The Rise and Fall of Mercantilism: An Analysis of Its Impact on Business, Economy, and Society
Thu. Sep 21st, 2023

The Rise and Fall of Mercantilism: An Analysis of Its Impact on Business, Economy, and Society


Mercantilism is an economic theory and practice that dominated Western European economic thought from the late 16th to early 18th centuries. It favors the accumulation of wealth through trade and the use of protectionist policies to encourage domestic industries and restrict imports.

What is mercantilism?

In mercantilist theory, the wealth of a country was measured by the accumulation of precious metals such as gold and silver. The goal was to increase the country’s exports and reduce its imports, thus generating a trade surplus that could be used to obtain more precious metals. This surplus was thought to increase the power and security of the country.

To achieve these goals, trading countries used various policies such as tariffs, subsidies, and export restrictions to promote domestic production and limit imports. They established new colonies as sources of raw materials and markets for finished goods.

Mercantilism was widely practiced by European nations during the era of exploration of new markets and played a significant role in the rise of European colonial imperialism. However, it was eventually replaced by other economic principles, such as laissez-faire capitalism, industrialization, and globalization changed the shape of the world economy.

Definitions of Mercantilism

Scholars have given various definitions of mercantilism, including:

According to Jacob Viner, mercantilism is “the economic principle that government control of foreign trade is paramount to ensuring the prosperity and security of the state.”

Adam Smith defined mercantilism as “the system of rules which sought to secure a positive balance of trade for the home country, by exporting more than importing, and thereby accumulating precious metals.”

Joseph Schumpeter described mercantilism as “a system of economic management that regards foreign trade as a means of increasing national wealth, which can be achieved through state intervention with the economy.”

Eric Hobsbawm saw mercantilism as “an economic theory based on the belief that the wealth of nations depends on the accumulation of gold and silver, and on promoting exports, limiting imports, and controlling prices.” It is the responsibility of the state to regulate economic activities.

Douglas Irwin defined mercantilism as “an economic system in which a government seeks to maintain a trade surplus, and to promote domestic industries through tariffs, subsidies, and other forms of government intervention.”

Understand Commercialism as

Mercantilism was an economic doctrine that emerged in the 16th century and dominated Western European economic thought until the late 18th century. It was based on the idea that a country’s wealth is measured by its reserves of precious metals such as gold and silver and that economic policy should aim to accumulate these metals.

To achieve this goal, trading countries used various policies to promote domestic industries and restrict imports. For example, he used tariffs to make imported goods more expensive and subsidies to make domestic goods cheaper. They established colonies as sources of raw materials and as markets for manufactured goods.

The mercantile system was based on the idea of a fixed amount of money in the world so that one country’s gain is another’s loss. This led to a zero-sum approach to international trade, with countries seeking to maximize their exports and minimize their imports.

While mercantilism was successful in promoting domestic industries and building colonial empires, it also had some negative effects. The focus on the accumulation of precious metals led to the neglect of other important economic activities, such as investment in infrastructure and education. The emphasis on exports also led to the neglect of domestic consumption and created an imbalance in trade.

While it played an important role in the rise of European colonial empires, it was eventually replaced by other economic theories as industrialization and globalization transformed the world economy.

Noteworthy Characteristics of Mercantilism

Mercantilism emerged in Europe during the 1500s and replaced the feudal economic system in Western Europe. It was based on the belief that a nation’s wealth and power were best served by increasing exports and limiting imports. The following are some noteworthy characteristics of mercantilism:

The Belief in the Static Nature of Wealth

Mercantilists believed that financial wealth was limited due to the rarity of precious metals. Therefore, nations sought prosperity and power by securing as much wealth as possible, even at the expense of other nations.

The Need to Increase the Supply of Gold

Gold represented wealth and power in mercantilism. It could pay for soldiers, seafaring exploration for natural resources, expanding empires, and protecting against invasion. A lack of gold meant the downfall of a nation.

The Need to Maintain a Trade Surplus

Maintaining a trade surplus was integral to building wealth in mercantilism. Nations focused on selling their exports and collecting the associated revenue more than spending on imports and sending gold out of the country.

The Importance of a Large Population

Mercantilists believed that large populations represented wealth. Increasing a nation’s population was integral to supplying a labor force, supporting domestic commerce, and maintaining armies.

The Use of Colonies to Support Wealth

Some nations needed colonies for raw materials, labor supply, and a way to keep wealth within their control. Essentially, colonies increased a nation’s wealth-building power and national security.

The Use of Protectionism

Protecting a nation’s ability to build and maintain trade surpluses encompassed prohibiting colonies from trading with other nations and imposing tariffs on imported goods.

History of Mercantilism

England was the epicenter of the British Empire during the rise of mercantilism, but it had relatively few natural resources. To grow its wealth, England introduced fiscal policies that discouraged colonists from buying foreign products and created incentives to buy only British goods. Programs like the Sugar Act of 1764 and the Navigation Act of 1651 resulted in a favorable balance of trade that increased Great Britain’s national wealth.

Under mercantilism, nations frequently engaged their military might to ensure that local markets and supply sources were protected. Mercantilists believed that a nation’s economic health could be measured by its ownership of precious metals such as gold or silver. Their levels tended to rise with increased new home construction, agricultural output, and a strong merchant fleet that serviced additional markets with goods and raw materials.

French and British Mercantilism: A Comparison

Mercantilism was an economic philosophy that dominated European economic thought in the 16th and 17th centuries. It emphasized the accumulation of wealth through trade and commerce, and the use of government policies to promote a positive balance of trade. While many European countries practiced mercantilism, France and Britain were two of the most influential proponents of the philosophy.

French Mercantilism

Jean-Baptiste Colbert, the French Controller General of Finance, was arguably the most influential proponent of mercantilism. Colbert studied foreign-trade economic theories and was uniquely positioned to execute mercantilist ideas. He called for an economic strategy that protected the French crown from a rising Dutch mercantile class, and he increased the size of the French navy to control trade routes and increase French wealth. While his practices ultimately proved unsuccessful, his ideas were hugely popular and had a lasting impact on French economic policy.

British Colonial Mercantilism

In Britain, mercantilism had a direct and indirect impact on its colonies. The adoption of far-reaching trade restrictions stunted the growth and freedom of colonial businesses. The British Empire also fostered the development of the slave trade in its colonies, including America, by triangulating trade between its colonies, foreign markets, and the Empire. This resulted in the colonies providing products demanded by African imperialists, while slaves were returned to America or the West Indies and traded for sugar and molasses.

Furthermore, the British government demanded that trading be conducted using gold and silver bullion, which led to insufficient bullion left over to circulate in the colonies’ own markets. The colonies issued paper currency to replace it, but the mismanagement of printed currency resulted in inflationary periods. In addition, heavy taxation was needed to support Great Britain’s army and navy due to constant wars. The combination of taxes and inflation caused great colonial discontent.

Mercantilism in Colonial America and the Role of Merchants

Mercantilism was a significant economic system in Colonial America, where it aimed to strengthen the economy by aligning the interests of the colonies with those of the founding countries. The British Empire, for example, benefited from receiving raw materials from its colonies, while the colonies were protected from hostile nations.

However, critics argued that the restrictions on international trade raised the expenses for the colonists, making it disadvantageous for them to affiliate with Great Britain. This tension eventually led to the Revolutionary War after the British Empire pushed harder against the colonies.

In Europe, mercantilism’s emphasis on generating wealth through trade led to the rise of the merchant class. Merchants were granted exclusive government-controlled monopolies and cartels, protected by regulations, subsidies, and even military force. Citizens invested in these corporations through shares, which were the first traded corporate stocks.

The most famous mercantilist corporations were the British East India Company and the Dutch East India Company, which maintained exclusive trade rights for over 250 years. These corporations played a crucial role in the development of mercantilism and the expansion of trade routes protected by their respective governments.

Mercantilism in Colonial America also played a role in shaping the social and political landscape of the colonies. The system required strict government control over the economy, which resulted in laws and regulations that limited individual freedoms and autonomy.

For example, colonial laws prohibited the export of certain goods to other countries, enforced high tariffs on foreign goods, and mandated that all trade with foreign nations be conducted through British ships. These restrictions prevented colonists from trading freely with other nations and hindered their ability to develop their own industries and markets.

Despite the drawbacks, mercantilism did have some positive effects on the colonies. It encouraged the growth of industries and businesses that supported the British Empire’s trade interests. This led to the development of the shipbuilding, fishing, and agriculture industries, which were essential for the growth and expansion of the colonies.

Mercantilism vs. Imperialism and Capitalism Today

Mercantilism is a centuries-old economic policy that aims to create favorable trade balances by manipulating a nation’s economy. Imperialism often employs military force and mass immigration to impose mercantilism on less-developed regions, as exemplified by Britain’s establishment of the American colonies. In contrast, capitalism allows for free trade and benefits individuals, businesses, and nations through increased choice, competition, and productivity.

Today, mercantilism is widely considered outdated and dangerous, with global trading and relationships being preferred as a means of combating nationalistic policies. However, many nations still engage in mercantilism, such as Russia and China, which use it to control foreign trade, balance of payments, and foreign reserves. The appeal of mercantilism’s nationalism has also contributed to the rise of leaders like Donald Trump and Narendra Modi.

In 2018, President Trump’s imposition of tariffs on Chinese imports ignited a trade war that continues to this day. While mercantilism may persist in some forms, capitalism’s benefits have made it the preferred economic policy for many individuals and nations in the modern world.

Despite the benefits of capitalism, there are also criticisms of the system, such as income inequality and the exploitation of labor. These criticisms have led some to argue for alternative economic policies, such as socialism or mixed economies.

Furthermore, while mercantilism may seem outdated, some argue that it still plays a role in modern economic policies, such as protectionism and subsidies. For example, many countries provide subsidies to industries deemed essential for national security or economic competitiveness, which can be seen as a form of mercantilism.

The debate between mercantilism and capitalism, and the role they play in modern economic policies, continues to be a topic of discussion among economists and policymakers. However, it is clear that both systems have their advantages and disadvantages and that finding a balance between them is essential for achieving sustainable economic growth and development.

What Were the Main Beliefs of Mercantilism and How Does it Differ from Capitalism?

Mercantilism, a precursor to free-trade economic theory, had several core beliefs. These included the belief that the world had limited wealth in the form of gold and silver, that nations needed to build their stores of gold at the expense of others, that colonies were important for supplying labor and trading partners, that armies and navies were crucial to protecting trade practices, and that protectionism was necessary to ensure trade surpluses.

In contrast, capitalism calls for minimal government intervention and ownership of capital, trade, and industry by private entities and individuals. It promotes individual freedom and encourages competition in the marketplace. Mercantilism, on the other hand, involves state control and regulation, which is said to suppress individual freedom.

Is Mercantilism Still Used Today?

While mercantilism has been replaced in many parts of the world by free-trade theory and capitalism, it still exists in certain countries whose governments seek to maintain control over property ownership, trade, and the creation of wealth. Some nations still employ tariffs and other protectionist measures to ensure a fair balance of trade with other nations.

The Bottom Line

Mercantilism had a significant impact on world history, as it sparked an age of exploration and colonization in an effort to secure raw materials, controllable trade partners, and a net transfer of wealth. Its theory of financial wealth building and state power supported the use of protectionism to increase export revenue and decrease imports. While it has been largely replaced by free-trade theory and capitalism, mercantilism’s influence can still be seen in certain economic policies and practices today.

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