What is mercantilism?
Mercantilism is an economic system, dominant in early modern Europe, that holds a nation's wealth and power are best increased by maximizing exports, minimizing imports, and accumulating precious metals, typically through active state direction of trade.
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Core tenets
- Trade surplus as national wealth
- Holds that a nation grows wealthier by exporting more than it imports, accumulating gold and silver as the measure of that surplus.
- State direction of trade and production
- Government actively directs economic activity, through tariffs, subsidies, and trade monopolies, to favor domestic industry and exports over imports.
- Zero-sum view of international trade
- Treats global wealth as roughly fixed, so one nation's gain through trade is understood as coming at another nation's expense.
How it works in practice
Mercantilist policy was historically implemented through direct state control over colonial trade and domestic industry.
- Tariffs and trade barriers
- High tariffs on imported goods protect domestic industry and discourage the outflow of precious metals used to pay for imports.
- Colonial trade monopolies
- Colonies were typically required to trade exclusively with their controlling nation, supplying raw materials and purchasing finished goods in an arrangement designed to benefit the mother country.
Common variants
- Bullionism
- An early, more literal form of mercantilism focused specifically on accumulating gold and silver as the primary measure of national wealth.
- Neo-mercantilism
- A modern variant in which states pursue export-oriented industrial policy and currency management to run persistent trade surpluses, without the historical focus on precious metals specifically.
What it is often confused with
Mercantilism is sometimes confused with capitalism generally, but mercantilism specifically holds that the state should actively direct trade to accumulate national wealth, a view classical economists such as Adam Smith explicitly wrote against in favor of free markets.
Criticisms and debates
Criticism of mercantilism, dating back to the founding of modern economics, centers on its zero-sum view of trade and its reliance on state-directed intervention.
Classical economic critique
Adam Smith argued that mercantilism's zero-sum view of trade was mistaken, since voluntary trade between nations can make both parties better off, not just the one running a surplus.
Response: Some modern neo-mercantilist policy defenders argue that strategic trade intervention can still benefit a specific national economy under certain conditions, even if unrestricted free trade produces greater total global wealth.
Efficiency critique
Contends that state-directed trade monopolies and tariffs protect favored industries at the cost of higher prices and reduced choice for domestic consumers.
Response: Historical defenders of mercantilist policy argued that building strong domestic industry, even at short-term consumer cost, served a nation's long-term strategic and economic independence.
Historical examples
- British colonial trade policy, 17th and 18th centuries
- Required American colonies to trade primarily with Britain, a widely cited example of mercantilist colonial policy.
- France under Colbert, 1660s to 1680s
- Jean-Baptiste Colbert directed extensive state support for domestic manufacturing and trade protection, a defining example of mercantilist economic policy.
Sources
- 1.Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. 1776.
- 2.Stanford Encyclopedia of Philosophy. Adam Smith.
- 3.Encyclopaedia Britannica. Mercantilism.