Mercantilism is a theory of economics commonly practiced in Western Europe between 1500 and 1700. It was based on the idea that the world has a limited amount of wealth. Under mercantilism, governments regulated the national economy in an attempt to acquire as much of this available wealth as possible and to store it in monetary reserves. The belief at that time was that a country’s success and power could be measured by its gold reserves. To achieve this goal, emphasis was placed on restricting imports and increasing exports to create a positive trade balance.
Principles of mercantilism
Mercantilism has several basic principles that were true regardless of where it was practiced. These include:
- Governments have imposed high tariffs on imports to discourage goods entering the country and subsidized exports to encourage an increase in the number of goods leaving the country.
- Silver and gold cannot be exported.
- Commercial goods could not be transported on foreign vessels.
- If the country had colonies, those colonies could not trade with foreign countries.
- In order to have products for export, governments have supported manufacturing industries through tax breaks and subsidies. Furthermore, the use of local resources for production was considered ideal.
Before mercantilism, most of Western Europe practiced feudal economies. For these countries, mercantilism became the first time the government regulated and controlled economic activity.
England and France: centers of mercantilism
France was the first European country to adopt mercantile measures. In 1539, the monarchy prohibited the importation of wool from Spain and the following year, forbade the export of gold. This was the beginning of mercantilism in France and throughout the rest of the 16th century, it introduced more of these economic policies. The government has even regulated production and defined how to produce specific products. This country has implemented the same policies in its colonies in North America.
Mercantilism was the strongest in England around 1640, although monopolized societies were viewed negatively by many. The British crown also began mercantile trade with its American colonies. Two policies, in particular, have been enacted to ensure that settlers bought British assets rather than foreign goods: the sugar law and shipping documents. The sugar law has increased the tariffs on sugar and molasses in other countries, forcing the settlers to buy from Great Britain. Navigation records banned foreign trade along the American coast and required colonial exports to be first inspected by British customs. These taxes and restrictions were not popular with the settlers and eventually led to the revolutionary war.
Criticism of mercantilism
Critics of mercantilism argue that this economic approach has effectively hampered global economic growth. This is because companies were more motivated to specialize in the production of goods and services. If, for example, a certain import is prohibited, the producers will work to produce that product on the domestic market. However, this usually involves inefficient production or a higher investment cost. This in turn increases the cost of the final consumer of the product and reduces the potential profit. The country with trade restrictions decreases its potential economic growth. Furthermore, the country that can produce a product efficiently and cost-effectively does not have the possibility to do so. This also reduces the potential economic growth in the other country.