Chapter 10: Ideas and Practice of Mercantilism
1. Origins of Mercantilism
Mercantilism emerged as a response to the socio-economic and political transformations in Europe between
the 16th and 18th centuries. The decline of feudalism, growth of nation-states, and the rise of international
trade after geographical discoveries led to the need for a new economic doctrine. European rulers wanted to
strengthen the state by increasing their control over the economy. This was also the period when monarchical
absolutism was consolidating power, and economic resources were now viewed as tools for state-building
and military expansion. Thus, mercantilism became the guiding principle of economic governance, linking
economic power to political power.
2. Chief Ideas of Mercantilism
- Bullionism: The core belief was that a nation's wealth was based on the amount of gold and silver it
possessed. This idea led to an emphasis on hoarding precious metals.
- Favorable Balance of Trade: Mercantilists advocated for exporting more than importing. Export surplus
brought bullion into the country, strengthening the state.
- State Regulation: The state was central to the economy. It regulated trade, imposed tariffs, granted
monopolies, and supported industries through subsidies to protect domestic markets.
- Colonial Exploitation: Colonies were seen as essential economic assets - providers of raw materials and
guaranteed markets for the mother country's manufactured goods.
- Self-Sufficiency: Mercantilist policies discouraged dependency on imports. They aimed to develop domestic
industries, encourage population growth, and control wages to keep production costs low.
- Economic Warfare: Mercantilism also treated economic competition between states as rivalrous and
militaristic. Trade was often regulated in the context of national rivalry, not cooperation.
3. Mercantilism in European States
- England: Adopted aggressive trade policies like the Navigation Acts, which restricted colonial trade to
English ships. England focused on building a strong navy, supporting commercial agriculture, and expanding
overseas colonies. The East India Company played a major role in English mercantilism.
- France: Under Jean-Baptiste Colbert, mercantilism became a highly centralized state project. Colbert
promoted manufacturing, roads, ports, and regulations on production standards. He established
Chapter 10: Ideas and Practice of Mercantilism
state-sponsored industries and tightly regulated foreign trade to protect the French economy.
- Spain: Benefited initially from massive inflows of silver and gold from the Americas. However, it failed to
invest in productive economic structures, leading to economic stagnation. The reliance on bullion led to
inflation and underdevelopment.
- Netherlands: Though known for trade liberalism, the Dutch adopted a pragmatic form of mercantilism,
focusing on shipping, finance, and colonial trade through companies like the Dutch East India Company.
Their naval and commercial policies aligned with mercantilist goals.
- German States: Practiced Cameralism, a localized version of mercantilism that emphasized population
growth, agriculture, taxation, and administrative efficiency. These states lacked political unity, so policies
were more fragmented.
4. Rejection of Mercantilism
By the late 18th century, mercantilist ideas began to be criticized and abandoned:
- Intellectual Critique: The rise of economic liberalism challenged mercantilism. Thinkers like Adam Smith in
The Wealth of Nations (1776) rejected the idea that wealth is measured in bullion. Instead, Smith argued that
labor and production are the true sources of wealth and emphasized free trade and market forces.
- Limitations of Mercantilism: Overregulation, monopolies, and colonial dependence led to inefficiencies.
Mercantilist states often faced internal economic stagnation, and the policy failed to adapt to the emerging
needs of industrial capitalism.
- Emergence of Capitalism: As industrialization progressed, economic thought shifted toward laissez-faire,
advocating limited state interference and encouraging entrepreneurship, competition, and global trade.
