Mercantilism: Concept, Factors and

Characteristics
Article Shared by Samia Rekhi

In this article we will discuss about Mercantilism: - 1. Concept of Mercantilism 2.

Concept of Mercantilism:

The dominant system of economic thought that prevailed in Europe from 16th to 18th
Century was Mercantilism. It was known by different names in different countries. In
England it was called as commercial system or mercantile system because it emphasised
the importance of commerce and free trade. It was also known as “Restrictive system”
because its practical policies consisted of numerous restrictions and regulations on
commerce.

In France it was known as “Colbertism” after the name of Colbert, the Finance Minister of
Louie the XIV. In Germany and Austria it was called “Cameralism”. It was also known as
“Bullionism” because of the importance given to gold and silver.

Factors Shaping Mercantilism:

Some economic, political, religious and cultural factors were responsible for the emergence
of mercantilism.

1. Economic Factors:

Towards the end of the 15th century changes were taking place in the economic life of the
people. Domestic economy was giving way to an exchange economy. Agriculture was
giving place to industry. Trade became very important and it changed the foundation of
socio-economic set-up of the middle ages.

Trade necessitated the use of money which was available in the form of gold and silver.
Along with the expansion of commerce there were improvements in transport, agriculture,
population, etc., so the Mercantilist thought was the outcome of these developments.

2. Political Factors:

Towards the end of the middle ages nationalism became the strong force. Europe changed
greatly due to Renaissance. As a result, there was a fundamental political change. It
resulted in the emergence of strong nations like England, France, Spain, etc., Feudalism
came to an end and the King became more powerful. Each nation wanted to preserve its
independence and considered other nations as enemies. In order to create a strong and
powerful state the Mercantilists tried to regulate the political and economic activities of the
people.

3. Religious Factors:

The Reformation Movement was revolt against Roman Catholic Church. It challenged the
authority of Pope. Initially the Roman Catholic Church controlled the political and
economic activities of the nation. But after the Reformation the authority of the Pope was
challenged.

4. Cultural Factors:

Culturally also Europe was undergoing a sharp change. Renaissance gave a new light of
learning to the people. People were made to realise that this worldly life was more
important than the heavenly life. As a result, money came to occupy an important place in
human activities.

5. Scientific Factors:

In the field of science and technology great improvements and inventions were made. The
discoveries of compass and printing press were of great importance, with the help of
compass navigation became easier and it led to the discovery of new countries. Thus new
countries opened the gates to a variety of raw materials and markets. The invention of
printing press helped the spread of new ideas and knowledge.

Thus all the above factors provided an atmosphere for the development of
Mercantilist thought:

1. The fundamental aim of Mercantilism was to make a country strong. The strength of a
country was tested with the help of the wealth of the country, above all, in that portion of
wealth which consisted of precious metals like gold and silver. So the Mercantilists
attached greater importance to bullion (gold) because it was the most durable, useful and
generally acceptable form of wealth.

2. If a country has gold mines and silver mines, it can get gold and silver but if a country
has no mines, it can get gold and silver through trade. The country should have a favorable
balance of trade. In other words, there should be an excess of exports over imports.

3. In the Mercantilist system of thought trade was the most important occupation. Industry
and commerce were ranked second in importance. Agriculture was the least important of
all. The state had an important role to play in the Mercantilist system. It should come
forward to exploit the natural resources of the country to increase its exports. There was
regulation of economic life by the government.

Main ideas or Characteristics of Mercantilism:

The fundamental aim of the mercantilists was to make the country strong. The strength of
the country was found in the wealth of the country, especially that portion of wealth which
consisted of precious metals like gold and silver.

Mercantilism firmly believed that gold was the basis of wealth and power. Hence the
mercantilist slogan was ‘more gold, more wealth and more power’. All the economic
activities in the country were centred around wealth. According to Gray, “Everybody
thought that his country was engaged in a race with other countries and in that race it must
not be the looser”.

In this respect it seems that the mercantilists should have drawn inspiration from their
predecessors because in ancient Greek and Roman and throughout the middle ages power
was considered to be synonymous with accumulation of treasure or precious metals.
Commerce was also encouraged on the same ground. To quote Columbus “Gold is a
wonderful thing; whoever possesses it, is a master of everything he desires; with gold one
can get souls into paradise”.

This greatest importance given to precious metals may be attributed to the following
reasons:

(i) In the 16th century, the only form of wealth, most useful and generally acceptable was
gold and silver. Naturally the mercantilist attached more importance to gold and silver.

(ii) With the rise of absolute monarchy, taxation could be possible only if money was used
as measure of value. Thus on the political side also money came to occupy greater
importance.

(iii) For conducting wars money was essential. Three things were required for war—
money, more money and still more money.

(iv) Mercantilists believed that trade depended on plentiful of money.

(v) Money was also needed for development of exchange economy.

(vi) Money in those days was identified with capital.

Thus the Mercantilists had a high regard for money. If we consider the circumstances of the
day, Mercantilists were justified in attaching greater importance to gold. According to
Keynes, “the Mercantilists understood the important role of money in the economic system.
They studied the effects of an increase in the quantity of money on the price level and
employment.”

2. Foreign Trade:
The Mercantilist theory of foreign trade is known as the balance of trade theory. The aim of
this theory was to get large amount of precious metals. Foreign trade was considered to be
the only Source for getting gold and silver. They believed that all those nations which did
not possess their own gold and silver mines could become rich after getting gold and silver
from foreign countries through trade.

Sir Thomas Mun the greatest representative of Mercantilist declared that, “foreign trade
ought to be encouraged, for, upon it hinges the great revenue of the King, the honour of the
kingdom, the noble profession of the merchant, the supply of our poor, the improvement of
our lands and means of our treasure”.

The mercantilists insisted that the value of export should always be greater than imports. In
short, they advocated a favourable balance of trade. Hence they encouraged exports and
discouraged imports. “Export more, import less and collect the balance in the form of gold
and silver”, was the essence of this theory. Accordingly every exporter was considered to
be a close friend of the state and every importer as an enemy.

However, the mercantilists theory of foreign trade has no validity in modern times. If every
nation exports more, there would be an end to international trade. Further, the mercantilists
did not distinguish between particular balance of trade and general balance of trade. By
general balance of trade we mean balance of the country’s trade with other countries and
particular country.

Further, the mercantilists were ignorant of the fact that favourable balance of trade cannot
be maintained for ever because if gold comes into a country more and more, there would be
inflation. Thus the mercantilist theory of foreign trade is not a correct one.

3. Commerce and Industry:

The mercantilists considered commerce and industry as the most important branches of the
national economy. They wanted to increase the national productive efficiency by means of
regulation of industry and commerce. They believed, that commerce and trade were the
most productive occupation and agriculture was the least productive.

Further, as they believed that manufacturing industries were more closely connected with
commerce, they must receive all attention from the government. However, it should not be
misunderstood that the mercantilists regarded agriculture as insignificant. They thought that
agriculture did not contribute directly to the strength of the country.

4. Population:

Mercantilists encouraged large population for making the nation militarily strong and for
increasing its productive capacity. They believed that cheap and abundant supply of labour
would keep the cost of production low.
This would enable a country to sell its commodity at a lower price in the international
market According to Davenant, “People were the real strength of a country”. The
mercantilists even encouraged immigration because they would bring wealth and enrich the
country.

5. Natural Resources:

The mercantilists wanted to utilize all the natural resources to the maximum extent so as to
produce more, export more and import less. They also attached importance to agriculture in
order to solve the food problem. Colonies were developed to supply the required raw
materials. Further, the colonies were not allowed to export directly to foreign countries. All
the commodities should be exported to the mother country only.

6. Wages and Rent:

The mercantilists discussed the problems of production only. So they did not give much
importance to the problems of distribution, especially to wages and rent.

7. Interest:

No unanimity existed among the mercantilist writers on the subject of interest. Sir Thomas
Mun, a famous mercantilist writer favoured interest taking for the loans on the ground that
lending helped the poor and young merchants. It also led to the employment of the savings
of the widows. Thomas Mun and his followers told that the rate of interest would be high or
low depending upon the industrial conditions of the country.

8. Taxation:

The views of the mercantilists on taxation were interesting because they were more
scientific and ahead of their time. Broadly speaking the mercantilists favoured a multiple
tax system based on the principle of “each should pay according to the benefits received
from the state”.

9. Theory of Value:

Regarding value, both subjective and objective approaches existed. Prior to the
mercantilists, value was regarded as an intrinsic quality possessed by a commodity, it
depended upon the utility of the commodity. Value was thus considered to be different
from price. By the end of the mercantilist period, market value was recognised. Scarcity
also determined the value of a commodity. According to the mercantilists the normal value
of a commodity depended on the cost of production.

10. Factors of Production:

Mercantilists recognised three important factors of production, namely, land, labour and
capital. Here we can quote Sir William Petty’s saying “Labour is the father and active
principle of wealth as land is the mother”. The Mercantilists emphasised the cultivation of
agricultural waste lands so that food production might increase and the country might
become self-sufficient and imports might be reduced.

11. Commercial Regulation:

Mercantilists believed that commercial regulations were essential for maximising social
welfare. Commercial laws were passed to restrict the import of food materials. But no
regulation was applied to the import of raw materials because they were required for the
industrial development of the country. The state supported the export industries and
shipping which would secure a favourable balance of trade.

12. Role of State:

The mercantilists regarded the state as the supreme power for controlling the activities of
the people. State was the master and its citizens, the servants. The mercantilists believed
that state intervention was necessary to solve the problems of the society. They believed
that for securing success in wars a strong nation was required.

Nearly, all the mercantilist writers believed that since the total economic resources of the
world were limited, the economic policy must be framed in such a manner as to increase
the power of the state. As a result they suggested the policy of protection.

The state policies were shaped according to this idea. Special acts were passed to encourage
exports and the development of industries. Protection was given to the industries because
their main objective was to maintain a favourable balance of trade.

12. Land Banking Schemes:

Mercantilists ideas regarding money gave rise to the establishment of Land Banking
Schemes. Land Bank Schemes were introduced by Chamberlin and Barbon.

13. Occupation:

Mercantilists believed that merchants were the most profitable members of the society. To
them occupation was productive only if it increased wealth of a country.

Critical Estimate of Mercantilism:

Mercantilist theories and practices have been criticised by many writers. The opposition
actually started towards the end of the 17th century. The storm of criticism against
mercantilism was particularly strong in France. The criticism against mercantilism reached
its climax towards the end of the 18th century when Adam Smith published his book “The
Wealth of Nations”, one fourth of which was devoted to this.
Broadly speaking, the following criticisms have been leveled against mercantilists and
their policies:

(1) They gave too much importance to gold and silver and neglected the importance of
other commodities.

(2) They exaggerated the importance of commerce and undermined the usefulness of
agriculture and other branches of human history.

(3) They were wrong in believing that a favourable balance of trade was the only source of
prosperity.

(4) Their belief that the gain of one nation was necessarily the loss of another was wrong.

(5) Their ideas regarding ‘utility’ and ‘value’ were vague and abstract.

(6) Their ideas about capital and interest were imperfect.

(7) They lacked broad-mindedness.

But at the same time, we should not completely criticize the mercantilist doctrines and
theories. While studying their ideas, one should not overlook the circumstances and
problems of their times. Mercantilism was essentially a product of its age. It is no doubt
true that they erred at places. But as Haney has remarked “they are far from a mass of
absurdities”. Thus the mercantilist system had its own weaknesses.

As an economic policy it lacked universal application. As a body of doctrines, it could not

Mercantilists were not only practical administrators and traders, they also put forward such
ideas which led to the development of various economic theories in modern times. Dr.
Smith has rightly pointed out, “It is the mercantilists and not Smith, who are the spiritual
predecessors of modern economics”. Mercantilism implied a general view of society which
is often overlooked. They developed a sort of macro-economic approach to the problems of
the society.

The mercantilists emphasised the need for maximising exports not only with the idea of
accumulating gold and silver, but with the hope that a prosperous export sector would
provide more employment. Even the emphasis of the mercantilists on more money can be
justified on economic grounds. They were aware of the dynamic functions of money.

An increase in the supply of money would result in lowering the rate of interest which
would serve as an inducement to invest. Knut Wicksell developed his theory of interest
with the mercantilist ideas as the basis. Keynes also admired some of the mercantilist ideas.
The mercantilists were aware of the fact that money is not merely a medium of exchange
but a store of value.

Keynes noted that the mercantilists were concerned with the economic system as a whole
and they were interested in securing optimum employment of the resources. Keynes
approved two mercantilist ideas – more money for business expansion and more money for
lowering the rate of interest.

Mercantilism paved the way for many western nations for their transformation from
‘commercial capitalism’ to ‘industrial capitalism’. The mercantilists ideas are powerful
even today. In the words of Eric Roll, “Down to the present day they all reappear from time
to time in various guises as symptoms and weapons of economic conflict”.

Decline of Mercantilism:

Mercantilism declined due to many reasons. Under the influence of the teachings of Smith,
policy of plenty began to replace the policy of power. The development of banking reduced
the importance of bullion and coins. Further, the expansion of market economy showed that
real estates, factories and machinery were more important items of wealth than gold and
silver.

The economic growth that took place during the Industrial Revolution made the society to
rely on competition. It was realised that the wealth of all nations could be increased
simultaneously by efficient utilisation of natural resources and through the progress made
in science and technology.

https://www.economicsdiscussion.net/mercantilism/mercantilism-concept-factors-and-
characteristics/20980