A School of Thought prevailed in Europe from

16th to 18th century

The background for Mercantilism
The Renaissance : The re-birth or beginning of interest
and activities in art, literature and ideas during 14th, 15th
and 16th centuries – age of reasoning – increasing
inquisitiveness led to materialism – institution of
private property and contract rights
Protestantism : Weakening of loyal and blind
obedience gave rise to more reasoned arguments
Feudalism was gradually replaced by commercial
capitalism- led to changes in production and exchange
Concept of nation-states evolved with their own
defensive/armed strength
Emerging of Mercantilism
Co-incidence of economic interests of merchant
class and political interests of the state
Agriculture was replaced by industries resulting in
trade and in turn use of money in form of gold,
silver etc.
Improvements in science and technology like
compass and printing press opened up new
countries and new markets
Economic counterpart of political views of
Machiavelli and Jean Bodin
Objectives of Mercantilists
To make a country strong with the help of wealth
consisting of precious metals which attached
importance to Bullions ; the most durable and
acceptable form of wealth
To have a favorable balance of trade that is excess of
exports over imports
To enhance trade with the highest priority followed
by industry and commerce and then by agriculture
To offer a larger role to state to augment and exploit
natural resources to increase exports
What is Mercantilism?
It is the economic theory and practice common in
Europe from the 16th to the 18th century.
Closely associated with trade and commerce.
According to Gray, mercantilism was conditioned by
two things: perpetual neediness of government and
effect of discoveries of precious metals and their
inflow on European economies
It promoted governmental regulation of a nation's
economy for the purpose of augmenting state power
at the expense of rival national powers.
Mercantilism Continued
Aspirations of rising merchant capitalists to whom strong
state was a necessary institution for their protection
An interest in foreign trade – acquisition of precious
metals – military strength and power of a country
It was the economic counterpart of political absolutism.
Its 17th century publicists, most notably Thomas Mun in
England, Jean Baptiste Colbert in France, and Antonio
Serra in Italy, never used the term Mercantilist to describe
themselves.
This name was given to them by the Scottish economist
named Adam Smith in his Wealth of Nations (1776).
 A Nine-Point Mercantilist Manifesto:
Philipp von Hornick (Austria), 1684.
 Extensive use of the soil to produce agricultural products.
 All commodities found in the country that cannot be used in their
natural state should be worked up within the country.
 Promote large population.
 Gold and silver not to be taken out of the country.
 Inhabitants should make every effort to get along on their domestic
products.
 Foreign products to be obtained in exchange for domestic goods, not
gold and silver.
 Goods should be imported in unfinished form, then worked up within
the country.
 Seek opportunities to sell the country's superfluous goods to foreigners
in manufactured form.
 Allow no imports of which there is a sufficient supply of suitable quality
at home.
Mercantilism’s Principles
Precious metals, such as gold and silver, were deemed
indispensable to a nation's wealth.
If a nation did not possess mines or have access to them,
precious metals should be obtained by trade.
It was believed that trade balances must be “favourable,”
meaning an excess of exports over imports.
Colonial possessions should serve as markets for exports
and as suppliers of raw materials to the mother country.
Manufacturing was forbidden in colonies, and all
commerce between colony and mother country was held
to be a monopoly of the mother country.
Specie Flow Mechanism
Continuous favourable trade balance would result into
the following (equation of exchange implicit)
 Inflow of gold—raise domestic prices.
 Higher prices made imports attractive, domestic goods
unattractive, & therefore more difficult to export.
 Thus, selling dear and buying cheap tends to increase
imports and decrease exports, which in turn, creates an
unfavorable balance of trade against a country.
 To pay for this unfavorable balance of trade, the
country loses specie
Because of the specie-flow mechanism, a long term
surplus cannot exist.
The Dictates of Mercantilism
Human wants were to be minimized, especially for
imported luxury goods since they drained off
precious foreign exchange.
Sumptuary laws (affecting food and drugs) were
passed to ensure that wants were held low.
Thrift, saving, and even parsimony were regarded as
virtues. Only by these means could capital be created.
In effect, mercantilism provided the favourable
climate for the early development of capitalism, with
its promises of profit.
Leading

Features of Mercantilism
Maintaining a surplus in the balance of trade and
accumulating gold were the keys to prosperity.
Bullion and treasure were the essence of wealth.
Regulate foreign trade to maximize social welfare
Promote industry—import cheap raw materials but not
food materials.
Promote colonialism.
Place heavy tariffs on imported manufactured goods.
Encourage exports of manufactured goods.
Increase population and keep wages low.
State intervention is essential to solve problems of society
and enjoy success in wars- power of state to increase with
policy of protection
Criticisms of Mercantilism
Too much importance to gold and silver
Overemphasized commerce, trade but undermined agriculture
Wrongly believed in the concept that favourable trade only
leads to prosperity of a country
Lacked universal applications due to lack of scientific system of
thought
Assumed wrongly that in a foreign trade when one country
gains, the other loses- a mutually advantageous trade is possible
between countries
Adverse effects of continuous favourable trade were ignored by
many mercantilists except Thomas Mun.
To conclude it was a temporary and short-term policy which
can not be undermined as it provided strong basis for
capitalism