Definition of Mercantilism, History, & Economic Theory

Definition of Mercantilism, History, & Economic Theory –¬†an economic theory that believes that the prosperity of a country is only determined by the amount of capital or assets stored in that country and the amount of international trade carried out by that country. Mercantilism also includes national economic policies aimed at accumulating foreign exchange reserves through a positive trade balance, especially in manufactured goods. For those of you who are business people or are engaged in economics, understanding the economics of mercantilism is important.

Well, discussing mercantilist is closely related to the capital or wealth of the country which is clearly explained by the amount of capital (precious metals, especially gold and other commodities) owned by the state. In addition, this wealth increases exports to obtain a balance of trade with other countries by reducing imports.

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It is always considered positive. Mercantilism teaches that in this case the government must achieve its national goals by protecting the economy, encouraging exports and reducing imports (generally by imposing high tariffs). Economic policy in this sense is called the economic system of mercantilism. Then what is the understanding, history, and impact of the theory of mercantilism in the economy of a country? Here is the full explanation:

Definition of Mercantilism

Definition of Mercantilism, History, & Economic Theory

The term Mercantilism comes from the English word Merchant which means merchant. This means that in understanding the theory of mercantilism, if every country wants to progress, it must trade with other countries. As a result, the source of the country’s wealth can be obtained from a surplus of foreign trade in the form of gold or silver. With contacts with other countries, there will also be time policies that encourage export activities and also limit imports so that international trade can run healthy.

Mercantilism is an economic theory which states that the prosperity of a country is determined by the amount of investment or assets it owns and the size of its foreign trade. The concept of mercantilism was explained by prominent thinkers such as the French philosopher Jean Bodin. Jean Bodin discusses the theory of money and prices increasing due to taxes on imports from abroad and the taxes that need to be issued. As one of the large economic systems, many scientists and experts argue about the practice of mercantilism theory.

One of them was Thomas Mann, who was a British trader and discussed the trade surplus theory that income from a trade surplus or higher can make a country economically prosperous. Jean-Baptiste Colbert, a French civil servant and Minister of Economy and Finance, spoke about how important the position of a merchant is and how merchants and rulers or governments can work together to advance the country’s economy. Sir William Petty was an English economist, scientist and philosopher who studied economic theory and political arithmetic, labor theory and currency theory.

In addition, there is Scottish-born David Hume discussing the theory of prices, which states that prices are influenced by the quantity and quantity of goods. Mercantilism means that the state plays an active role in the economy and directly intervenes in the functioning of the economy. Before economic thinkers discuss mercantilism, we must first know what mercantilism is. As mentioned earlier that mercantilism is a theory that the welfare of a country is determined by the amount of assets owned by the country or the capital owned by the country, and the amount of foreign trade is also very important.

According to this merchant’s understanding, all countries want to progress, one of which is to carry out foreign trade which can increase their income and the money generated will become a trade surplus. Saves a lot of money and then saves money that is used in the production of goods and then exported. In addition, some thinkers, such as the French scientist Jean Bodin (1530-1596), discussed mercantilism systematically or in detail discussing the theory of money and prices.

Then Thomas Mun (1571-1641) considered that a prosperous merchant from England who discussed his foreign trade experience and the problems that often arise in foreign trade. Jean-Baptiste Colbert (1691-1683), a French civil servant who served as Minister of Economy and Finance, discussed his policy of national power and glory working with businessmen to increase personal wealth.

Sir William Petty (1623-1687), an English economist, scientist and philosopher also discussed the importance of labor, not land resources, to improve a country’s domestic economy in relation to the practice of mercantilism. Scottish-born and friend of Adam Smith, David Hume (1711-1776), in his book Trade Balance, explains that prices are in part influenced by the quantity of money and commodities in circulation.

Mercantilism Theory

Today, all European economists from 1500 to 1750 are considered mercantilists, but the term mercantilism was not known at that time. This term was first introduced by Victor de Riqueti and Marquis de Mirabeau in 1763 and popularized by Adam Smith in 1776. The term mercantilism was first introduced in 1763 by Victor de Riqueti and in 1776 by Marquis Mirabeau Smith.

Historically, Adam Smith first mentioned the contribution of mercantilism to economics in his book The Wealth of Nations. The word mercantilism itself comes from the Latin word Mercari which means barter. It is rooted in the word brand, which means product. The term mercantilism was initially used only by critics such as Mirabeau and Smith, but was later used and adopted by historians.

The background for the emergence of the theory of mercantilism is often seen in politics that led to war and is also motivated by the expansion of colonies. Mercantilist economic theory in its application today varies greatly from author to author and has evolved over time. The policies that exist in the mercantilist economic system include:

  • Establishment of overseas colonies
  • High tariffs are imposed on finished products
  • Optimizing the use of domestic resources
  • Export of gold and silver, including payment methods, is prohibited
  • Colonies are prohibited from doing business with other countries
  • Dominate the market in major ports
  • Limiting wages
  • Issuing export subsidies
  • Ban on foreign ship trade
  • Promotion of the manufacturing industry through research and direct subsidies
  • Limiting domestic consumption through non-tariff barriers to trade

The main purpose of the concept or theory of mercantilism is to build a nation, especially in times of constant war, where nations must find ways to strengthen their economies and weaken foreign enemies.

History of Mercantilism

The concept of this mercantilism theory first appeared around the 18th century with an economic understanding that showed the welfare of a country. The teachings of mercantilism were dominantly taught in European schools from the early 16th century to the 18th century, the era of the booming economy of mercantilism. At that time the awareness of the state was quite high in society. The emergence of mercantilism as an economic system has made a country’s intervention to regulate its economy even greater.

The emergence of mercantilism was due to the high awareness of the state of the people since the birth of modern independent countries in Europe, such as Germany, France, England, Italy, and the Netherlands. In order to maintain the sovereignty of independence and the welfare of its people, the country must have a stable and strong economic condition in order to survive.

The policy that emerged during the mercantilism era was to ignore the agricultural sector which resulted in various criticisms. The main idea behind the concept of mercantilism is the trade balance, the mechanism of the flow of precious metals, the theory of the quantity of money and protection against it. From the three main points of view of economics, it becomes centered on the doctrine of mercantilism, namely the result of a trade balance that must be profitable.

Based on one doctrine of mercantilism, a country’s foreign exchange earnings will be determined from the following:

  • Export goods
  • service export
  • precious metal export
  • Capital imports are not only in the form of investment from abroad, but also a form of profit from investment
  • abroad and other forms of loans

Meanwhile, foreign exchange spending takes the form of imports of goods, imports of services, imports of precious metals, and exports of capital.

The beginning of the concept of this theory is to assume that countries that want to become developed countries need to establish trade cooperation with other countries. With the concept of foreign trade in mind, creating a group of merchants who have an important position.

As a result, the cooperation between merchants and power becomes more massive, so that both of them support each other and have more privileges such as monopoly, protection, or other forms of privilege. In the 17th century AD until the 18th century AD became an era called commercial capitalism or merchant capitalism in Europe. When the mercantilism economy developed, several European countries that adhered to the theory of mercantilism were England, France, Portugal, the Netherlands, and Spain.

In that era, the development of mercantilism’s economic thought developed rapidly, starting in terms of quality and quantity. This era is a period in which each individual becomes an economist for themselves.

Characteristics of a Mercantilism Economic System

When entering the renaissance era and the development of mercantilism in Europe, precious metals became a measuring tool for the welfare, wealth, and power of a country. This means that the more precious metals an imperialist country has, the richer and more powerful that country will be. The following are the characteristics of a mercantilism economic system:

  1. The state is the only form of rulership of an economy
  2. Obtain as much precious metal as possible and that becomes the main thing
  3. Focus on a surplus trade balance which is a form of gaining large profits from foreign trade
  4. There are policies that can support the sustainability of the economic mercantilism system, such as:
  • Creating colonies outside of their parent country
  • Prohibit the blood or the colony from trading with other countries, especially rival or rival countries
  • There is a market monopoly that maximizes the role of the main ports as part of the main economic activity
    Forbidding the colonies to export gold and silver, even as a means of payment
    Prohibit trade commodities from being carried on foreign ships
  • Create export subsidies, namely subsidies that the government bears the burden of costs on companies when exporting goods abroad. The purpose of this policy is so that exporting parties can sell their goods abroad at lower prices, so that economic conditions become competitive
  • Promoting various manufacturing industries through research or research on subsidies directly by the government which is useful for increasing production results
  • Limiting the wages of workers whose aim is to reduce state and company spending so that profit is maximized
    Maximizing the use of domestic resources with the aim of reducing the cost of importing goods because
  • imports can increase a country’s spending
  • Limiting domestic consumption through non-tariff trade barriers, where the state tries to prevent the entry of
  • imported goods through various policies where the policy is not an import customs tariff

Impact of Mercantilism

This mercantilist theory was widely taught in all European schools in the early modern period (18th and 19th centuries) when national consciousness was beginning to develop. This event first triggered the intervention of the state that regulates its economy, and finally the capitalist system was born in this era. The market needs taught by the theory of mercantilism eventually led to many wars between European countries.

Finally the era of European imperialism has begun. Mercantilist economic theory began to disappear in the second half of the 18th century with the emergence of a new economic theory by Adam Smith. There are several countries that use this theory. France was one of the most important economies in Europe at the time. Louis XIV of France argued that the state should rule in the economic sphere, as in diplomacy.

In addition, the interests of the state take precedence over those of merchants and others, as appointed by the King. The goal of mercantilist economic policy was to build canyons, especially during times of intense war, and countries had to find ways to strengthen their economies and weaken foreign enemies.

Well, that’s an explanation of mercantilism, starting from its understanding, history, purpose, impact, and a complete explanation of economic theory.

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