Mercantilism

Definition

Mercantilism is an economic theory and practice that emerged in Europe from the 16th to the 18th century, emphasizing the importance of accumulating wealth, particularly gold and silver, through a positive balance of trade. It promoted government regulation of the economy to increase national power, influencing various historical events and developments such as colonization and imperialism, shaping modern economic thought.

5 Must Know Facts For Your Next Test

1. Mercantilism was characterized by the belief that national strength could be maximized by limiting imports via tariffs and maximizing exports.
2. It was closely linked to the rise of colonial empires, as countries sought to control resources and markets in their colonies to enhance their wealth.
3. Governments played a crucial role in mercantilist policies by creating monopolies, granting charters, and supporting specific industries.
4. The system encouraged European powers to engage in fierce competition for overseas territories to secure resources and markets.
5. Mercantilism laid the groundwork for later economic theories, including classical economics, which challenged its ideas about trade and government intervention.

Review Questions

• How did mercantilism influence the economic policies of European powers during the period of colonial expansion?
  • Mercantilism significantly shaped the economic policies of European powers as they engaged in colonial expansion. Under this theory, nations aimed to acquire colonies to ensure a steady supply of raw materials and a market for their finished goods. Governments implemented protectionist measures such as tariffs and trade monopolies to maximize exports while minimizing imports, thereby increasing national wealth. This competition for resources contributed to the establishment of vast colonial empires.
• Evaluate the role of government intervention in mercantilist policies and its impact on trade relationships among European nations.
  • Government intervention was central to mercantilist policies, as states actively regulated economies to promote national interests. By imposing tariffs on imports and subsidizing exports, governments sought to create favorable trade balances. This often led to strained trade relationships among European nations, as countries would compete aggressively for dominance in trade routes and colonial holdings. Such intervention laid the groundwork for conflicts over trade rights and territorial claims.
• Assess how the decline of mercantilism paved the way for classical economics and modern economic thought in the 19th century.
  • The decline of mercantilism in the late 18th century opened the door for classical economics, which emphasized free markets and minimal government intervention. Thinkers like Adam Smith criticized mercantilist practices, advocating instead for competition and individual entrepreneurship as drivers of economic growth. This shift not only transformed economic theory but also altered political landscapes as nations began moving toward laissez-faire principles. The ideas stemming from this transition influenced modern economic thought by promoting concepts like free trade and market efficiency.

Related terms

Balance of Trade: The difference between the value of a country's exports and imports, with a positive balance indicating that exports exceed imports.

Protectionism: Economic policy of restricting imports from other countries through tariffs and regulations to protect domestic industries.

Colonial Economy: An economic system in which colonies provide raw materials to the mother country while importing finished goods from it, often under mercantilist principles.