Mercantilism

Topic: Schools of Economic Thought and Economic Laws · NCERT: Beyond NCERT

Meaning

Mercantilism was the main economic doctrine of Europe from the 16th to the 18th century. It said a nation's wealth is its stock of gold and silver (bullion). A nation gets more bullion by running an export surplus (selling more abroad than it buys) and by protecting home industry with tariffs, colonies and chartered monopoly companies.

Formula: Balance of trade = Exports − Imports. A mercantilist wants this to be a surplus (a positive number).

It matters because it is the first step in the "market or state?" debate. Its zero-sum view of trade still comes back today as neo-mercantilism: tariff wars, export-led surpluses and forex hoarding.

Explanation

How it works: from trade surplus to bullion

• Core belief: coin and bullion are the essence of wealth. The physiocrats later said only the products of the soil count as wealth [2].
• The chain of logic:
• the nation exports more than it imports
• foreigners pay the gap in gold or silver

• the bullion stock rises, so to a mercantilist the nation is "richer"

• Worked example:

• England exports goods worth ₹120 crore and imports goods worth ₹100 crore.
• Balance of trade = 120 − 100 = +₹20 crore (a surplus).

• Foreigners settle this ₹20 crore in gold and silver, so England's bullion stock rises by ₹20 crore.

• Zero-sum trade: world wealth is a fixed cake. One nation gains only if another loses.

• So trade looked like war, and the "bullion wars" of the 16th–18th centuries followed.

Tools of mercantilist policy

• Tariffs (taxes on imports) to keep foreign goods out.
• Bans on exporting raw materials, so home factories get them cheap.
• Colonies, used in two ways:
• as captive markets, where the colony must buy the mother country's goods

• as sources of raw materials

• Chartered monopoly companies (firms given sole trading rights by the Crown). The East India Company (1600) was mercantilism in action.

Types and key thinkers

• Bullionism, the crudest form:
• wealth is precious metal

• so the state should ban the export of gold and silver outright

• Trade-balance mercantilism (Thomas Mun):

• Mun wrote England's Treasure by Forraign Trade in the 1620s. It was published in 1664.
• He was a director of the East India Company.

• He argued that only the overall balance of trade matters, not each single deal. Some bullion could leave the country if the total balance stayed in surplus.

• Colbertism (France):

• Jean-Baptiste Colbert was finance minister to Louis XIV in the 1660s–80s.
• His form of mercantilism was led by the state.

Why it declined

• Physiocrats (France, 1750s–70s):
• They wanted trade and industry left to follow their natural course [3].

• Their slogan was "laissez faire, laissez passer" (let things be made, let goods pass).

• Adam Smith, Wealth of Nations (1776): trade makes both sides better off. In other words, trade is positive-sum.

• Ricardo's comparative advantage (1817) answered the zero-sum view. Figures are the labour-years needed to make one unit:

	Wine	Cloth
Portugal	80	90
England	120	100

• Portugal is better at making both goods.
• One unit of wine costs Portugal 80/90 = 0.89 cloth. It costs England 120/100 = 1.2 cloth.
• So Portugal should specialise in wine and England in cloth. If they then trade, both gain. This is not zero-sum.

In India

• Colonial India was mercantilism in practice (NCERT Class 11 link):
• The East India Company was a chartered monopoly.
• India exported raw materials and imported finished British goods.
• India ran an export surplus, but no gold flowed into India.
• Instead, the surplus paid for the colonial government's office in Britain, Britain's wars and "invisible" imports (payments for services, not goods).

• This outflow is called the drain of wealth. The mother country gained and the colony lost.

• India's forex reserves today:

• Total: US$ 698,192 million (about US$ 698.2 billion) on 25 July 2025 [1].
• Foreign currency assets: US$ 588,926 million [1].
• Gold: US$ 85,704 million [1].

• Forex reserves are the foreign currency and gold held by the central bank, which in India is the RBI.

• The key difference:

• Mercantilists stored gold because they saw it as wealth itself.

• The RBI holds reserves as insurance, to calm sharp swings in the rupee and to pay for imports in a crisis.

• Import substitution (1950–90):

• Under the Mahalanobis model, India protected infant industries (new home industries that cannot yet face foreign competition) with high tariffs.
• Critics compare this with mercantilist protection.
• The 1991 reforms moved India towards freer trade.

Don't confuse with

• Bullionism: a narrow form of mercantilism that banned all export of gold and silver. Mercantilists like Mun let some bullion leave, as long as the overall trade balance stayed in surplus.
• Physiocracy: here wealth is the products of the soil, not bullion [2]. Physiocrats wanted free trade and a single tax on land. They were the first to push back against mercantilism [3].
• Neo-mercantilism: the modern version, seen in export-led surpluses, forex-reserve hoarding and tariff wars. It has the same zero-sum logic but uses different tools. Classical mercantilism was about gold and colonies.
• Classical free trade (Smith, Ricardo): trade is positive-sum, and each country should specialise by absolute advantage (Smith) or comparative advantage (Ricardo). This is the direct opposite of mercantilist zero-sum thinking.

Prelims Hooks

• Mercantilism (16th–18th century) held that national wealth = the stock of gold and silver. It saw trade as zero-sum.
• England's Treasure by Forraign Trade: Thomas Mun. Written in the 1620s, published in 1664. Mun was an East India Company director.
• Colbertism is the state-led mercantilism of Jean-Baptiste Colbert, finance minister to Louis XIV (France, 1660s–80s).
• Bullionism, which banned the export of gold and silver, is the crudest form of mercantilism. It is not a separate school.
• The East India Company (1600), a Crown-chartered monopoly, is the classic example of a mercantilist tool.
• Trap: "laissez faire, laissez passer" is a physiocratic slogan, not a mercantilist one. It argued against mercantilist controls.

Mains Points

• Neo-mercantilism versus the WTO order (GS-III):
• Today's tariff wars and export-surplus strategies bring back zero-sum thinking.
• Ricardo's comparative advantage and the WTO rest on the view that trade is positive-sum.

• India's reserves of about US$ 698 billion (25 July 2025) [1] are held for safety (to steady the rupee and cover imports), not hoarded as wealth. Use this point to answer "reserve hoarding" critiques.

• Colonial drain as mercantilism's cost (GS-I/GS-III):

• India was turned into an exporter of raw materials and a market for British goods.
• Its export surplus paid for British expenses and did not bring wealth home.

• So the zero-sum logic fell hardest on colonies.

• Protection versus openness in Indian policy (GS-III):

• Import substitution (1950–90) looked like mercantilist tariff protection. It built an industrial base but also caused inefficiency.
• The 1991 reforms moved India towards free trade.
• The debate is still live when India considers tariffs to protect domestic manufacturing.

Related concepts

• Bullionism
• Physiocracy
• Classical economics
• Laissez-faire
• Night-watchman state
• Division of labour
• Labour theory of value
• Say's law
• Malthusian theory of population
• Malthusian trap

Read more

• Mercantilism, physiocracy and classical political economy