Topics: International trade, Free trade, Mercantilism Pages: 7 (2436 words) Published: April 30, 2011

Mercantilism is a political and economic system that arose in the 17th and 18th centuries. The definition of this system can be explained as economic nationalism for the purpose of building a wealthy and powerful state. It purports that a country's economic strength is directly related to the maintenance of a positive balance of trade. This theory also claims that a country must export more than it imports. Such a positive balance of trade, according to mercantilist thought, results in a surplus of gold in the practicing country's treasury. Moreover, one of the key assertions of mercantilism is that national wealth will come through the import and accumulation of gold or other precious metals such as silver. Mercantilism as a historical period has been associated with the rise of a particular form of European capitalism often referred to as merchant capitalism. Mercantilism was also a doctrine advanced by various economic writers of the period, who tended to call for a powerful alliance between merchants and the monarchial system, which was then in decline. The term mercantilism is often used today to describe protectionist trade policies which, when coupled with other government policies, directly or indirectly subsidize particular industries in order to gain national or regional trade advantage. What is more, American sociologist, David L. Sills in his work mentioned five essential elements of mercantilism: • Nationalism and policy go hand in hand, with all policy being directed towards nationalism. • Foreign trade should always be thought of in terms of its effect on the country's stock of precious metals. • Lacking domestic gold or silver mines, these precious metals must be accumulated by an excess of exports over imports. • Government trade authorities, through policy, should strive to restrict imports and encourage exports. • Economic foreign policy and political foreign policy should be coordinated toward the achievement of these ends.

As every system mercantilism also had critics. One of the best-known were Adam Smith and David Hume, who later were called as father of anti-mercantilism because he coined the term “mercantile system”. Adam Smith created concept of laissez-faire economy (free trade, free enterprise, free movement of people and goods), which was the opposition to mercantilism. Smith expressed great concern about colonialism and the monopoly trade routes instituted by the merchant class, which often worked against the economic interests of the citizenry. They also created doctrine “the quantity theory of money”, which claims that a positive trade balance implies a positive net flow of money, because more money is coming in than going out. They claimed that we have to raise prices when we want to keep money in circulation.

Mercantilism is economic nationalism for the purpose of building a wealthy and powerful state. Adam Smith coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports. This system dominated Western European economic thought and policies from the sixteenth to the late eighteenth centuries. The goal of these policies was, supposedly, to achieve a “favorable” balance of trade that would bring gold and silver into the country and also to maintain domestic employment. In contrast to the agricultural system of the physiocrats or the laissez-faire of the nineteenth and early twentieth centuries, the mercantile system served the interests of merchants and producers such as the British East India Company, whose activities were protected or encouraged by the state.

The most important economic rationale for mercantilism in the sixteenth century was the consolidation of the regional power centers of the feudal era by large, competitive nation-states. Other contributing factors were the establishment of colonies outside Europe; the...
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