Mercantilism is a bankrupt theory that has no place in the modern world.  Is this an accurate statement?

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Tamara K. H. eNotes educator| Certified Educator

In 1776, Adam Smith proposed mercantilism as a means of growing a domestic economy by limiting imports and increasing exports. The goal was to bring more wealth into the country through exports while also preserving the domestic labor market (Library of Economics and Liberty, The Concise Encyclopedia of Economics, Laura LaHaye, "Mercantilism"). However, most economists do indeed find that mercantilism doesn't achieve its goals.

In a report the Cato Institute issued to the U.S. International Trade Commission titled "The Economic Effects of Significant U.S. Import Restraints," researchers presented data from a study conducted in 2000 showing that import barriers enforced on lumber imports through the U.S.-Canadian Softwood Lumber Agreement actually raised the U.S. prices of lumber by "$50 and $80 per board," which in turn raised the cost of housing and hurt the real estate market. Higher costs of production also led to a decrease in employment in the lumber industry.

Economists agree that import barriers create high prices for certain producers, which can be profitable for the producers, but consumers suffer from the higher prices, which in turn hurts profits. Hence, mercantilism can indeed be called a bankrupt theory.

rrteacher eNotes educator| Certified Educator

Mercantilism itself is an outdated theory, one which had its origins in the establishment of European kingdoms as nation-states in the seventeenth century. Many of its assumptions were based on the existence of colonial empires, which would provide a mother state with the raw materials and wealth it needed to sustain manufacturing and other pursuits. In order to establish favorable trade balances and to promote domestic industry, nations set trade regulations, banning imports on certain goods and outlawing colonial trade with other nations. Obviously, this economic system became less appealing when nations lost their colonies, and economic theory largely shifted to favoring free trade. That said, some aspects of mercantilism have always persisted. Most nations establish some kind of trade restrictions intended to favor their own domestic economies. Many engage in clearly protectionist policies that are intended to benefit domestic manufacturing. President Donald Trump, for example, has promised to foster a return of American industries by placing large tariffs on Chinese, German, and other manufactured goods. The Chinese government severely restricts imports as well. So while mercantilism might be a "bankrupt" set of ideas, or way of understanding political economy, some of its policies remain on the table, so to speak, as legitimate in the minds of some policy makers.

mkoren eNotes educator| Certified Educator

Mercantilism is a policy where one country benefits from having colonies or by controlling other lands. In this scenario, the dominating country sets up a series of rules and regulations that funnel resources and trade from the places this country controls back to itself. Policies are developed that are favorable to the dominating country, and these policies may or may not be helpful to the countries being controlled.

Since these rules and regulations often restrict trade, it is not a generally beneficial policy. Free trade usually leads to desirable outcomes for consumers. When trade is restricted, consumers often suffer because there may be fewer choices of products and higher costs for products.

In a modern world where free choice is valued, there is no place for a policy that helps some at the expense of others. This policy also often may lead to inefficient use of resources, which also has no place in a modern society. Therefore, it is fair to say that mercantilism is a bankrupt policy.

pohnpei397 eNotes educator| Certified Educator

This is an accurate statement in that economists today do not believe in mercantilism at all.  Mainstream economists are unanimous on the idea that trade helps all countries.  Countries produce things in which they have a comparative advantage and trade for things in which they do not.  This allows world production to be higher than it otherwise would be.

However, there are countries that follow at least some aspects of mercantilism.  Any protectionist policies can be seen as mercantilism.  Therefore, when countries like China erect trade barriers and emphasize exports they are acting in ways that are influenced by mercantilism.  Therefore, it may not be a completely “bankrupt” idea.