DEFINITION: Mercantilism was a theory and practice of political economy, which operated under the premise that global wealth at any given time is a zero-sum quantity.
This means that any advantage my country obtains through international trade is your country’s disadvantage, and vice versa.
Mercantilism was the intellectual justification which, for some two centuries during the Early Modern period, led European governments to attempt to control trade, each for its own benefit—that is, to enhance its own national wealth and influence at the expense of its neighbors’.
Many if not most European nations sought at this time to increase their own proportion of what they conceived to be the fixed quantity of world wealth. They did this by boosting their exports through subsidies and curtailing their imports through duties and tariffs.
ETYMOLOGY: The French term “mercantilisme” was coined in 1763 by the Marquis de Mirabeau. The term, translated into English, was popularized in 1776 by Adam Smith in The Wealth of Nations.
The words mercantile in French and “mercantile” in English both derive from the Italian mercante, meaning “merchant, which itself derives from the Latin past participle mercāns, mercantis, of the deponent verb mercor, mercari, meaning “to carry on trade.”
USAGE: Mercantilist theory and practice flourished from approximately the sixteenth through the eighteenth centuries.
The ultimate objective of Mercantilism was to strengthen a country’s reserves of gold and silver through increased exports—as opposed to diminishing them through imports—all the while promoting domestic employment.
At its core, Mercantilism prioritized the welfare of merchants and producers over those of consumers. Historically, the doctrine went hand-in-glove with the rise to power and world dominance of such firms as England’s East India Company and the Dutch East India Company.
The adoption of Mercantilist theory by governments of the day ensured the protection of the economic interests of these companies as essential components of the national economic system.
Here is a checklist of the characteristics of Mercantilism:
- World trade is a zero-sum game
- A country must increase its supply of gold
- A trade surplus is necessary for national prosperity
- Protectionism is necessary to foster a trade surplus
- A country should strive to increase its population
- By supplying cheap raw materials and a captive market for finished goods, colonies help to increase national wealth
During the course of the nineteenth century, classical liberal political economy replaced Mercantilism in the financial theory and practice of most European countries.