For centuries, the British empire dominated local and international trade by depending on mercantilism. According to Weingast (2018), mercantilism is an economic philosophy that implemented policies that would bring wealth to the empire without losing it to other countries. this was important to the British empire as they did not have any mines for gold and silver ores, two very valuable metals in the time. The result was a heavy dependence and obsession with coin and bullion for all trades. To the British empire, these were more valuable than land and buildings since the latter were perceived to have no financial and economic value. There are many reasons mercantilism worked between the 13 th and 18 th centuries, but the primary driving factors for the transition were the increased scarcity of gold and silver and industrial revolution.
First, the empire had absolute control over its economy. Mercantilism allowed the British empire to control how the colonies made and spent money (Conti, 2018). This included control over the types of raw materials the colonies could produce, what and whose means of transport they could use (ships), which ultimately determined their trading partners. Being that the British controlled everything, the colonies found it easier to buy goods from the empire and produce those that were valuable to the empire’s trading partners, such as other European countries and other colonies.
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Geographical differentiation is the second reason why mercantilism was successful for five centuries. The British empire owned and operated in different colonies, each of which required a different supply of goods and were driven by the empire to produce fewer types of raw material or finished product. The empire then benefited from operating an extensive and highly complex supply chain between the colonies. From Virginia, for example, the empire exported tobacco, timber and rice from South Carolina, codfish and sails from Massachusetts, slaves from Africa, cotton and spices from India, and wheat and corn from North America (Wallech et al., 2013). Note that this is not an exhaustive list of the raw materials and products the British empire moved, but it serves to demonstrate the power and magnitude it had at an international scale. The system was profitable too, as the empire would buy the raw materials and products at low prices and sell them at high prices, taking full advantage of the supply and demand. Furthermore, the empire was under no ethical obligation to promote fairness since it viewed all colonies under its control as property whose value was to generate wealth.
Unfortunately, mercantilism did not last. By mid-18 th century, different factors not only forced the empire to reconsider its dependence on mercantilism and completely replace it with free-market capitalism. First, gold and silver were always in scarce supply. Different European countries like Spain and France started to hoard their gold and silver supplies. Without any local or highly productive gold and silver mines, scarcity drove the value of the ores, and an empire that viewed coin and bullion as the only sign of wealth started to face inflation. As a result, they had to pay more money to sustain the entire empire while facilitating international trade as much as possible. Such an approach was not sustainable and the empire started to look for other sources of wealth and assets.
The second driving force behind the transition from mercantilism to free-market capitalism came with the industrial revolution. Before the 18 th century, the British empire produced goods under a cottage system. All manufacturing was performed in different homes and the merchant’s job was to buy them, transport, then sell them in markets where demand was high, but supply was low. With the industrial revolution, however, production capacity increased with the invention of machines that could do the jobs humans did and produce consistent quality products. The social structure and system of control subsequently changed, where power lied at the hands of the individuals owning the factories. Not only could they have more control over their workforce, they could pay them whatever amount they wanted and have them work for as long as they wanted. This was not beneficial to the British empire as it lost the power to control all essential economic processes.
To remain powerful, the British empire readily accepted free-market capitalism. This included changing their views on wealth and their sources. For instance, coin and bullion were no longer the only means to add to the empire’s wealth. Instead, controlling the factors of production was. As a result, the empire started to view resources like land and property as assets and ways to increase wealth. Banking and credit also emerged as a way for the empire to increase its wealth. With the understanding, the empire started to manage their debt in better ways, thus avoiding the limitations of mercantilism. After all, with mercantilism, wealth was limited to the maximum availability of coin and bullion. In contrast, free-market capitalism helped in debt control and increased the utilization of natural resources to generate wealth. This included using land for agriculture and raising animals to be sold later.
In conclusion, the transition from mercantilism to free-market capitalism in the British empire was not immediate. Furthermore, it was necessitated by different driving factors, among them the increased scarcity of gold and silver and industrial revolution. To remain powerful and relevant against its European competitors, the British empire found it necessary to completely replace mercantilism with free-market capitalism. History shows that their early decision was beneficial, as those countries that did still dominate internationally.
References
Conti, T. V. (2018). Mercantilism: a materialist approach. Scandinavian Economic History Review , 66 (2), 186-200.
Wallech, S., Daryaee, T., Hendricks, C., Negus, A. L., Wan, P. P., & Bakken, G. M. (2013). World History: A Concise Thematic Analysis, Volume One (Vol. 1). John Wiley & Sons.
Weingast, B. R. (2018). War, Trade, and Mercantilism: Reconciling Adam Smith's Three Theories of the British Empire. Available at SSRN 2915959 .
