Mercantilism: Meaning, Causes and Characteristics of Mercantilism

The ‘Commercial Revolution’ which took place between 1450 and 1750 brought a revolutionary change
in the economy of Europe.

Many countries of Europe encouraged the intervention of state in commercial activities for the increase
of national wealth and power

This gave birth to ‘Mercantilism’ which played a vital role for the economic prosperity of a country. This
Mercantilism created a milestone in the field of European Economy.

Meaning of ‘Mercantilism’:

Adam Smith, the ‘Father of Economics’ had first used the word ‘Mercantilism’ in his famous book
‘Wealth of Nations’. Mercantilism means-“Governmental regulation of economic affairs, especially,
trade and industry”. The exponents of Mercantilism opined that Commerce is the key to progress of
every country and it can be achieved at the cost of the interest of other country. Although they put
emphasis on economy, they never wanted the intervention in politics.

Causes of the Rise of Mercantilism:

Mercantilism grew due to several reasons. At first, the Renaissance did not accept the religious doctrine
of Medieval Europe. It explained ‘Materialism’ as one of the mediums of human happiness. So,
everybody dreamt to lead a happy and prosperous life. This gave birth to Mercantilism.

Secondly, the Fall of Feudalism was another cause for the rise of Mercantilism. With the fall of
feudalism, the fate of agriculture was doomed. This encouraged the small-scale industries. The towns
and guilds wanted the increase of these industries. They wanted to export the surplus of these
productions. This led to the rise of Mercantilism.

Thirdly, the Reformation Movement encouraged the merchants. The results of the Reformation
Movement carried on by Martin Luther in Germany and Henry VIII in England were far reaching. They
condemned the unnecessary intervention of Pope in Political and Economic affairs except
religion.Martin Luther opposed the Pope so much so that he was issued ‘Bull of excommunication’ by
the Pope. However, Luther did not bend before it. In a similar vein Henry VIII of England did not obey
Pope and brought reformation in the Church of England.

All these activities encouraged the merchants to take up their business independently. This encouraged
Mercantilism.

Fourthly, the Guilds and Banking System gave great impetus for the growth of Mercantilism. The guilds
acted as distribution centres and exported the surplus to outside countries. This encouraged the
international trade which was well-regulated by the banking system. Thus, Mercantilism grew out and
out.
Sixthly, Political Patronage established Mercantilism on sound footing. The kings wanted to reduce the
power of the feudal Lords and Barons. So, they encouraged the merchants for trade. Henry, ‘the
Navigator’ of Portugal and Henry VIII and Queen Elizabeth of England patronised sailors. Their patronage
established Mercantilism on sound footing.

At last, Scientific Invention and Discoveries helped a lot in the growth of Mercantilism. The telescope
invented by Galileo helped the merchants in their journey. The Mariner’s Compass also helped the
merchants a lot to determine direction inside the deep sea. These inventions made merchants confident
for maritime trade which galvanised Merchantilism.

Characteristics of Mercantilism:

Mercantilism had many characteristics. It was seen mostly in the European countries. Among those
countries, England, France, Germany, Italy etc. were prominent.

The characteristics of Mercantilism were as such:

Foreign Trade:

At first, the merchants put emphasis on foreign trade. They knew that gold and silver are not plentily
available in many countries. They wanted to procure gold and silver from other countries by sailing their
own products to them. This was infact, one of the great characteristics of Mercantilism.

Emphasis on Money:

Money, ‘brighter than sun-shine and sweeter than honey’ was another feature of Mercantilism. The
merchants had understood that for the development of trade, money is needed. So, they discarded
‘barter’. They had felt that “Money is what money does”. So money economy galavanised Mercantilism.

Profit and Interest:

Moon, a notable economist had advised to charge interest on principal when money was lent. It
increased the amount of money inside a country. On the other hand, it also inspired a trader to work
hard for the repayment of money what he had borrowed and also encouraged him to be rich. Thus,
profit and benefit became two sides of Mercantilism.

Population:

Mercantilism put emphasis on population. Devenant had opined that the real power of a country is its
population. The presence of more population helps in the growth of industry which leads to more
production. Samuel Fortre had advised that in case of need, the refugees are to be employed in
different factories and given shelter in the country for more production.
Medium of Production:

The exponents of Mercantilism put emphasis on ‘land’ and ‘labour’. In the language of Peltti “Labour is
the father…. as lands are the mother”. So, Mercantilism delivered a message that a country should be
economically prosperous. By this, a country should be self-sufficient in production.

Regulation of Trade and Commerce:

The merchants of Europe had devised means to regulate trade and commerce of a country. Every
European Country framed laws to regulate its trade and commerce. By these laws, it was not possible to
import goods from outside countries. This helped in exporting the surplus of the country.

Encouragement to Capitalism:

Mercantilism was meant to encourage capitalism. The capitalists invested their capital and made
mercantilism more mobile. It was difficult on the part of Mercantilism to thrive without capital. This
helped in the growth of trade and commerce.

The Golden Principles:

The ‘Golden Principles’ of Mercantilism contained its chief characteristics. Those principles were self-
dependency, industry, mine, commerce, naval power, colony, unity etc. Being guided by these
principles, colonialism reached the pinnacle of success.

Mercantilism theory and examples

Tejvan Pettinger March 31, 2017 trade

Mercantilism is an economic theory and practise where the government seeks to regulate the economy
and trade in order to promote domestic industry – often at the expense of other countries. Mercantilism
is associated with policies which restrict imports, increase stocks of gold and protects domestic
industries.

Mercantilism stands in contrast to the theory of free trade – which argues countries economic well-
being can be best improved through the reduction of tariffs and fair free trade.

mercantilism-sailing-boat-sea

Mercantilism involves
Restrictions on imports – tariff barriers, quotas or non-tariff barriers.

Accumulation of foreign currency reserves, plus gold and silver reserves. (also known as bullionism) In
the sixteenth/seventeenth century, it was believed that the accumulation of gold reserves (at the
expense of other countries) was the best way to increase the prosperity of a country.

Granting of state monopolies to particular firms especially those associated with trade and shipping.

Subsidies of export industries to give competitive advantage in global markets.

Government investment in research and development to maximise efficiency and capacity of the
domestic industry.

Allowing copyright/intellectual theft from foreign companies.

Limiting wages and consumption of the working classes to enable greater profits to stay with the
merchant class.

Control of colonies, e.g. making colonies buy from Empire country and taking control of colonies wealth.

Examples of mercantilism

England Navigation Act of 1651 prohibited foreign vessels engaging in coastal trade.

All colonial exports to Europe had to pass through England first and then be re-exported to Europe.

Under the British Empire, India was restricted in buying from domestic industries and were forced to
import salt from the UK. Protests against this salt tax led to the ‘Salt tax revolt’ led by Gandhi.

In seventeenth-century France, the state promoted a controlled economy with strict regulations about
the economy and labour markets

Rise of protectionist policies following the great depression; countries sought to reduce imports and also
reduce the value of the currency by leaving the gold standard.

Some have accused China of mercantilism due to industrial policies which have led to an oversupply of
industrial production – combined with a policy of undervaluing the currency.

However, the extent of mercantilist policies are disputed – See – Is China Mercantilist? NBER

Modern Mercantilism

In the modern world, mercantilism is sometimes associated with policies, such as:

Undervaluation of currency. e.g. government buying foreign currency assets to keep the exchange rate
undervalued and make exports more competitive. A criticism often levelled at China.
Government subsidy of industry for unfair advantage. Again China has been accused of offering state
supported subsidies for industry, leading to oversupply of industries such as steel – meaning other
countries struggle to compete.

A surge of protectionist sentiment, e.g. US tariffs on Chinese imports, and US policies to ‘Buy American.’

Copyright theft

Criticisms of Mercantilism

Adam Smith’s “The Wealth of Nations” (1776) – argued for benefits of free trade and criticised the
inefficiency of monopoly.

Theory of comparative advantage (David Ricardo)

Mercantilism is a philosophy of a zero-sum game – where people benefit at the expense of others. It is
not a philosophy for increasing global growth and reducing global problems. Also, increasing other
peoples wealth can lead to selfish benefits, e.g. growth of other countries, increases markets for our
exports. Trying to impoverish other countries will harm our own growth and prosperity.

Mercantilism which stresses government regulation and monopoly tends to lead to inefficiency and
corruption.

Mercantilism justified Empire building and the poverty of colonies to enrich the Empire country.

Mercantilism leads to tit for tat policies – high tariffs on imports leads to retaliation.

The growth of globalisation and free trade during the post-war period showed possibilities from opening
markets and respecting other countries as equal players.

Economies of scale from specialisation possible under free trade.

Justification for neo-mercantilism

Despite many criticisms of mercantilism, there are arguments to support the restriction of free trade in
certain circumstances.

Tariffs in response to domestic subsidies. Supporters argue that since China’s steel is effectively
subsidised leading to a glut in supply, it is necessary and fair to impose tariffs on imports of Chinese steel
to protect domestic producers from unfair competition. US tariffs on imports of steel from China 266%.
In Europe, tariffs are 13%.

Protection against dumping. If some countries have an excess supply of goods, they can sell at a very low
price to get rid of the surplus. But, this can make domestic firms unprofitable. Protectionism can be
justified to protect against this dumping. Examples, include EEC dumping excess agricultural production
on world agricultural markets and China’s dumping of steel.

Infant industry argument. For countries seeking to diversify their economy, tariffs may be justified to try
and develop new industries. When the industries have developed and benefited from economies of
scale, then the tariffs and protectionism can be dropped.