What is mercantilism?

We explain what is mercantilism, what was its origin and the pillars that compose it. Also, how it works and criticism about it.

1. What is mercantilism?

Commercialism means the set of political and economic ideas developed in Europe during the sixteenth, seventeenth and first centuries of the eighteenth century , within the framework of monarchical absolutism.

These ideas proposed a greater intervention of the State in the economy and the taking of a series of measures to protect local production over foreign production , in order to form nation-states as economically robust as possible.

Mercantilism suggested that the wealth of nations was only achievable through a positive trade balance with respect to foreigners, so it was necessary to protect the local economy through strong State measures , leaving behind the economic logic that had prevailed in the West from the Middle Ages: Crematistic

According to the latter, inheritance to the Christian world of the ancient Greek philosophers (Thales of Miletus, Plato, Aristotle), loans and usury were counter-natural, a dehumanizing exercise; judgment in which the Christians agreed, because such conduct incurred the sin of greed.

Mercantilism puts an end to this thought and opens European monarchies to the capitalist system, born in 14th-century Italy. It will be the model in vogue until its crisis at the end of the 18th century, giving way to new physiocratic and liberal economic theories. It is estimated that at the beginning of the 19th century mercantilism had disappeared altogether . Their resurrection attempts are labeled as  neo-commercialism.

2. Origin of mercantilism

As has been said, mercantilism appears to introduce European absolutist monarchies into capitalism , which had already emerged in Renaissance Italy , and will be the prevailing economic theory throughout the Modern Age (16th to 18th centuries).

It will also mark the emergence of nation-states and the Old Regime in Western Europe, opposing the State and its economic control to the spiritual powers of the Catholic Church.

3. Pillars of mercantilism

The pillars of mercantilism were three economic principles, evaluated distinctly by each of the aspects and variants that this model represented in reality. These pillars were:

• The relations between political and economic power . What were once separate instances, began to have a relationship of control and reciprocity. The political power, represented by the absolutist monarchy, assumed its role in the economic conduct of society and decided to undertake the construction of a rich nation-state, which had enough capital for its numerous projects.
• The control of the currency . The unification of the internal market, the increase in population and the privilege of internal production marched to the defense of national capital, more than anything in terms of agriculture , mining and manufacturing. It also sought to have a large and laborious population behind the currency.
• The interference of the State in the economy . The control of exports (the export of raw materials was prohibited, but the rest of the production surpluses were widely exported) and especially of the imports (tariffs, blocked with barriers, hindered except in the case of scarce raw materials in the country), gave the State the wheel of a model of protection of the local economy.

4. How does mercantilism work?

The functioning of mercantilism responds to nine fundamental principles (the nine Von Hornick rules), which were implemented differently and individually in each of the European nation-states, according to their needs and particularities. These principles are:

• The use of the entire national territory for agriculture, mining and manufacturing.
• Dedicate all the country’s raw material to national industries, since manufactured goods are worth more than raw materials internationally.
• Promote an abundant and working population.
• Prohibit exports of precious metals and keep the national currency in circulation.
• Obstacle the importation of foreign goods.
• Import the necessary goods in exchange for other scarce goods and not the payment of gold and silver.
• Limit imports to scarce raw material in the country.
• Sell ​​the surplus of the production manufactured abroad, in payments of gold and silver.
• Do not allow imports of goods produced and available in the country.

5. Criticisms of mercantilism

Mercantilism had numerous detractors, who accused him of not understanding the benefits of trade and comparative advantage . Theorists such as David Hume denounced the impossibility of mercantilism to maintain a favorable trade balance all the time (greater exports than imports) and excessive interest in precious metals such as gold and silver, which monopolized by the State lost their commercial value and owed rather be treated like any other scarce good.

Finally, mercantilism was replaced in the nineteenth century by theories of liberalism and  laissez-faire  proposed by Adam Smith.