Understanding Mercantilism, History, & Economic Theory

Mercantilism is 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 that aim to accumulate foreign exchange reserves through a positive trade balance, especially in manufactured goods. For those of you who are one of the business people or move in the economic field, understanding the economics of mercantilism is important.

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

It is always evaluated positively. Mercantilism teaches that in this case the government should 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 mercantilism economic system. Then what is the meaning, history, and impact of mercantilism theory in the economy of a country? Here is the full explanation:

Meaning of Mercantilism

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

Mercantilism is an economic theory that 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 increase due to import taxes from abroad and the taxes that need to be issued. As one of the big economic systems, many scientists and experts think about the practical theory of mercantilism.

One of them is Thomas Mann who is a British merchant and discusses the theory of trade surplus that income from trade surplus or higher can make the 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 discussed economic theory and political arithmetic, labor theory and currency theory.

In addition, David Hume, who was born in Scotland, discusses the theory of prices, which states that prices are affected by the quantity and amount 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, mercantilism is a theory that the well-being 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 doing foreign trade that can increase their income and the money produced will be a trade surplus. Save a lot of money and then keep the 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), discuss mercantilism which systematically or in detail discusses the theory of money and price.

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 strength and success working with entrepreneurs 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 the domestic economy of a country in relation to the practice of mercantilism. Scottish born and Adam Smith’s friend, David Hume (1711-1776), in a book called Trade Balance, explains that prices are partly influenced by the amount of money and commodities in circulation.

Theory of Mercantilism

Today, all European economists from 1500 to 1750 are considered mercantilists, but the term mercantilism was not known at that time. The 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.

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

The background of the emergence of the theory of mercantilism is often seen in the politics that cause war and also in the background of the expansion of colonial territories. Mercantilist economic theory in its current application varies greatly from writer to writer and has evolved over time. The policies in the mercantilist economic system include:

  • Establishment of colonies abroad
  • 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
  • Dominating the market in the main ports
  • Limiting wages
  • Issuing export subsidies
  • Prohibition of 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 continuous war, where nations must find ways to strengthen their economy and weaken foreign enemies.

History of Mercantilism

The theoretical concept of mercantilism first appeared around the 18th century with an economic understanding that shows the well-being 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 rapid economic growth of mercantilism. At that time, national consciousness was quite high in the community. The emergence of mercantilism as an economic system has made the intervention of a country to organize its economy even bigger.

The emergence of mercantilism is due to the high national consciousness of the people since the birth of the first independent modern countries in Europe, such as Germany, France, England, Italy, and the Netherlands. In order to be able to defend the sovereignty, independence and well-being of its people, the country must have a stable and strong economic condition in order to survive.

The policy that emerged during mercantilism was to ignore the agricultural sector which resulted in various criticisms. The basis of the concept of mercantilism is the balance of trade, the flow mechanism of precious metals, the theory of the quantity of money and protection against it. From the three principles of economic thought, it became centered on the doctrine of mercantilism, which is the result of a trade balance that should be profitable.

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

  • Export goods
  • export services
  • precious metal exports
  • Capital import which is not only in the form of investment from abroad, but also in the form of profit from investment abroad and other forms of loans

Meanwhile, foreign exchange spending forms such as import of goods, import of services, import of precious metals, and export of capital.

The beginning of this theoretical thinking concept is to consider that a country that wants to become a developed country needs to establish trade cooperation with other countries. With the concept of foreign trade in mind, create a merchant group that has an important position.

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

It was during that period that the development of mercantilism’s economic thought developed rapidly, starting from both quality and quantity. This era became a period where each individual became an economist for themselves.

Characteristics of Mercantilism Economic System

When entering the renaissance era and the development of mercantilism in Europe, precious metals became a measuring tool for prosperity, wealth, and power for a country. This means that the more precious metals an imperialist country owns, the richer and more powerful that country becomes. Here are the characteristics of a mercantilism economic system:

  1. The state is the only form of ruler of an economy
  2. Get as much precious metal as possible and that becomes the main thing
  3. Focus on a surplus trade balance which is a form of obtaining large profits from foreign trade
  4. There are policies that can support the sustainability of the economic mercantilism system such as:
    • Make colonial countries outside their sovereign countries
    • Prohibiting blood or colonial countries from doing trade 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 activity of the economy
    • Forbids colonial countries to export gold and silver, even as a means of payment
    • Prohibits trade commodities to be carried in foreign ships
    • Making export subsidies, ie subsidies whose cost burden is borne by the government on companies when exporting goods abroad. The purpose of this policy is for the exporting party to be able to sell its goods abroad at a cheaper price, so that economic conditions become competitive
    • Carry out promotions in various manufacturing industries through research or directly subsidized research by the government which is useful to increase production results
    • Limiting the wages of workers whose purpose is to suppress the production of the country and companies so that the acquisition of profits becomes more maximal
    • Maximizing the use of domestic resources that aims to reduce the cost of importing goods because imports can increase a country’s production
    • Limiting domestic consumption through non-tariff trade barriers, where the country tries to prevent the entry of imported goods through various policies where the policy is not an import customs tariff
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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 began to develop. This event first triggered the intervention of the state that regulated the economy, and finally the capitalist system was born in this era. Market needs taught by the theory of mercantilism eventually caused 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 thought that the country should rule in the economic field, as in the case of diplomacy.

In addition, the interests of the country are prioritized above the merchants and others, as indicated by the King. The purpose of mercantilist economic policies was to build a canyon, especially during times of intense war, and countries had to find ways to strengthen their economies and weaken foreign enemies.

Well, that’s the explanation of mercantilism, starting from the meaning, history, purpose, impact, and explanation of the complete economic theory. Learning about economic theory certainly requires a lot of references because of the wide scope of scientific research. To start learning it, Reader can start from basic reference sources, such as an introduction to economics, and the application of economic theory in general. Reader can visit the Sinaumedia book collection at www.Sinaumedia.com or www.ebooksSinaumedia.com , such as the following book recommendations about economic theory: Happy learning. #SahabatTanpabatas.

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