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Economic Development Lesson 4

Mercantilism, a dominant economic theory from the 16th to 18th centuries, emphasized self-sufficiency and a favorable balance of trade through government intervention and imperialist policies. It aimed to accumulate wealth by maximizing exports and minimizing imports, leading to trade surpluses. Modern critiques highlight its limitations, paving the way for market systems and economic nationalism, which focuses on domestic control and protectionism against globalization.

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6 views

Economic Development Lesson 4

Mercantilism, a dominant economic theory from the 16th to 18th centuries, emphasized self-sufficiency and a favorable balance of trade through government intervention and imperialist policies. It aimed to accumulate wealth by maximizing exports and minimizing imports, leading to trade surpluses. Modern critiques highlight its limitations, paving the way for market systems and economic nationalism, which focuses on domestic control and protectionism against globalization.

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odilerothbart20
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© © All Rights Reserved
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Download as DOCX, PDF, TXT or read online on Scribd
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Theories on Development Economics

Mercantilism

Mercantilism is thought to be one of the earliest forms of development


economics that created practices to promote the success of a nation. It was a
dominant economic theory practiced in Europe from the 16th to the 18th
centuries. The theory promoted augmenting state power by lowering
exposure to rival national powers.

Mercantilism is an economic theory that emphasizes self-sufficiency through


a favorable balance of trade. Mercantilist policies focus on the accumulation
of wealth and resources while maintaining a positive trade balance with
other countries. By maximizing exports and minimizing import.

Originating in 16th-century Europe, mercantilism began with the emergence


of the nation-state. The dominant economic theory was that the global
supply of wealth was finite, and it was in the nation’s best interest to
accumulate as much as possible. During that time, wealth was measured by
a country’s quantity of silver and gold. To accumulate more wealth, European
countries, such as Britain and France, would focus on maximizing their
exports and minimizing imports, which resulted in a favorable balance of
trade.

For countries with a negative trade balance with a mercantilist country, the
difference would be paid back in silver or gold. To maintain a favourable
trade balance, the early mercantilist countries would enact imperialist
policies by setting up colonies in smaller nations.

The aim was to extract raw material to send back to the home country,
where it would be refined into manufactured goods. The goods would then be
resold to the colonies, allowing early mercantilist nations to accumulate
wealth through a positive trade balance.

Mercantilism monopolized markets with staple ports and banned gold and
silver exports. It believed the higher the supply of gold and silver, the
wealthier it would be. In general, it sought a trade surplus (exports greater
than imports), did not allow the use of foreign ships for trade, and it
optimized the use of domestic resources.

As an economic theory, mercantilism relies on government intervention to


regulate international trade and protect domestic industries. Mercantilist
policies involve the protection of domestic corporations through regulations
and the promotion of trade surpluses. In the context of international trade, a
favorable trade balance is achieved through government regulations, such as
tariffs and restrictions on imports.

Modern mercantilist policies include tariffs on imports, subsidizing domestic


industries, devaluation of currencies, and restrictions on the migration of
foreign labor. Mercantilist policies can also explain the recent escalation of
tariffs and trade restrictions between the US and China.

The Modern Age economics which was headed by Adam Smith found faults
or limitations on Mercantilism:

The scholars (Adam Smith and David Hume) realized that the world’s wealth
is not finite, that it could be created by productive allocation of labor
resources.

Mercantilism failed to account the benefits of trade, comparative advantage


and economies of scale. Such realization of the failure of mercantilism leads
to the introduction of a market system, or the application of demand and
supply.

Under a mercantilist system, the restriction of imports meant consumers


obtained access to fewer goods at higher prices. Under a system of free
trade, consumers benefit from lower prices due to increased competition and
greater access to goods from across the world.

Economic nationalism.

Economic nationalism reflects policies that focus on domestic control of


capital formation, the economy, and labor, using tariffs or other barriers. It
restricts the movement of capital, goods, and labor.

Economic nationalists do not generally agree with the benefits of


globalization and unlimited free trade. They focus on a policy that is
isolationist so that the industries within a nation are able to grow without the
threat of competition from established companies in other countries.

The economy of the early United States is a prime example of economic


nationalism. As a new nation, it sought to develop itself without relying so
much on outside influences. It enacted measures, such as high tariffs, so its
own industries would grow unimpeded.

In recent times, economic nationalism is on the rise again.

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