Mercantilism

Definition

Mercantilism is an economic theory and practice that dominated European economic policy from the 16th to the 18th centuries, emphasizing the role of the state in managing the economy to increase national power through a favorable balance of trade. This approach encouraged nations to accumulate wealth, primarily gold and silver, by promoting exports over imports and establishing colonies to provide raw materials and markets for finished goods.

5 Must Know Facts For Your Next Test

1. Mercantilism held that the accumulation of precious metals was essential for a nation's prosperity, leading to fierce competition among European powers to acquire colonies rich in resources.
2. Colonial powers like Spain, Portugal, France, and Britain used mercantilist policies to establish trade monopolies in their colonies, restricting colonial trade to benefit the mother country.
3. Mercantilist thought influenced government policies, including subsidies for export industries and tariffs on imports, aiming to boost national production and limit foreign goods.
4. The mercantilist era saw significant investment in naval power to protect trade routes and colonies, reflecting the belief that military strength was vital for economic security.
5. Critics of mercantilism, like Adam Smith, argued for free trade principles in the late 18th century, eventually leading to its decline as nations began adopting more liberal economic policies.

Review Questions

• How did mercantilism shape European colonial policies during its dominance in the 16th to 18th centuries?
  • Mercantilism significantly influenced European colonial policies by encouraging nations to establish colonies as sources of raw materials and markets for their manufactured goods. This led to the creation of strict trading regulations that forced colonies to trade primarily with their mother countries. Consequently, European powers expanded their empires aggressively, seeking to maximize their wealth through controlled trade practices that aligned with mercantilist principles.
• Analyze the relationship between mercantilism and the development of naval power during the era.
  • The relationship between mercantilism and naval power was crucial, as nations recognized that controlling trade routes and protecting their colonies required a strong navy. Mercantilist policies drove countries to invest heavily in shipbuilding and naval forces, allowing them to safeguard their trade interests against rival nations. The establishment of powerful navies not only facilitated the transport of goods but also acted as a deterrent against piracy and foreign invasions, making military strength essential for economic prosperity.
• Evaluate the impact of mercantilism on modern economic thought and policy, particularly in relation to globalization.
  • Mercantilism's impact on modern economic thought can be seen in how nations approach trade and economic policy even today. While contemporary economics generally favors free trade principles, elements of protectionism rooted in mercantilist ideas still persist. In a globalized world, countries often implement tariffs and subsidies aimed at protecting local industries from foreign competition, echoing historical mercantilist practices. Thus, understanding mercantilism provides insight into ongoing debates about trade policy and national economic strategies.

Related terms

Balance of Trade: The difference in value between a country's imports and exports, which is crucial in mercantilist policies to ensure a surplus that boosts national wealth.

Colonialism: The practice of acquiring control over foreign territories, often for the purpose of exploiting resources and establishing trade networks, which was central to mercantilist strategies.

Protectionism: Economic policy aimed at shielding domestic industries from foreign competition through tariffs and regulations, which aligns with mercantilist goals.