What is the Difference Between Capitalism and Mercantilism

The main difference between capitalism and mercantilism is the role of government. Capitalism typically functions without government intervention, while mercantilism involves government regulation.

Capitalism is an economic system in which private owners control the country’s trade and industry, rather than by the state, while mercantilism is an economic theory and practice that advocates governmental regulation of the nation’s economy to generate wealth and augment national power. But, both are economic systems based on profit. However, there are several differences between capitalism and mercantilism.

Key Areas Covered

1. What is Capitalism 
     – Definition, Features
2. What is Mercantilism
     – Definition, Features
3. Difference Between Capitalism and Mercantilism
     – Comparison of Key Differences

Key Terms

Capitalism, Mercantilism

What is Capitalism?

Capitalism is an economic system in which individuals and businesses own the factors of production.  Entrepreneurship, natural resources, capital goods and labour are the factors of production in capitalism. In a capitalist society, the production of goods and services depends on supply and demand in the general market. Furthermore, private property, competitive markets, capital accumulation, wage labour, a price system, and voluntary exchange are some of the main characteristics of capitalism.

Economists have analyzed capitalism and identified several forms of capitalism in practice, including free-market capitalism, state capitalism, and welfare capitalism. In fact, free-market capitalism is considered the purest form of capitalism. In such an economy, there are unrestrained private individuals as they have the power to decide what to produce and sell, where to invest and prices for goods and services. However, in most countries of the modern world, we can observe a mixed form of capitalism, with some degree of government regulation.

The main advantage of capitalism is that it gives the best products for the best prices. Moreover, there is an intrinsic reward for innovation in capitalism. However, this system also has disadvantages. The private ownerships in capitalistic systems allow businesses to gain monopoly power in terms of product and labour markets. This can, of course, create a great injustice in society.

What is Mercantilism

Mercantilism was an economic theory common in practice in Europe from the 16^th to 18^th centuries. This theory advocated governmental regulation of the nation’s economy to generate wealth and augment national power. Moreover, the basis of the theory was that the wealth of the world was static, and it was necessary to accumulate the maximum possible share of the wealth by increasing their exports and limiting their imports through tariffs.

Figure 2: Mercantilism helped to create trade patterns such as the triangular trade in the North Atlantic

We can even describe mercantilism as the economic counterpart of political absolutism. It is also a type of economic nationalism as it strengthens military, corporate and national growth. Some features of mercantilism are given below.

Features of Mercantilism

• Maximizes exports in an attempt to collect precious metals such as silver and gold
• Advocates trade policies that protect domestic industries
• Imposes tariffs on imports
• Prohibits the emigration of skilled labour, capital, as well as tools
• Use the military to ensure the protection of local markets as well as supply sources
• Availability of a strong merchant fleet in order to provide additional markets with raw materials and goods

Difference Between Capitalism and Mercantilism

Definition

Capitalism is an economic system in which private owners control the country’s trade and industry, rather than by the state, while mercantilism is an economic theory and practice that advocates governmental regulation of the nation’s economy to generate wealth and augment national power.

Role of Government

Capitalism typically functions without government intervention, while mercantilism involves government regulation.

Objective

The main objective of capitalism is earning profits, while the main objective of mercantilism is increasing the wealth of the nation.

Tariffs

While capitalism has low tariff rates, mercantilism imposes high tariffs on imports.

Conclusion

In brief, the main difference between capitalism and mercantilism is the role of government. Capitalism typically functions without government intervention, while mercantilism involves government regulation.

Reference:

1. Amadeo, Kimberly. “Is Mercantilism Back in Vogue?” The Balance, 11 Nov. 2020, Available here.
2. Chappelow, Jim. “Capitalism Definition.” Investopedia, 4 Nov. 2019, Available here.

Image Courtesy:

1. “Triangle trade2” By SimonP at en.Wikipedia – Modification made by SimonP., also Transferred from en.Wikipedia (CC BY-SA 3.0) via Commons Wikimedia
2. “Graphic depiction of capitalism” By Rcragun – Own work (CC BY 3.0) via Commons Wikimedia