What is Mercantilism?

Mercantilism is the idea that a country can increase its prosperity by running a favorable balance of trade. It is an idea that greatly influenced the conduct of trade policy by European countries from the 16th through the 18th century.

The policies that it led to were responsible for a lot of warfare and conquest back then. And the idea fell out of favor in the 19th century it continues to live on in the policies of several countries today though few countries would admit to following mercantilism. It is therefore worthwhile to understand the idea well.

Why did the mercantilist consider it desirable for their countries to run a trade surplus? An example can be instructive, consider Britain a big European power which followed mercantilism but by no means was the only nation to do so, let’s say it imported a certain quantity of raw materials from the rest of the world, say raw materials worth 1 million pounds. British importers would pay for these raw materials with gold as all payments back then were made with precious metals such as, gold, silver etc. So 1 million pounds worth of gold would flow out of the country, the British factory owners would add value to the raw materials by turning them into manufactured goods, say worth 3 million pounds which would then be exported leading to an inflow of gold worth 3 million pounds into the country, as a result of this whole exercise Britain would be left with a net inflow of 2 million pounds worth of gold equal to the amount of its trade surplus.

Such accumulation of gold was considered desirable by many people, they equated a country’s accumulation of gold with national power and prestige, such thinking is known by the name bullionism, because it involves obsession with the accumulation of gold bullion has a goal.

The thing is Mercantilists were not bullions, because they did not care about gold as an end in itself, what they were excited about was that this process of converting raw materials into finished exports had created jobs for British workers and profits for British manufacturers, they were further excited about the prospect that this newly accumulated gold would be spent in the country creating even more jobs and more profits due to what in economics we call the multiplier effect.

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