exporting its cloth abroadCamelot grows richer and more powerful relative to Avalon which declines. Mercantilism is often confused with bullionismthat is, seeking to acquire precious metals like gold, and falsely conflating gold with wealth. In the old days, gold or silver was physically shipped from country to country to balance the books.

They wanted to employ more shepherds. This is how mercantilists actually thought. This is what they wrote about. For example, Antoine de Montchrestien , the godfather of French mercantile theory as well as a playwright and all-around renaissance man , wrote:. They wanted to increase domestic industrial production and employment as much as possible, because they believed that prosperity, both for the nation and the individual, flowed from productivity it does.

Mercantilism is simply a set of economic policies, a broad-strokes trade regime, that countries use to benefit their economy.

This argument is like saying that socialism is bad because Nazis were socialists , or that free trade is bad because the American south practiced slavery. The British and the Americans both employed mercantile policies during the 19th century, however only Britain acquired a global empireAmerica was isolationist.

In school they try to ram down your throat the idea that liberal, globalist capitalism is the only form of capitalismeverything else takes you down the road to communism. Capitalism and mercantilism co-evolved, and were synonymous for roughly years , until liberal capitalism was hypothesized during the Enlightenment Era.

Liberal capitalism means open domestic and international markets, whereas mercantile capitalism means open domestic, but restricted international markets. And in a counter-intuitive way, mercantile policies often protect domestic marketsthey make them better. This is because China practices predatory trading via currency manipulation, wage suppression, export subsidies etc.

In the end, this cheap stuff out-competes American producers, who either have to offshore or close down. They point out that when two countries freely trade, they both benefit: therefore mercantilism is wrong. Economics may not be zero sum, but politics isthe more powerful your rival is, the less powerful you are relative to them. Therefore, since mercantilism evolved in a period of endemic warfare, it made sense to link economic and political gainsthe richer your rival was, the more powerful they were.

So, if you wanted to limit their power, you needed to limit their economy. However, they would reject such a relationship, because it narrows the relative power differential between the two states.

Economically, both benefitthis makes liberal economists happy. For example, now we have to worry about armed conflict with China in the South China Sea. Just a heads-up: when you search for information on Jean-Baptiste Colbert d.

Also important: this book pre-dates the era of academic polarization, so avoids the cherry-picking of facts that often pollutes modern economic histories, that focus on Cold War ideological battles. Because of this, France relied heavily on foreign merchants, who were subject to national regulation.

France also had a massive trade deficit: they exported million livres of goods in , but imported 12 million from Holland, 12 million from Italy, and 3 million from the English, Germans, and Scandinavians. Furthermore, they mostly exported agricultural products, and imported manufacturing the opposite of what you want.

Colbert made it easier to do business in France by standardizing regulations and taxation in France. His Council of Commerce worked to harmonize the rules governing economic guilds, regulate the banks, standardize bookkeeping practices, and clarify property alienation and bankruptcy laws. He also invested heavily in infrastructure. Colbert increased government spending on roads from 40, livres annually, to , livres during his tenurethere was a building boom.

France was crisscrossed with new roads, bridges and canals, that made the French economy more productive. Colbert adopted mercantile policies. In he expanded free trade in France, while simultaneously restricting international trade which was among the freest in Europe.

However, British mercantilism began to formalize in the s, due to shipping competition with the Dutch. For England, it was either protect their merchant marine, or lose it like France had. They protected it. British mercantilism picked up steam under Prime Minister Robert Walpole , whose mercantile trade policy set the tone until the s.

During the 18 th C. The composition of British exports also changed: rather than exporting woolens, she began exporting manufactured products, such as tools, glass, and scientific equipment. Essentially, Britain built whatever the colonies needed if you needed a gun, you bought from Britain. Mercantile policies worked out well for Britainthey became the richest and most powerful nation on earth.

The greatest test of anything is the test of time: the longer it lasts, the more useful it is. Mercantilism has stood the test of time for nearly a millennium. The only thing that could possibly sweeten the deal are examples of the phenomena evolving multiple timesthis would really speak to its success. Again, mercantilism fits the bill China and Europe. Read the articles. Because mercantile policies create a natural incentive for innovation and technological developmentwhich is what grows the economy in the long run.

Mercantilism concentrates lots of higher industry in the same place, and raises the cost of labor. This creates a powerful incentive to invest in labor-saving technology, from steam engines to personal computers. We can adopt time-tested policies that worked. We can embrace mercantilism. Dead wrong. Why the ignorance about mercantilism? Three reasons: 1. Because it works. What Is Mercantilism? Defining The Mercantile System. Mercantilism first evolved in the Italian city-state of Venice during the Middle Ages.

Mercantilists took the phrase he who has the gold or guns makes the rules to heart. Mercantilists want to make the economy as big and technologically advanced as they can.

Their common tools include: Imposing high taxes on value-added imports, while limiting them on raw materials or non-competing products. For example, mercantilists will tax imported laptops, but not bananas. Limiting taxes on value-added exports, and imposing high taxes on exported raw materials. Seeking out new markets to export advanced products, in exchange for raw materials. Restricting the outflow of technology but not its inflow , thereby diminishing foreign competition.

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