Final answer:
Mercantilism is an economic theory from the sixteenth and seventeenth centuries focusing on wealth accumulation through trade controls and colonial exploitation. Nations sought to maximize wealth by implementing high tariffs and monopolies to promote domestic industries and discourage imports. Criticism arose against this system, which paved the way for capitalism, where competition would regulate the economy.
Step-by-step explanation:
Mercantilism: An Economic Theory
Mercantilism is an economic theory that played a crucial role during the sixteenth and seventeenth centuries, particularly in European nations such as England and France. To maximize wealth, mercantilist policies encouraged nations to acquire bullion and maintain a positive balance of trade. These nations fostered economic self-sufficiency by utilizing colonies to supply raw materials and serve as markets for their manufactured goods. Policies such as high tariffs, monopolies, and subsidies were enforced to discourage imports and thus stimulate domestic industries.
The mercantilist system relied on the control of colonial trade to ensure a favorable balance of trade for the mother country. Under this system, colonies were expected to export raw materials, especially precious metals, to the home country and import finished goods in return. The restrictions included exclusivity of trade with the mother country, high tariffs, and the development of manufacturing within the mother country propelled by inventions leading to the Industrial Revolution.
However, mercantilism faced criticism over time. Intellectuals like Adam Smith argued that wealth was not finite and that nations could flourish simultaneously. Smith promoted the idea that competition among producers, not government intervention, should regulate the economy. Despite criticisms, mercantilism significantly influenced the global economy by laying the foundation for later economic theories such as capitalism.