Exploring The Different Aspects Of Mercantilism

Studying economics will make you familiar with many intriguing theories like demand and supply, Keynesian theory or elasticity. Mercantilism is one such theory that students have to be familiar with while working on their economics assignment. Now, this is where things take a complicated turn because often students might not have enough clarity about mercantile system definition or how it works.

If this is exactly the topic you’re confused about, we will provide you with a little perspective. The mercantile system, as coined by Adam Smith, denotes a type economy. It aims to enrich the country by limiting imports and encouraging exports.

So, in this post we will try to dissect and define mercantilism and the different aspects associated with it.

What is mercantilism?

Mercantilism was the prevalent economic system of trade generally practised between the timeframe of 16^th-18^th century. Mercantilist theorists were of the opinion that the amount of wealth in the world was static. This is why the European nations took multiple measures and policies to ensure their nations amassed as much of this wealth as possible.

It was widely believed that national strength could be elevated by restricting the imports via tariffs and increasing the exports. The objective behind this system was to increase a nation's wealth by implementing government regulation that made safeguarded the nation's commercial interests.

Breaking down the principles and policies of Mercantilism

Mercantilism depends on the idea that powerful nations had the scope to form a global economy by using a state's military power. This ensured that local markets and supply sources were safeguarded. The loyalists of mercantilism thought that the prosperity of a nation was chiefly dependent on its supply of capital. They also thought that the global volume of trade was stationary.

One idea behind the theories of mercantilism is that the economic prosperity of a nation could be calculated based on the amount of gold, silver or metal it owned. The system called for each nation to be economically self-sufficient. This meant that every nation would have to accelerate the process of domestic production and build new homes and industries. However, since it is not possible for every country to have a surplus of exports, many of them require an abundant amount of imports to propel their growth.

The patrons of the mercantile system also observed that agriculture was a significant element of an economy and should be promoted. That way, a nation can decrease the need to import foods. The theorists suggested that a strong nation-state requires colonies and a merchant fleet, both of which could offer additional markets for products and raw materials. Mercantilists also believed a large population was crucial to the domestic labour force of a nation.

 The mercantilism theory involved the following practices-

• Collection of foreign currency reserves, and gold and silver reserves (also called bullionism). In the 16^th/17^th century, it was a prevalent notion that cumulation of gold reserves (at the expense of other countries) was the ideal way to scale up the economic prosperity of a country.

• Allowing state monopolies to a handful of organisations specifically those related to trade and shipping

• Implementing limitations on imports– quotas, tariff barriers or non-tariff barriers

• Subsidies of export industries to present a competitive advantage in international markets

• The sponsorship of government in research and development to elevate the efficiency and ability of the domestic industry

• Lowering the wages and consumption of the working classes to allow greater profits to stay with the merchant class

• Exercising control over colonies. For instance, making colonies buy from Empire country and taking control of the wealth these colonies have to offer

• Allowing copyright/intellectual theft from foreign organisations

Distinction between Capitalism and Mercantilism

Capitalism essentially developed from mercantilism. Now, while both economic policies are leaned towards profit, the differences rest in the way the profit is achieved. Capitalism is a theory of economics that works around the concept of wealth creation in the pursuit of economic growth for the nation. On the other hand, mercantilism emphasises on wealth accumulation through extraction. The efforts of wealth extraction were maximised by the widespread phenomenon of colonisation.

Capitalist theories consider the individual member of society as the main figure in the process of wealth creation. The idea is that a nation’s wealth could grow through the productive efforts of every individual. Capitalism considers individuals as intrinsically competitive.

The theory also suggests that individuals will boost their skills to achieve higher efficiency in providing value to their own wealth and subsequently contribute to the economic success of the nation. There isn't any predetermined limitation to wealth creation.

Mercantilists, on the contrary, tend to believe that wealth is finite. So, the skills of the people should be honed for greater efficiency in extracting such wealth. They further back the concept that a nation should diversify and sell goods to other countries to gather more wealth. Also, it is essential to avoid the importation of products and services in order to maintain a proper balance of trade. This balance of trade means more gold is collected to the treasury of the country.

Capitalism ensures a competitive business environment where the process of supply and demand defines the price of products and services. In mercantilism, industries are primarily governed by monopolies that are protected and supported by the government through numerous subsidies.

From the perspective of the capitalists, individuals should be allowed the free will and equal opportunity in accumulating wealth through a free market. This further ensures a level playing field and comes with minimal regulatory intervention. The freedom to consume what people want to encourage them to gain more wealth that will give them more purchasing power.

Mercantilists contradict this view and assert the need for heavy regulation in order to stop the people from pursuing their selfish motives of gathering wealth for themselves rather than enriching their country. The theory even considers that people should be compelled to patriotism and strictly adhere to the regulations to the regulation. Mercantilists even go to the extent of forbidding people from purchasing luxury items because this would mean a large amount of money flushing out of the economy.

In conclusion,

Mercantilism was a prominent theory which has been widespread since 16^th-17^th centuries. With the advent of capitalism or socialism, it may have lost its significance. However, it’s definitely laid the basis for multiple intriguing concepts of economics. Read this blog for insights and use the knowledge to prepare a stellar paper.

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