In addition, the wartime partnership between government and industry in the United States created a relationship—the military-industrial complex, in Dwight D. In Europe, the shortage of dollars after the war induced governments to restrict imports and negotiate bilateral trading agreements to economize on scarce foreign exchange resources. These policies severely restricted the volume of intra-Europe trade and impeded the recovery process in Europe in the immediate postwar period.
The economic strength of the United States, however, provided the stability that permitted the world to emerge from the postwar chaos into a new era of prosperity and growth.
The Marshall Plan provided American resources that overcame the most acute dollar shortages. The Bretton Woods agreement established a new system of relatively stable exchange rates that encouraged the free flow of goods and capital. Finally, the signing of the GATT General Agreement on Tariffs and Trade in marked the official recognition of the need to establish an international order of multilateral free trade. The mercantilist era has passed. But some mercantilist policies continue to exist.
Agricultural trade is still heavily protected by quotas, subsidies, and tariffs, and is a key topic on the agenda of the ninth Doha round of negotiations. And cabotage laws, such as the U. The Jones Act requires all ships carrying cargo between U. Modern mercantilist practices arise from the same source as the mercantilist policies of the sixteenth through eighteenth centuries. Groups with political power use that power to secure government intervention to protect their interests while claiming to seek benefits for the nation as a whole.
In their recent interpretation of historical mercantilism, Robert B. Ekelund and Robert D. Tollison focused on the privilege-seeking activities of monarchs and merchants. The mercantile regulations protected the privileged positions of monopolists and cartels , which in turn provided revenue to the monarch or state.
According to this interpretation, the reason England was so prosperous during the mercantilist era was that mercantilism was not well enforced. Parliament and the common-law judges competed with the monarchy and royal courts to share in the monopoly or cartel profits created by mercantilist restrictions on trade.
This made it less worthwhile to seek, and to enforce, mercantilist restrictions. Greater monarchical power and uncertain property rights in France and Spain, by contrast, were accompanied by slower growth and even stagnation during this period.
And the various cabotage laws can be understood as an efficient tool to police the trading cartels. By this view, the establishment of the WTO will have a liberalizing effect if it succeeds in raising the costs or reducing the benefits of those seeking mercantilist profits through trade restrictions. Business Essentials. Stock Trading. International Markets. Your Privacy Rights. To change or withdraw your consent choices for Investopedia.
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I Accept Show Purposes. Your Money. Personal Finance. Your Practice. Popular Courses. Table of Contents Expand. What Is Mercantilism? History of Mercantilism. Jean-Baptiste Colbert's Influence. British Colonial Mercantilism. American Revolution Mercantilism. Merchants and Mercantilism. Mercantilism vs. Free Trade vs. Key Takeaways Mercantilism was an economic system of trade that spanned from the 16th century to the 18th century. Mercantilism was based on the idea that a nation's wealth and power were best served by increasing exports and so involved increasing trade.
It also prohibits the emigration of skilled labor, capital, and tools. It doesn't allow anything that could help foreign companies. In return, businesses funnel the riches from foreign expansion back to their governments. Its taxes pay for increase national growth and political power. Mercantilism was the dominant theory in Europe between and Countries all wanted to export more than they imported. In return, they received gold.
It powered the evolution of nation-states out of the ashes of feudalism. Holland, France, Spain, and England competed on the economic and military fronts. These countries created skilled labor forces and armed forces. Before that, people focused on their local town, kingdom, or even religion. Each municipality levied its tariff on any goods that passed through its borders.
The nation-state began in with the Treaty of Westphalia. The advent of industrialization and capitalism set the stage for mercantilism. This phase strengthened the need for a self-governing nation to protect business rights. So, merchants supported national governments to help them beat foreign competitors. It then plundered their riches as the British government protected the company's interests.
Many members of Parliament owned stock in the company. As a result, its victories lined their pockets. Mercantilism depended upon colonialism as the government would use military power to conquer foreign lands. Businesses would exploit natural and human resources.
The profits fueled further expansion, benefiting both the merchants and the nation. Mercantilism also worked hand-in-hand with the gold standard. Countries paid each other in gold for exports. The nations with the most gold were the richest. They could hire mercenaries and explorers to expand their empires. They also funded wars against other nations who wanted to exploit them.
As a result, all countries wanted a trade surplus rather than a deficit. Mercantilism relied upon shipping. Control of the world's waterways was vital to national interests.
Countries developed strong merchant marines and imposed high port taxes on foreign ships. England required all imports from Europe to come in its own vessels, or in a vessel registered in the country where the goods originated. Democracy and free trade destroyed mercantilism in the late s.
American and French revolutions formalized large nations ruled by democracy. They endorsed capitalism. It purports that a country's economic strength is directly related to the maintenance of a positive balance of trade. That is, in order to remain economically and politically viable 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.
Although not a proponent of mercantilism, noted 18th century Scottish economist Adam Smith was responsible for coining the term "mercantile system. In other words, it went against the precepts of a laissez-faire economy. 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.
Smith was highly critical of this theory of wealth and he clearly understood the class bias in the merchant system that supported it. In fact, 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. Mercantilism as an economic system is generally held in low regard today.
Japan, however, with its structural barriers to foreign competition and its discouragement of foreign direct investment has been accused of practicing a late 20th century form of mercantilism. 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.
Japan, as stated above, is a late 20th century example of such policies. Mercantilism has thus come to be associated with nationalistic economic policies and is shunned by free trade advocates who argue for minimal state interference in the domestic and international marketplace.
The mercantile system advocated various nationalistic trade policies thought to enhance the wealth of the respective nation. This wealth was to be achieved via mercantilism's five essential elements, as noted in the work of writer David L. While most closely associated with 18th century Europe, the term mercantilism has also been used to refer to the general principle of the aggrandizement of state power for the economic gain of its capitalist class by manipulating and controlling trade.
During colonial times, for example, this took the form of military control over trade routes, large tariffs on imported goods especially manufactured products , and outright plundering of colonies in pursuit of gold and raw materials. The rationale for mercantilist practices, aside from the imperatives of empire and colonial conquest, was reflected in 18th century notions of the origin of profit and the nature of exchange.
From a merchant's perspective, profit originated from "buying cheap and selling dear. This is in contrast to the sacred belief of marketplace ideology held by classical economists—that exchange should be made on the basis of equivalents. Mercantilists believed, moreover, that the seller gains via the buyer's loss. Therefore, a nation will only become richer if it exports or sells more than it imports or buys. Gold or other "money commodities" will thus be amassed to the benefit of the state.
The view that profit or surplus originates in the unequal exchange of commodities was therefore perfectly consistent with the mercantilist policy of controlling the terms of trade.
Mercantilism played an important but not necessarily dominant role in the transition from feudalism to industrial capitalism. Mercantilism, however, did greatly benefit large merchant enterprises such as the British East India Company, which shipped home goods over trade routes protected and maintained by the state. Foreign trade was thought to be necessary for the accumulation of gold because domestic trade could not generate a net surplus or profit.
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