Mercantilism in a Nutshell
Global economic policy took a drastic turn during the 16th century. A rising
merchant social class, which was organized by trades into professional guilds
that represented specific industries, developed international trade like never
before. This created a shift in Europe from a system that had functioned on a
basis of subservience—the Medieval “feudal” system—to one that intermingled
politics and trade in a new way.
Because Medieval and early Renaissance sovereigns still saw the merchants’
products as belongings of the crown, the value of internationally-traded items
became highly important by the 17th century. In the system of mercantilism,
sovereign powers declared the absolute economic policy of their realm, often
causing a pattern of effects. The kings began to hoard the items they considered
precious, and placed strict controls on international trade routes, shipments,
tariffs, and quotas.
Mercantilism extends the economic theory of bullionism, based in the values of
exchange rates of precious metals. Because each country wanted to obtain a
vast treasury through trade, extended wars and colonial expansion became
common. Countries acquired more resources by taking them from others.
Additionally, countries in a mercantilist system had high trade taxes, and they
attempted to maintain strict market monopolies. Countries began to be known
as solitary producers of certain goods. In order to maintain that identity, the
people who lived within the country were often not allowed to purchase or
consume the goods that were intended for exportation.
The most famous mercantilist economic theorist of the 17th century was JeanBaptiste Colbert, who served as personal economic advisor to King Louis XIV of
France. Colbert worked to create a surplus in France’s treasury, despite the
contributions that his trade policies made to France’s involvements in various
wars. Colbert also established the Merchant Marine in an attempt to secure his
trade routes, and instituted a number of regulations on industry guilds.
Capitalism v Mercantilism
Capitalism evolved from mercantilism and while both economic systems are
geared towards profit, these systems have differences in the way this is
achieved. Capitalism is an economic system that works around the concept of
wealth creation in the pursuit of economic growth for the nation while
mercantilism focuses on wealth accumulation through extraction of wealth
which they believe is measured by the amount of gold bullions that the nation
has in its possession. Wealth extraction efforts are augmented by colonization to
gain more wealth.
Capitalists regard the individual member of society as the central figure in
wealth creation. They believe that a nation’s wealth could grow through the
productive efforts of each individual. They view individuals as naturally
competitive. As such, they will enhance their skills to achieve greater efficiency
in adding value to their own wealth and consequently contribute to the
economic success of the nation. There is no pre-defined end to wealth creation.
Nations must continue to grow wealthier each day. Mercantilists, on the other
hand, think that wealth is finite and the skills of the people should, therefore, be
honed for greater efficiency in extracting from such wealth. They further
support the idea that a nation should diversify and sell goods to other countries
to accumulate more wealth while avoiding the importation of goods and
services in order to maintain a positive balance of trade. The positive balance of
trade means more gold goes to the treasury of the country.
Capitalism supports a competitive business environment where the forces of
supply and demand determine the price of goods and services. In mercantilism,
industries are run and controlled by monopolies which are protected and
supported by the government through subsidies.
From the point of view of the capitalists, individuals should be given freedom
and equal opportunity in creating wealth through a free market that has a level
playing field and a minimal regulatory intervention. The individual’s freedom to
consume what he wants encourages him to produce more and consequently gain
more wealth that will give him more purchasing power. Mercantilists oppose
this view and assert the need for heavy regulation in order to prevent the people
from pursuing their natural selfish motives of amassing wealth for themselves
instead of enriching their country. They even believe that people should be
forced to be patriotic and submit themselves to regulation. Mercantilists go to
the extent of prohibiting people from purchasing luxury items because this
would mean a large amount of money flowing out of the economy.
Mercantilism is now considered as extinct while capitalism is the more popular
system adopted by many economies all over the world.