How did mercantilism work?

Mercantilism was one of the first economic theories that marked the history of economic thought and international politics. This doctrine, which dominated between the 16th and 18th centuries in Europe, emerged in an era of exploration, colonial expansion and significant changes in the global economy. Its main objective was to enrich nation-states through the accumulation of wealth, especially precious metals such as gold and silver, by controlling trade and the economy.

Next, we will explore the key aspects of this doctrine: its origin, fundamental principles, its effects on the economy and politics of the time, as well as its legacy in the development of later economic theories.

Origin of Mercantilism.

The rise of mercantilism is set against a backdrop of change and transformation in Europe. The Age of Discovery brought unprecedented access to far-flung territories and valuable natural resources. Colonial expansion and the creation of international trade routes increased European states' interest in accumulating wealth and controlling trade. As absolute monarchies consolidated their power, the need arose for new sources of revenue to fund armies, infrastructure projects, and other state expenditures.

By the end of the 16th century, mercantilism had become the dominant ideology in Europe, driven by the growth of industries and the need for capital to sustain armies and fleets. This system was consolidated through economic policies and strategies that sought to increase gold and silver reserves, which were considered indicators of a nation's wealth and power.

Fundamental Principles of Mercantilism.

Mercantilist theory focused on several key principles that defined its operation and impact on the economies of European countries. These principles include:

Accumulation of Precious Metals.
Mercantilism viewed a country's wealth as measured in terms of its reserves of precious metals, such as gold and silver. Unlike modern economic systems, the goal was not the creation of wealth through economic growth or investment, but the accumulation of these metals. To achieve this, countries sought to have a positive balance of trade, that is, to export more than they imported, so that gold and silver would flow into the country.

Control of International Trade.
Mercantilism promoted protectionism through policies that limited imports and encouraged exports. Governments imposed high tariffs on imported goods and placed restrictions on the entry of foreign products, thereby promoting the consumption of domestic products and strengthening local industries. In addition, colonial expansion and the establishment of trade monopolies were encouraged, particularly on strategic goods such as spices and manufactured goods.

Monopolies and Colonial Companies.
The mercantilist system favored the creation of monopolies and state-backed trading companies, such as the British East India Company and the Dutch East India Company. These companies controlled trade between Europe and its colonies, allowing states to secure an advantage over other nations and channel the wealth generated by trade into national coffers.

State Interventionism.
State intervention in the economy was one of the pillars of mercantilism. The state not only regulated foreign trade through tariffs and restrictions, but also encouraged the development of strategic industries through subsidies and tax benefits. The idea was to strengthen the national economy and reduce dependence on foreign products, thus increasing the power of the state.

Colonial Expansion.
Colonies played a crucial role in the mercantilist system. These areas provided natural resources and markets for the dominant country's manufactured goods, ensuring a constant flow of goods and wealth. Colonies were forced to trade only with the mother country, which prevented them from developing independent economies and reinforced the European nation's economic and political control.

Impact of Mercantilism on the Economy and Society.

The implementation of mercantilism transformed the economy and society of European countries in the 16th, 17th and 18th centuries. While it boosted the growth of certain industries and colonial expansion, it also generated challenges and conflicts:

Industrial Growth and City Development.
Mercantilism encouraged the development of local industries, especially in the textile, metallurgical and naval sectors. Port cities grew and became centres of trade and manufacturing, housing industries and activities related to foreign trade. This process contributed to urbanisation and the growth of a new class of entrepreneurs and merchants.

Increased International Competition.
The quest for a positive trade balance and the desire to accumulate precious metals generated tensions between European states. Protectionist policies and control of trade routes led to conflicts and wars, such as the Anglo-Dutch War, which pitted England and the Netherlands against each other for control of maritime trade. This competition between the European powers fostered colonial expansion, but also led to resource depletion and conflict in the colonies.

Impact on the Colonies.
The mercantilist system subjected the colonies to a subordinate role in the global economy. The colonies not only supplied raw materials to the mother countries, but also acted as exclusive markets for manufactured goods. This relationship prevented the development of local industries in the colonies and consolidated the dominance of the European powers. The exploitation of natural resources and the forced labour of the native population and African slaves were common features of the mercantilist colonial system.

Social Inequality.
Mercantilism primarily benefited monarchs and the merchant class, who accumulated wealth at the expense of the working population. Peasants and industrial workers faced difficult conditions, as income generated by the accumulation of precious metals and trade was not distributed equitably. Social inequality was maintained and, in some cases, deepened by protectionist policies and state interventionism.

Criticisms of Mercantilism and its Decline.

Over time, criticism of the mercantilist system arose, especially in the 18th century, when economists such as Adam Smith questioned the validity of its principles. In his work The Wealth of Nations (1776), Smith argued that the wealth of a nation lay not in the accumulation of precious metals, but in the ability to produce goods and services. This idea gave rise to the economic theory of liberalism and free trade, which proposed reducing state intervention and allowing the market to regulate itself through supply and demand.

Constant wars and the high costs of maintaining colonies also made mercantilism less effective. As the ideas of economic freedom and international trade spread, many countries began to abandon protectionist policies, giving way to the development of capitalism and economic liberalism.

Legacy of Mercantilism.

Despite its decline, mercantilism left a lasting legacy in economic and political history. The idea of protecting domestic industry through tariffs and trade restrictions is still present in some countries, especially those seeking to strengthen their emerging economies. Moreover, mercantilism laid the groundwork for the development of capitalism and colonial expansion, which defined the global economy in the following centuries.

It also provided an important lesson about the consequences of extreme protectionism and aggressive competition for resources. The tensions generated by mercantilism led to conflicts that shaped European geopolitics and set precedents in diplomacy and international politics.

Mercantilism was an economic and political theory that drove the economy of European countries between the 16th and 18th centuries, favouring the accumulation of precious metals, protectionism and colonial expansion. Although it managed to strengthen some economies, the mercantilist system generated inequalities and conflicts, both internally and in the colonies. Its decline marked the beginning of new economic theories based on free trade and capitalism, promoted by figures such as Adam Smith.

However, the study of mercantilism and its impact on global economic and political history remains relevant, as it reminds us of the importance of balancing protectionism with social welfare and sustainable development. Ultimately, mercantilism not only defined an era, but also left a legacy that continues to influence politics and economics today.