During the Colonial Period in Europe, mercantilism was a common system of economic development that was enforced. A mother nation would control the economy of its colonies through the regulation of trade. Certain products, such as precious metals or expensive spices, would be eliminated from trade if necessary so that wealth could accumulate for the mother nation and then trickle down to its colonies. By purchasing local goods first, economies could be stimulated, but it also limited the types of goods that were made available. Here are some of the other key points to consider when evaluating the pros and cons of mercantilism.
What Are the Pros of Mercantilism?
1. It encourages the complete development of all natural resources.
Many economies today have a lot of waste that occurs because there is an emphasis on using foreign trade to fill in product or service gaps. Through mercantilism, there is a need to research and develop all possible resources to their greatest extent to support the local and mother nation economy.
2. It encourages trade deficits for foreign nations.
The goal of mercantilism is to build wealth, which means any opportunity to do so is encouraged. From a trading perspective, raw materials were a hot commodity for nations participating in mercantilism because they could be refined into manufactured goods and resold to foreign nations at a high price. It’s a perfect example of what it means to buy low and sell high.
3. It naturally reduces unemployment rates.
Because there is such an emphasis on developing local resources, jobs are created to make this happen. From the finding of resources to creating innovative new products from them to selling in new markets, people are needed at every stage to make this happen. Of course many of the jobs are based in the mother nation, but there are additional opportunities created in each colony as well.
4. Cultural exchanges are encouraged to promote trade.
The rules of business have not really changed since the beginning of time. First and foremost, before any long-lasting relationship can be created, a relationship must be formed. Because the foundation of a system of mercantilism is to continue increasing business opportunities, many cultural exchanges are encouraged and these influences then enhance the standards of living that people experience.
What Are the Cons of Mercantilism?
1. It creates high levels of resentment.
Trickle-down economics works on paper. It just doesn’t work well in real life thanks to the inherent greed that so many people have. Why give others money when you can keep it for yourself? The rich tend to get richer in a system of mercantilism and the working class gets to be stagnant at best. Eventually this creates resentment, which leads to rebellion, and ultimately it led to many colonies seeking out their own independence.
2. It creates a preference for the mother nation to always be first.
Many colonies are also treated as a foreign nation in a system of mercantilism. This means the colonies are forced to sell their local raw materials for a bargain basement price and then be forced to purchase manufactured goods at a higher price than necessary. This creates an even wider wealth gap between the different income classes.
3. There is always a risk of local raw materials and resources running out.
Because mercantilism is based on the complete use of natural resources, there will always be a day when those resources run out. Natural resources are finite in nature, so even if there is an extensive reserve in place that can be accessed, that reserve will one day run out. If that happens sooner rather than later, then the entire economy can collapse.
4. The system is ultimately quite inefficient.
Because materials and goods are shipped back and forth between colonies and their mother nation, the price of goods is inflated more than it needs to be. Even with modern shipping methods, it costs less to manufacture goods locally where raw resources are available than it does to ship those items back and forth. Because of this, it also creates vulnerabilities in both economies should those shipments be intercepted by someone else.
The pros and cons of mercantilism show that it is a system that is largely out of practice due to the high risks that are involved. For economies that are rich in raw materials, it could still have certain benefits. With globalization occurring at a rapid pace, however, a movement toward isolation could do more harm than good.