Mercantilism

Mercantilism, economic policy prevailing in Europe during the 16th, 17th, and 18th centuries, under which governmental control was exercised over industry and trade in accordance with the theory that national strength is increased by a preponderance of exports over imports. Mercantilism was characterized not so much by a consistent or formal doctrine as by a set of generally held beliefs. These beliefs included the ideas that exports to foreign countries are preferable both to trade within a country and to imports; that the wealth of a nation depends primarily on the possession of gold and silver; and that governmental interference in the national economy is justified if it tends to implement the attainment of these objectives. The mercantilist approach in economic policy first developed during the growth of national states; efforts were directed toward the elimination of the internal trade barriers that characterized the Middle Ages, when a cargo of commodities might be subject to a toll or tariff at every city and river crossing. Industries were encouraged and assisted in their growth because they provided a source of taxes to support the large armies and other appurtenances of national government. Exploitation of colonies was considered a legitimate method of providing the parent countries with precious metals and with the raw materials on which export industries depended.

Mercantilism, by its very success in stimulating industry and developing colonial areas, soon gave rise to powerful antimercantilist pressures. The use of colonies as supply depots for the home economies, and the exclusion of colonies from trade with other nations produced such reactions as the American Revolution, in which the colonists asserted their desire for freedom to seek economic advantage wherever it could be found. At the same time, European industries, which had developed under the mercantile system, became strong enough to operate both without mercantilist protection and in spite of mercantilist limitations. Accordingly, a philosophy of free trade began to take root. Economists asserted that government regulation is justified only to the extent necessary to ensure free markets, because the national advantage represents the sum total of individual advantages, and national well-being is best served by allowing all individuals complete freedom to pursue their economic interests. This viewpoint received its most important expression in The Wealth of Nations (1776) by the Scottish economist Adam Smith.

The free-trade system, which prevailed during the 19th century, began to be curtailed sharply at the beginning of the 20th century in what has been called a revival of elements of mercantilist philosophy, or neomercantilism. High protective tariffs were reintroduced, and for political and strategic reasons, great emphasis was put on national self-sufficiency as opposed to national interdependence and a free flow of trade.

See also Free Trade.