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What is Mercantilism?

Robinhood LearnJune 19, 2020
Democratize finance for all. Our writers’ work has appeared in The Wall Street Journal, Forbes, the Chicago Tribune, Quartz, the San Francisco Chronicle, and more.
definition

Mercantilism is a term in economic theory that refers to a country’s efforts to protect the merchant class from foreign competition.

🤔 Understanding mercantilism

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. It stems from the era of gold as the standard currency, in which monarchs viewed the quantity of gold in the treasury as the measure of a nation’s wealth. This preoccupation with the accumulation of gold first became known as mercantilism by way of Adam Smith. Philosophers and economists adopted the term, which is sometimes still used today.

example

Britain was a mercantilist nation-state before the 1800s. It expanded its wealth by colonizing resources everywhere from India to the Americas. By capturing gold, and the means to trade for gold, Britain was among the most powerful empires of the day. The empire established trade barriers to protect that wealth, including the Navigation Act of 1651, which prohibited foreign ships from engaging in coastal trade in waters controlled by the crown.

Takeaway

Mercantilism is like a squirrel gathering nuts for the winter…

Every day, the furry animal runs around gathering nuts (gold). It stockpiles its loot and only cares about what it can collect. Any squirrel attempting to remove those nuts is an enemy. Imagine another animal willing to trade nuts for fruit. Regardless of how much fruit it offers in return, the squirrel declines the trade. Its goal is to collect more and more nuts, with no end in sight. And as long as that squirrel is adding to its stash, it feels like it is accomplishing its goal.

Tell me more...

How does mercantilism work?
What is the history of mercantilism?
What is the significance of mercantilism?
What are the criticisms of mercantilism?
What is the difference between mercantilism and imperialism?

How does mercantilism work?

Mercantilism generally includes any governmental policy that reduces imports and encourages exports. These protectionist policies are designed to shield merchants from foreign competition. The stated goal is that they guard against domestic job losses.

These policies may include placing tariffs on imported goods, restricting access to the domestic market, and building any other trade barriers to defend the economy from foreign products.

The general idea behind mercantilism is that money flowing into the economy is good, while money flowing out is bad. Therefore, imports are viewed as negative actions that cost something to the economy. Most often, people talk about the jobs that “could have occurred” in the domestic economy if the product were manufactured at home.

People with mercantilist views tend not to give much value to the reduced costs that are paid for those foreign products, or to the jobs that are created by the labor left free by not inefficiently producing goods domestically. In general, mercantilists view trade as a zero-sum game, in which the recipient of money wins, and the buyer loses.

What is the history of mercantilism?

The mercantilist era is generally considered to have run from around the founding of the American colonies to the American revolution. However, the Americas were not the central arena of mercantilism.

During the Age of Discovery, which started in the 15th century, ocean travel expanded the reach of nation-states. With the exploration and discovery of lands unknown to the European empires came the desire to control those new lands.

As the European powers raced to establish trade routes and capture new resources, defending their merchandise and territories became of utmost importance. These governments established merchant marines to protect cargos and waged trade wars to protect their merchants. The gold and silver required to undertake these efforts were prominent in the eyes of the monarchs. Without the means to support their efforts, the entire empire would be at risk.

Seeing as commerce ran on gold and silver as the international currencies, depleting the reserves of an enemy was a viable military strategy. Therefore, any action that reduced the amount of precious metals in the royal vaults was viewed as a negative outcome. Meanwhile, any ability to move gold from an enemy empire to one’s own was considered a military advantage.

Hence, sending gold to a foreign country in exchange for goods was often seen only in the context of the movement of the gold. Imports were harshly opposed, and exports were generously supported.

Several events in the late 1700s upended the mercantilist era. First, Adam Smith wrote the Wealth of Nations in 1776. Smith argued that the wealth of nations is not measured by the amount of gold in storage. Instead, he explained that it is the amount of value that is created by a country. This seminal work demonstrated how trade was mutually beneficial rather than zero-sum.

Second, the Industrial Revolution changed the way that economies functioned, moving away from agrarian (farm-focused) societies and toward urban manufacturing centers. This new method of mass production pushed economies toward specialization and trade.

Third, improvements in transportation began to connect the world in profound ways, leading to lower costs of foreign goods and more opportunities for international trade. This movement toward increasing trade is commonly considered the transition point from the mercantilist era toward globalization.

Finally, revolutions in the Americas stretched England and Spain thin, and the Napoleonic wars in France lead to a similar issue. The decreasing ability of a mother country to control its colonies eventually contributed to the collapse of the empires of Western Europe and the end of mercantilism in its historical form.

In recent years, some mercantilist ideas have resurfaced in populist politics. The misunderstanding of trade balances, offshoring, and globalization have created a bloc of disenfranchised individuals who are pushing for protectionism. Some observers have dubbed the recent increase in trade disputes “neomercantilism.”

What is the significance of mercantilism?

Historically, the mercantilist era was a time of discovery and expansion of the European empires. Searching for new trade routes and new resources, the Age of Discovery opened the oceans and connected the world.

As these nation-states expanded their reach, they competed for control of raw materials and popular products. Mercantilism became a military strategy of denying power to one’s opponents by depleting their treasuries.

In the modern era, countries have become more interdependent through foreign trade, which has led to less conflict and more cooperation. Yet, mercantilism has been gaining new significance in the modern economy.

As technological advances displace labor, and as globalization connects the world’s supply chain, the economic system is rapidly changing. To someone who loses a job to offshoring, the appeal of mercantilist policies can be intense. The injury to their livelihood is often seen as an assault on their identity. Accusations that foreigners are taking jobs away from countrymen are easy to accept, and many feel they are correct.

Populist candidates have been able to win elections and install some mercantilist trade policies by leaning on the feeling of longing and loss. That includes the election of Donald Trump in the United States, who insisted on renegotiating the North American Free Trade Agreement, expanded restrictions to immigration, and implemented tariffs on Chinese goods. It could also apply to Britain leaving the European Union, known as Brexit.

What are the criticisms of mercantilism?

Mercantilist policies run counter to free trade and globalization. While the benefits of the free market are well understood in modern economic literature, protectionism still holds some sway over the average worker.

When a factory is relocated to another country, the displaced workers feel the weight of lost wages squarely on their shoulders. However, they don’t tend to notice the indirect benefits that are spread across the rest of the country.

Those lower wages that lead to lower production costs often allow businesses to compete for more market share by reducing prices. The rest of the country also may benefit from those lower prices, increasing the number of things they can afford.

Economists generally understand that free trade is essentially always positive-sum — If both parties did not benefit from a deal, the loser could simply walk away. Mercantilism views trade as a zero-sum game, with a winner and a loser. But this ideology is commonly considered archaic, as it misinterprets the balance of trade and misunderstands the source of a nation’s wealth.

The most substantial criticism of mercantilism is that if forfeits gains from trade for the economy at large to protect a handful of directly impacted individuals.

By allowing countries to focus their resources on their comparative advantage, the global economy is more often than not stronger through specialization and trade.

Laissez-faire economic theory suggests the optimal amount of value creation occurs when there are minimal government interventions, and the free market economy is allowed to guide the most efficient use of resources with its invisible hand.

What is the difference between mercantilism and imperialism?

In the simplest terms, imperialism is a term that describes the expansion of a country’s ideas, culture, or military presence. It is often applied to the British empire, which significantly grew its influence in the centuries following the Middle Ages.

Mercantilism refers explicitly to economic policies that are meant to decrease importation and protect domestic merchants from foreign competition.

The terms overlap in some respects, as the past mercantilist motivation to limit trade pushed empires to build wealth through imperialism and the accumulation of new resources.

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