The main positive effect of mercantilism was the generation of wealth for the rulers and merchants of countries like Spain, Portugal, France and Britain through exploiting of distant foreign lands outside in the Carebian, the Latin America, the Indian subcontinent and Asia by first establisding trade relations, then overthrowing the native rulers and setting up colonies. The rulers of these Eoropean countries supported their own adventurerous merchant class to set up these colonies by providing initial risk capital wherever necessary and followed up with army support to capture the lands in intended colonies along with the clergy of the Church to convert. Once the colonies are set up the merchants were given exclusive rights to develop plantations and mines in colonies for ensuring cheap availabilty of raw materials for the homelands, capture jwelery, gold, silver and other precious material and remit to the home country, pay huge taxes to the home country. This processes considerably enriched the coffers of the colonial masters, the traders and the State/ Emperor/ King/ Queen/ Royal family of these countries in Europe. Later, this wealth provided the capital and assured supply of raw materias that would be needed needed to reap the benefits of the progress of science and technology through what we now call the industrial revolution.
The negative effect of mercantilism was borne by the local inhabitants of the colonies. Local people were exploited to the core, in many cases by converting them into slaves or bonded labor, making them work hard and for long hours everyday with bare minimum subsistence wages. With political independence gone and economic freedom curtailed and economic activities so coseh as to benefit the homelands in Europe, these colonies became economically weak and the local people highly demoralised.
One more positive aspect of Mercantalism is that this practice and system provided the major impulse to the developent of Economics (political economy) as a scientific discipline. Mercantilism as a whole cannot be considered a unified theory of economics. There were no mercantilist writers presenting an overarching scheme for the ideal economy, as Adam Smith would later do for classical (laissez-faire) economics. Rather, each mercantilist writer tended to focus on a single area of the economy. Only later did non-mercantilist scholars integrate these "diverse" ideas into what they called mercantilism. Smith saw the mercantile system as an enormous conspiracy by manufacturers and merchants against consumers, a view that has led some authors, especially Robert E. Eklund and Robert D. Tollison to call mercantilism "a rent-seeking society". To a certain extent, mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed the economic system as a zero-sum game, in which any gain by one party required a loss by another. Thus, any system of policies that benefited one group would by definition harm the other, and there was no possibility of economics being used to maximize the "commonwealth", or common good. Mercantilists' writings were also generally created to rationalize particular practices rather than as investigations into the best policies.
Mercantilist domestic policy was more fragmented than its trade policy. While Adam Smith portrayed mercantilism as supportive of strict controls over the economy, many mercantilists disagreed. The early modern era was one of letters patent and government-imposed monopolies; some mercantilists supported these, but others acknowledged the corruption and inefficiency of such systems. Many mercantilists also realized the inevitable result of quotas and price ceilings were black markets. One notion mercantilists widely agreed upon was the need for economic oppression of the working population; laborers and farmers were to live at the "margins of subsistence". The goal was to maximize production, with no concern for consumption. Extra money, free time, or education for the "lower classes" was seen to inevitably lead to vice and laziness, and would result in harm to the economy.
Mercantilism developed at a time when the European economy was in transition. Isolated feudal estates were being replaced by centralized nation-states as the focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade.[ Mercantilism focused on how this trade could best aid the states.
Another important positive effect of mercantilism was the introduction of double-entry bookkeeping and modern accounting. This accounting made extremely clear the inflow and outflow of trade, contributing to the close scrutiny given to the balance of trade. Of course, the impact of the discovery of America can not be ignored. New markets and new mines propelled foreign trade to previously inconceivable heights. The latter led to “the great upward movement in prices” and an increase in “the volume of merchant activity itself.” The mercantilist idea that all trade was a zero sum game, in which each side was trying to best the other in a ruthless competition, was integrated into the works of Thomas Hobbes. Note that non-zero sum games such as prisoner's dilemma can also be consistent with a mercantilist view. In prisoner's dilemma, players are rewarded for defecting against their opponents - even though everyone would be better off if everyone could cooperate. More modern views of economic co-operation amidst ruthless competition can be seen in the folk theorem of game theory.
In the English-speaking world, Adam Smith's utter repudiation of mercantilism was accepted without question in the British Empire but rejected in the United States by such prominent figures as Alexander Hamilton, Henry Clay, Henry Charles Carey, and Abraham Lincoln. In the 20th century, most economists on both sides of the Atlantic have come to accept that in some areas mercantilism had been correct. Most prominently, the economist John Maynard Keynes explicitly supported some of the tenets of mercantilism. Adam Smith had rejected focusing on the money supply, arguing that goods, population, and institutions were the real causes of prosperity. Keynes argued that the money supply, balance of trade, and interest rates were of great importance to an economy.
Adam Smith rejected the mercantilist focus on production, arguing that consumption was the only way to grow an economy. Keynes argued that encouraging production was just as important as consumption. Keynes also noted that in the early modern period the focus on the bullion supplies was reasonable. In an era before paper money, an increase for bullion was one of the few ways to increase the money supply.
Today the word mercantalism remains a pejorative term, often used to attack various forms of protectionism. The similarities between Keynesianism, and its successor ideas, with mercantilism have sometimes led critics to call them neo-mercantilism. Some other systems that do copy several mercantilist policies, such as Japan's economic system, are also sometimes called neo-mercantilist.
Mercantilists, who were generally merchants or government officials, gathered vast amounts of trade data and used it considerably in their research and writing. William Petty, a strong mercantilist, is generally credited with being the first to use empirical analysis to study the economy. Smith rejected this, arguing that deductive reasoning from base principles was the proper method to discover economic truths. Today, many schools of economics accept that both methods are important.
In specific instances, protectionist mercantilist policies also had an important and positive impact on the state that enacted them. Adam Smith, himself, for instance praised the Navigation Acts as they greatly expanded the British merchant fleet, and played a central role in turning Britain into the naval and economic superpower that it was for several centuries. Some economists thus feel that protecting infant industries, while causing short term harm, can be beneficial in the long term. Nonetheless, The Wealth of Nations had profound impact on the end of mercantilist era and the later adoption of free market policy. By 1860, England removed the last vestiges of the mercantile era. Industrial regulations, monopolies and tariffs were withdrawn.
1.When Spain conquered Latin America the rulers had a well defined economic policy. That policy is often called Mercantilism. In theory and practice Mercantilism appeared at a very specific period in European history. Mercantilism can be identified as an economic phenomena when Europe was moving away from feudal socioeconomic system and becoming capitalist.
Mercantilism as an economic practice and policy was essentially defended by royal authorities (the "Crown") - which had a vested interest in having an economy that would grow while at the same time weakening the position of the landed feudal lords. To that end, the royal monarchy often allied with town merchants [the term mercantilism comes from merchant]. Mercantilism in portions of western Europe went hand-in-hand with the building and consolidation of political absolutism. Historically speaking, mercantilism represented the progressive defeat of feudalism in Europe. Thus, the imposition of it in the Spanish and Portuguese colonies implies that the Spanish and Portuguese monarchies had devised such policy to weaken their domestic landlords.
What was mercantilism? It was an economic system based on direct state control over economic production with the aim of accumulating as much precious metals as possible. Mercantilisms functioned on the basis that the strength and wealth of a nation to be measured by the amount of gold and silver the country had. [At times they confused the "measure" with the actual wealth of a country]. For Latin America that meant that the Spanish and Portuguese colonial authorities committed themselves to the systematic exploitation of the new colonies. Colonies existed only for the benefit of the colonialist power, to help it accumulate bullion. Thus, the colonies were expected to: a) send as much gold and silver to Spain and Portugal, b) to provide raw materials at very cheap cost while buying goods produced in the colonialist country at high prices, which was another way of transferring wealth (it is now called a negative balance of trade, or negative terms of trade). In 129 years, from 1531 to 1660 Latin America sent to Spain alone no less than 44 million silver pesos (181 tons of gold - 1 ton= 2000 lb, and 16,000 tons of silver). These are the officially recorded figures. But it is estimated that Latin America sent much more.
The mining cycle: Main Periods
1493-1520 the Caribbean, particularly gold
1520-60 New Spain
The wealth of Latin America during the 16th and 17th centuries doubled the volume of money in circulation. Thus, the more gold and silver expanded the money (currency) supply. This altered the relation between money and goods. The gold and silver supply that arrived in Europe increased faster than the goods and services produced. This created inflation. The oversupply of currency led to more lending. Interest on loans went down because there was more currency available. So one could invest more. prices rose faster than income and wages, or rent. This meant that workers' ability to purchase goods was reduced. The earning capacity of people with fixed income (or tribute) saw their standard of living drop. The landed aristocracy saw their wealth dissipate. Moreover, inflation redistributed income, but taxed the politically weak. Inflation created a "forced savings" by reducing consumption The aristocracy declined and the commercial sectors benefited.
As the aristocracies lost economic strength in Europe, a similar process was underway in Spain and Portugal. But, more importantly, there was no commercial sectors )or bourgeoisie) to challenge the increasing power of the colonialist state. Hence, the gold and silver of Latin America strengthened the position of the Spanish colonial state, while reducing the power and influence of the landed aristocracy and hindering the development of an independent commercial class.
As the supply of gold and silver began to decline, particularly in the 18th century, the Bourbon monarchy initiated a series of measures (called "reforms") in order to modernize the colonial economies of Latin America. Mining would begin to become less important after the 1670s.
Mercantilism did not allow trade within the colonial regions of the Spanish or Portuguese empires, nor did it permit other countries to trade with the Latin American colonies. [The British and the French followed similar policies]. In the early 18th century the Bourbons fostered the development of plantations and trade with some areas outside of the Spanish colonial regime. Prof. Don Mabry has that,"The plantation became prominent. It was operated for profit not status; in other words, it was capitalistic instead of medieval. Plantations were often owned by new arrivals from Spain who knew of the demand for agricultural products, had contacts with international merchants, and possessed the enterprise and drive to establish new ventures. Plantations were in tropical areas, which meant that there were no highland Amerinds to put to work, that there a labor shortage. Planters, with Bourbon encouragement, brought in Africans as slaves. These new activities shifted the center of economic gravity away from the mining areas towards the new centers. In South America, for example, Lima began losing ground to Caracas in the north and Buenos Aires in the south."
The plantation economy, the expansion of trade, the development of the industrial revolution in England [after 1750], the French Enlightenment initiating the so-called age of reason, the independence of the 13 British colonies in 1776, the French revolution of 1789 and numerous technological innovations - radically influenced Latin American society by the end of the 18th century.The region remained primarily rural and agricultural, but major social changes were already taking shape.
B.Mercantilism is an economic theory that holds the prosperity of a nation depends upon its supply of capital, and that the global volume of trade is "unchangeable." Economic assets, or capital, are represented by bullion (gold, silver, and trade value) held by the state, which is best increased through a positive balance of trade with other nations (exports minus imports). Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the economy, by encouraging exports and discouraging imports, especially through the use of tariffs. The economic policy based upon these ideas is often called the mercantile system.
Mercantilism was established during the early modern period (starting in the 16th to the 18th century, which roughly corresponded to the emergence of the nation-state). This led to some of the first instances of significant government intervention and control over market economies, and it was during this period that much of the modern capitalist system was established. Internationally, mercantilism encouraged the many European wars of the period, and fueled European imperialism, as the European powers fought over "available" markets. Belief in mercantilism began to fade in the late 18th century, as the arguments of Adam Smith and the other classical economists won favour in the British Empire (among such advocates as Richard Cobden) and to a lesser degree in the rest of Europe (with the notable exception of Germany where the Historical school of economics was favored throughout the 19th and early 20th century). Some have said that America chose not to adhere to classical economics, preferring a form of neo-mercantilism embodied by the "American School," but in 1792 Alexander Hamilton, basing his policies on his study of Adam Smith, established a gold standard designed to conform to that of Britain to promote international trade contrary to the mercantilist leaning of men like Thomas Jefferson. America drifted from the gold standard a number of times prior to the Great Depression, but always returned to the Hamilton gold standard. The Great Depression influenced American government to return to neo-mercantilism imposing high protectionist tariffs and suspending private ownership of gold. Finally, during the New Deal, the currency was devalued based on the government’s new neo-mercantilist leaning. Today, mercantilism has seen a resurgence in economic theories that focus on the trade surplus and deficit as determinants of monetary value, but mercantilism as a whole is rejected by many economists. However, elements of mercantilism are still accepted by some economists including Ravi Batra, Pat Choate, Eammon Fingleton, and Michael Lind.