Importance Of Mercantilism

The Mercantilist theory was the first theory of international trade and is one of the foundation stones of modern economics. Mercantilism arose in England in the mid-sixteenth century and prevailed through the eighteenth century and it consisted in a political and economic system that purports that the strength of a country is directly connected to its capacity to maintain a positive balance of trade. Therefore countries should encourage exports and discourage imports in order to be economically and politically viable. Mercantilism played an important in the transition from feudalism to industrial capitalism.

In that period, the currency of trade between the countries were gold and silver. So, in the mercantilist thought, since maximizing

British Navigation Acts, which restricted other countries on trading with British colonies, is a great example of this type of policy and structure. This behavior and way of acting and thinking explicit a doctrine advocated by the mercantilists – government intervention in the economy to achieve a surplus in the trade balance.

Industrial mercantilist governments also enforced the importation of some raw materials, which could be transformed and manufactured into many other finished goods, carrying more value, thus costing more than the original raw material. In this case, the final product would be exported and sold for higher than the raw material was bought and the country would get more gold for it, increasing the nation’s treasury. Therefore, manufacturing was only important because it could result in an export

The biggest critic of the mercantilist system was Scottish philosopher, political and classical economist David Hume that in 1752, pointed out an intrinsic flaw in the doctrine proposed by mercantilism, later called specie-flow mechanism. The idea is that the trade surplus, the ultimate goal of mercantilists policies, and the accumulation gold and silver was unsustainable in the long run. He advocated the trade surplus, sets forces that tends to reverse itself. According to him. If a country has a surplus with another, the inflow of gold and silver would swell the domestic economy supply and culminate in inflation - there would be too much money for few goods, system operating in full capacity and money not being saved but kept circulating. In the other country, however, the outflow of gold and silver results in falling prices. The deficit country becomes more and more competitive, shifting the trade balance. That being said, Hume defended that a free flow of gold, would lead to an equilibrium in the balance of