Mercantilism

Adam Smith, author of An Inquiry into the Nature and Causes of the Wealth of Nations (1776; commonly known as The Wealth of Nations)—a text largely considered to be the foundation of modern economics—is documented as the first to use the term “mercantile system.” Smith used the term to refer to an economic policy designed to enrich a nation by increasing exports and decreasing imports. The model had become the dominant system and philosophy among internationally expanding Western European powers during the sixteenth and eighteenth centuries. Countries practicing mercantilism sought to create a beneficial balance of trade with two purposes: attracting commodities like gold and silver and increasing domestic employment. Unlike the traditional agriculture-based system, mercantilism disproportionately benefitted merchants and consortiums of merchants such as the British East India Company. Tariffs and quotas on imported goods protected domestic commercial ventures and provided industry and commerce with various economic incentives.

Background

One of the most important economic purposes of mercantilism, besides building an ideology of economic nationalism that buttressed the nation-state and its merchants, was the breakdown and absorption of feudal power centers by centrally governed nation states. Other influential factors were the establishment of European colonies in continents such as Africa, Asia, and the Americas; the shift from an agricultural to an industrial economy; the worldwide expansion of European trade, commerce, and industry; and the shift from the traditional barter system to the use of gold and silver currency systems.

Regular and widespread military conflict was a defining feature of the mercantilist era. Armies became full-time professional battalions, as opposed to temporary forces raised among the peasantry to respond to specific threats, as occurred under feudalism. Governments increasingly needed more gold and silver for the upkeep of military forces meant to protect their commercial and territorial expansion. Armies were also meant to defend the nation from the expansionist objectives of other nation-states, such as France under Napoleon I. In consequence, international policies were strongly influenced by the relationship between the governments and their merchant classes. These policies took many forms, such as tax exemptions, capital grants, and favorable loans; the establishment of monopolies in local markets and the colonies; and the imposition of tariffs on imports.

Because of the expansion of the colonies and the need to ship raw materials and other products from the colonies to Europe, shipping became a cornerstone of the mercantilist era. Increased shipping activity brought on the development of merchant marines, created so that ships could be used for both market and military purposes. Forms of government protectionism in the shipping world abounded. In France, the government provided financial incentives to shipbuilders, and in Britain, foreign ships were forbidden from engaging in trade along British coasts as well as between England and its colonies—Britain required that all imported products be carried on British vessels. Other European powers engaged in similar practices.

Overview

The mercantilist era largely gave way to the laissez-faire, or free-market, ideology. In his work, Smith developed the concept of laissez-faire, or noninterference, a term reportedly coined by Vincent de Gournay, and critiqued the mercantilist model. Smith rejected the notion that a nation’s wealth was dependent upon the richness of its treasury. He also argued that free trade, as opposed to mercantilism, benefits all parties. Moreover, he posited that the collusions between governments and merchants actually worked to the detriment of the general public. Mercantilism was meant to favor the government and the merchant class. Thus, Smith developed the laissez-faire model, in which he interpreted a new economy that took into account the well-being of the entire population. He proposed a relatively limited role for government, one in which it did not interfere with commerce unless it was to protect private property, provide security to the citizenry, give legal recourse via the court system, or build and maintain infrastructure, such as roads and bridges.

It was not only the inception of the new laissez-faire model that ended the mercantilist period, but also the incapacity of governments to enforce the restrictive policies they created—for example, they could not realistically stop the smuggling that its trade prohibitions provoked. Other factors that adversely impacted mercantilist practices were the formal independence of the United States and the end of the Napoleonic Wars in Europe. The relative peace that followed these events also ended the strong militaristic ideology that bolstered European mercantilism. By the 1860s, England, the most powerful mercantilist nation, eliminated regulations and tariffs, began to enact free-trade policies, and became the foremost economic power in Europe. However, in time, the emergence of the United States as a world power, and England’s success as an industrial power, led to the reestablishment of some protectionist measures and the competitive armament race between England, France, and Germany in the lead-up to World War I. Protectionist measures remained popular between both world wars.

Mercantilist policies experienced a resurgence post–World War II for a number of reasons. The Great Depression, for example, caused many to become disillusioned with the laissez-faire model. The policies of John Maynard Keynes, a British economist, considered markets irrational and unstable, and envisioned a new role for government in control of the economy. His views, in which the government played a central role in incentivizing the markets, were widely adopted in the United States after World War II and are credited with the period of postwar prosperity in the country. European governments, meanwhile, restricted imports and in general, significantly restricted the volume of trade among European countries. Some experts argue that these measures slowed postwar recovery in Europe. The economy of the United States, on the other hand, grew exponentially, providing decades of stability, which helped the nation and the rest of the world to enter an era of growth and economic prosperity.

Bibliography

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O’Malley, Gregory E. Final Passages: The Intercolonial Slave Trade of British America, 1619–1807. U of North Carolina P, 2016.

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