What is Mercantilism?

Definition: Mercantilism is an economic system that proposes that a nation’s wealth increases by having surplus in the balance of trade. It is a concept also known as commercialism, which is based on the belief that a country should encourage exports but at the same time to limit imports with the aim of driving economic growth.

What Does Mercantilism Mean?

Mercantilism used to be a popular economic system for a long time until the 18th century, namely in European countries like England and France. It substituted feudalism and assumed that the best way to increase nation prosperity was to accumulate gold and precious metals in hands of the state. This would be possible by maximizing exports, imposing high barriers to imports and encouraging economic self-sufficiency. Stocks of gold also meant powerful governments that invigorated nationalism and colonialism.

Under mercantilism, the State had strong intervention in the economy. But this system proved to be disadvantageous because some important elements to guarantee sustainable well being were undervalued, such as education, investment and specialization.

On the other hand, self-sufficiency was not a feasible option for small nations. Although it is now considered an outdated, inappropriate system, some mercantilist arguments tend to arise from time to time. Nationalism and protectionism are ideologies that still appear despite the fact that market freedom is nowadays the prevalent economic system in most prosperous countries.

Example

An African country that suffers high poverty rates held presidential elections in recent days. After a decade of liberalist policies, the new president enforced some mercantilist ideologies. He argued that foreign nations were taking advantage of the country through its massive imports.

Therefore he imposed high import tariffs to promote local production and gradually increased government intervention on prices and production. Some domestic industries were benefited but most of the importers had to close. Citizens faced a narrower range of products while some sophisticated goods became too expensive and disappeared from market. Some local producers increased sales but did not face enough competition. As a result, they operated with severe inefficiencies and prices remained high.