Mercantilism

Definition

Mercantilism is an economic theory and practice that emerged in Europe between the 16th and 18th centuries, emphasizing the importance of government intervention in the economy to achieve national power and wealth. This approach was characterized by a focus on accumulating gold and silver, maintaining a favorable balance of trade, and protecting domestic industries through tariffs and monopolies. The implications of mercantilism can be seen in various economic ideas and policies that followed, as well as its critique in later economic thought.

5 Must Know Facts For Your Next Test

1. Mercantilism was influential in shaping colonial policies as European powers sought to control resources and markets in their colonies to benefit the home country.
2. Governments under mercantilism actively intervened in the economy by granting monopolies, imposing tariffs, and regulating trade to enhance national wealth.
3. Key figures associated with mercantilist thought include Jean-Baptiste Colbert in France, who promoted state control of the economy to increase national power.
4. Mercantilism is often contrasted with later economic theories that advocate for free trade and minimal government intervention, such as classical economics.
5. The decline of mercantilism began with the rise of laissez-faire economics and critiques from thinkers like Adam Smith, who argued that individual self-interest drives economic prosperity.

Review Questions

• How did mercantilism influence government policies regarding trade during its period of prominence?
  • Mercantilism significantly influenced government policies by promoting active state involvement in economic affairs. Governments adopted measures such as imposing high tariffs on imports to protect domestic industries and encouraging exports to maintain a favorable balance of trade. This interventionist approach aimed to accumulate precious metals like gold and silver, reinforcing national power through economic strength.
• Compare and contrast the principles of mercantilism with those of Physiocracy, focusing on their views on wealth generation.
  • Mercantilism and Physiocracy present contrasting views on wealth generation. Mercantilists believed that wealth comes from accumulating precious metals through a favorable balance of trade, relying heavily on government intervention to achieve this. In contrast, Physiocrats argued that true wealth is derived from agricultural production and advocated for minimal government interference in the economy. They emphasized the importance of natural order in economic activities, suggesting that free markets would lead to optimal wealth generation.
• Evaluate how Adam Smith's critique of mercantilism laid the foundation for classical economic theories.
  • Adam Smith's critique of mercantilism played a crucial role in shaping classical economic theories by advocating for free markets and limited government intervention. In his work 'The Wealth of Nations,' Smith argued that individuals pursuing their self-interest would ultimately benefit society through increased productivity and innovation. By dismantling the mercantilist focus on state-controlled wealth accumulation, Smith laid the groundwork for the principles of supply and demand, competition, and the idea that economic prosperity arises from voluntary exchange rather than regulation.

Related terms

balance of trade: The difference between the value of a country's exports and imports, which mercantilists aimed to keep favorable by exporting more than importing.

protectionism: Economic policy of restraining trade between countries through tariffs on imported goods to protect domestic industries from foreign competition.

colonialism: The practice of acquiring control over foreign territories for economic exploitation, which was a key strategy for mercantilist nations to expand their wealth.