Why Was Mercantilism Considered the Best Trading System?

The logic behind mercantilism was that a country could accumulate wealth, treasure, and power by maximizing exports.

Carson O.
11 Min Read
Highlights
  • Mercantilism is based on the idea that global trade is a zero-sum game - for one country to gain, another must lose.
  • It pioneered concepts around trade policy and economic power that remain relevant centuries later.

Mercantilism was an economic policy that dominated Europe from the 16th to the 18th century. It centred on maintaining a positive trade balance by promoting exports and limiting imports. The logic was that a country could accumulate wealth, treasure, and power by maximizing exports.

At its peak, mercantilism was embraced by all the major trading powers in Europe and the colonies. While it ultimately faded in favour of more modern economic ideas, mercantilism made sense for its time and produced some benefits. Here is an in-depth look at why mercantilism was seen as the premier trading system when it emerged.

What is Mercantilism?

Mercantilism is based on the idea that global trade is a zero-sum game – for one country to gain, another must lose. Thus, the objective is to run consistent trade surpluses, exporting more than you import. The excess money earned from exports flows into the home nation, allowing the government to amass precious metals like gold and silver.

This stockpiling of bullion was considered the path to prosperity and military might. Limiting imports preserved national reserves of treasure while promoting exports expanded it. Colonies were expected to supply raw materials to the mother country to support this imbalanced trade.

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Mercantilism advises extensive government intervention in the economy to advance these goals. Strategies include monopolies, tariffs, quotas, subsidies, and other trade barriers. A united nationalism also dominated mercantilist thought – the economic interests of the state were paramount.

Some core tenets of mercantilism:

  • Export more than you import to build wealth
  • Maximize possession of precious metals like gold and silver
  • Discourage import purchases through tariffs and bans
  • Encourage export production via subsidies and advantages
  • Establish colonies to control vital raw materials
  • Monopolize and dominate strategic industries
  • Government regulation shapes the economy
  • Global trade is a zero-sum competition

This framework shaped European trade for over two centuries. So what made it so dominant in its day?

Mercantilism as a Logical Reaction to its Era

To understand mercantilism’s appeal, we must examine the global circumstances when it emerged in the 16th century. At this time, Europe was shifting toward new nation-states and global exploration. Mercantilism was a pragmatic model for these developments.

Spain had recently accumulated massive wealth by plundering gold and silver from its new American colonies. This demonstrated how amassing precious metals could finance military supremacy and imperial expansion.

With land and naval power essential for security and conquest, monopolizing exports appeared as the natural path to state power. If your neighbour acquired more treasure, they could use it against you.

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Global trade was also conducted mainly through high-value commodities like spices, silk, tobacco, and sugar. Stockpiling metals to purchase these luxuries abroad seemed prudent while importing manufactured goods could undermine domestic producers.

Finally, prevailing economic thought saw global wealth as finite – one nation’s gain required another’s loss. So running trade surpluses became paramount.

As colonialism expanded, mercantilism provided a framework where the mother country dominated manufacturing and trade while colonies provided raw materials. This imperial system enriched the parent state.

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For these reasons, mercantilism evolved as the obvious model to structure emerging global trade between European nation-states. Its logic aligned with the prevailing motivations of power, security, and wealth accumulation.

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Benefits Provided by Mercantilist Policy

While mercantilism later faced criticism from free trade advocates, it did provide some benefits for practising nations:

1. Amassing hard currency reserves

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Mercantilist policies succeeded in stockpiling gold and silver reserves for nations like Spain, England, and France. This financed their colonial expansion and naval power projection. Possessing treasure to fund wars and conquests was seen as essential for any aspiring world power at the time.

2. Spurring domestic industry

Limiting imports forced greater domestic production of finished goods in mercantilist countries. This helped incubate early manufacturing capability in places like England. The export promotion also provided advantages to domestic producers feeding global demand.

3. Increasing employment

Banning imports in strategic sectors shielded domestic industries from foreign competition. This preserved jobs in key areas like shipbuilding, ironworks, textiles, and armaments. Mercantilism sustained employment for artisans and manufacturers.

4. Improving trade balance

Mercantilist tactics generally succeeded in maintaining a net export surplus and positive trade balances. This instilled confidence in the mercantilist doctrine and supported state power. Countries like France and England became increasingly dependent on the earnings from trade surpluses built up under mercantilism.

5. Productivity of colonies

The mother countries benefited from a colonial system where raw materials flowed in while colonists provided a captive export market. Europe’s expanding colonial empires under mercantilism supported the prosperity of ruling nations.

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6. Economic nationalism

Mercantilism promoted a strong sense of economic nationalism focused on state power and wealth. This motivated societies around shared objectives and helped unify early nation-states. It also subordinated individual commercial interests to national goals.

So in summary, mercantilism was well-aligned to the priorities of early global trade and did achieve advantages for the governments that implemented it. This entrenched it as the dominant trading framework of its era. Of course, mercantilism later declined as its flaws became more apparent.

Drawbacks and Criticisms of Mercantilism

While mercantilism made sense in its historical context, it suffered from major drawbacks as global trade evolved:

  • Stifling domestic consumption – Banning imports limited consumer choice and kept prices higher. This hurt living standards.
  • Inefficiency and trade barriers – Monopolies and tariffs limited competition, hurting innovation. Complex regulations raised transaction costs.
  • Misunderstanding money – Amassing bullion didn’t necessarily improve prosperity. Increased money supply from New World Treasure caused inflation.
  • Conflicts with colonies – Mercantilism bred resentment in colonies and forced them into unequal trading relationships.
  • Militarism and imperialism – Mercantilism encouraged armed conflict and imperial expansion to dominate vital imports like spices or sugar.
  • Zero-sum fallacy – Adam Smith refuted the zero-sum view of trade, noting specialization and exchange can benefit all parties.
  • Unproven national wealth logic – Stockpiling money does not automatically increase real economic output or productivity.

By the late 1700s, critics increasingly saw mercantilism as imposing unnecessary costs on trade while breeding conflict. The Napoleonic Wars seriously stressed mercantilist economies. This set the stage for new classical economics ideas that advocated for greater free trade, competition, and open markets.

Mercantilism vs Free Trade

The shift away from mercantilism accelerated in the early 19th century as free trade theories gained traction. Adam Smith’s seminal book The Wealth of Nations provided the intellectual foundation for dismantling trade barriers.

Smith demonstrated that trade restrictions were detrimental and consumed national wealth. He argued that removing barriers, while allowing countries to specialize in their competitive advantage, would maximize prosperity for all.

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Other free trade advocates like David Ricardo further developed theories showing how countries benefit more by opening up imports and exploiting comparative advantages. The repeal of the British Corn Laws in 1846 marked a major triumph for free trade over mercantilism.

While pure free trade also has its flaws, these ideas permanently changed economics. The benefits of competitive markets, limited regulations, and minimal trade barriers became widely embraced.

Mercantilism steadily declined over the 19th century as colonialism itself waned. However, nationalist and protectionist sentiments never fully disappeared. Elements of mercantilism have reappeared in modern trade disputes around issues like tariffs, currency manipulation, buying local rules, and intellectual property protections.

Debates between interventionist and free trade approaches remain unsettled in economics today. But the theories of early free trade advocates succeeded in overturning the core mercantilist doctrine that had dominated for so long.

Why Did Mercantilism Decline?

Mercantilism faded for several reasons:

  • Increased appreciation for wide consumer choice through open trade.
  • The realization that amassing bullion was not the same as increasing prosperity.
  • Developing the belief trade could be mutually beneficial rather than zero-sum.
  • The desire for greater efficiency, competition, and innovation in trade.
  • Philosophical preference for more limited economic governance.
  • Opposition to imperialism and militarism fueled by mercantilism.
  • Practical failure to deliver sustained growth and stability.
  • The rise of alternative schools of economic thought.

Legacy and Influence

While mercantilism faded, it left some lasting impacts and influence:

  • Providing early models for national economic governance and policy.
  • Supporting the rise of European nation-states and colonial ventures.
  • Contributing to the expansion of European manufacturing and productivity.
  • Creating some of the first systems for long-distance trade between continents.
  • Demonstrating the pivotal role of economic policy in building state power.
  • Shaping enduring debates between nationalism and liberalism.
  • Influencing related schools of thought like protectionism and economic nationalism.

Conclusion

So in conclusion, mercantilism was the dominant trading system of its era due to prevailing economic assumptions and the priorities of early global commerce. While it declined, it pioneered concepts around trade policy and economic power that remain relevant centuries later. The debates first stirred by mercantilism and free trade advocates still echo national and global economic policy today. According to Investopedia, some countries still practice mercantilism today.

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I am a multi-faceted professional with a strong foundation in Business and Finance, honed since 2020. Additionally, I possess a deep passion for automobiles, serving as an avid car enthusiast. In parallel to my diverse interests, I am also a dedicated student pursuing a career in the medical field.
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