<p>Here are a few reasons why an empire might choose to establish trade and exchange relations with its colonies rather than just take resources by force:</p>
<p>First, trade can be more efficient than the direct extraction of resources. It may be more cost-effective for the empire to allow the colonies to produce certain goods and then trade them for finished products rather than attempting to produce everything itself. This is a <a href="https://en.wikipedia.org/wiki/Comparative_advantage" rel="nofollow noreferrer">comparative advantage</a> consideration.</p>
<p>Second, trade can be more politically stable than direct resource extraction. If the empire can establish mutually beneficial trade relationships with its colonies, it may be able to maintain better relations with those colonies and avoid conflict. (A geo-political risk consideration).</p>
<p>Finally, trade can be a way for the empire to influence the colonies and shape their development. By controlling the terms of trade and the flow of goods and resources, the empire could influence its colonies' economic and political development.</p>
<p>So, overall, establishing trade and exchange relations with colonies can be a way for an empire to maximize its wealth and influence while minimizing the costs and risks associated with direct resource extraction. Having said that, as 1muflon1 points out in his answer, mercantilism, the dominant theory at the time did not fully recognize all these aspects, but they are still good reasons.</p>

CC BY-SA 4.0
2023-01-08T18:39:40.720Z
2023-01-08T18:39:40.720Z
BrsG
<blockquote>
<p>But why would an empire transport finished goods back to colonies?</p>
</blockquote>
<p>During the time the prevailing economic theory was mercantilism. According to mercantilism the way how country progresses and gets wealthy is by accumulating species of rare metals (gold and silver). Since these metals are rare in nature the easiest way of doing this is by running huge trade surpluses which means you have to export more than you import. Hence, following the expert consensus at the time countries tried their best to encourage exports and discourage imports. In fact, mercantilist would discourage even the imports of raw materials unless it was considered necessity (see more detailed overview in Grant and Brue the History of Economic Thought).</p>
<p>However, you should note this theory is now discredited. In fact going by current modern understanding of international trade such mercantilist policies reduce the wealth of a country (e.g. see discussion in Krugman et al International Trade Theory and Policy ch 3 and 10). So it is a misconception to say that the empires themselves received wealth from the colonies using this system as although merchant class for sure benefited (but they are private individuals not the whole country) country as a whole would be richer if it would opted for more sensible trade policy.</p>
<blockquote>
<p>Why would an empire establish trade and exchange relations with a colony at all if it can just take all the resources for free (given that an empire is more advanced in technology and weapons)?</p>
</blockquote>
<p>Several reasons:</p>
<ol>
<li><p>First you are not entirely correct.  Some empires did just that. For example, in South america Spanish conquistadors did effectively just plunder local population.</p>
<p>However, this is clearly not sustainable model of running economy. In fact it even lead to economic decline of Spain's economy after initial period of boost (see discussion in Ferguson Ascent of Money). The reason for this is two fold first the sort of genocidal plundering that conquistadors did is one-off thing. After you get gold and other valuables during initial plundering, this 'wealth' won't get renewed as you destroyed the society that created it in the first place, and removed any incentive of local people to accumulate new wealth.</p>
<p>Next, flooding an economy by some commodity (such as the Spain's gold inflow) just destroys the value of that commodity, it also encourages wasteful spending and can also lead to <a href="https://en.wikipedia.org/wiki/Dutch_disease" rel="nofollow noreferrer">dutch disease</a>. You can read more about that in the source mentioned above, or I also found this <a href="https://history.stackexchange.com/questions/9060/how-did-the-gold-of-the-new-world-cause-the-spanish-empire-to-collapse">history.se</a> answer to have quick summary.</p>
</li>
<li><p>In 16-18 century Africa was not colonized. European colonies were limited to primarily the New World and lesser extent Asia.</p>
<p>After the period of initial plundering in the New World (especially in South and Central America since North American societies were mostly just hunter gatherer societies without much to be plundered) the colonies were predominantly composed not of native population but by Europeans (most natives would live outside colonies).</p>
<p>Hence there wasn't any big technological difference. European settlers had pretty much the same level of technology as home countries. Hence they could much more easily resist mother countries that tried to extract too much resources out of them. Famously, thirteen colonies humiliated the British empire which was at the time of American war for independence number 1 super power over excessive taxation (and mind you this <em>excessive</em> taxation was on average 1-1.5% and much smaller than taxes levied back home in Britain - see <a href="https://www.mountvernon.org/george-washington/colonial-life-today/early-american-economics-facts/" rel="nofollow noreferrer">Miller</a>).</p>
<p>When it comes to Asia and British conquest of India, there wasn't extremely large technological difference between Mughal Empire and East India Company, and various different political entities in India had support from other European powers such a France or Portugal. East India Company conquered India by some clever diplomacy, having trained professional army and exploiting the decay of Mughal empire which was not directly caused by the company itself  (see <a href="https://www.worldhistory.org/East_India_Company/" rel="nofollow noreferrer">Cartwright 2022</a>). Moreover, the way how an administration in India worked was that for a most part local rulers stayed in place they just pledged their allegiance to the company and later British rule. There wasn't any modern concept of an Indian nation, nationalism was not invented yet (that came in 19th century). Individual princes ruled their feudal princedoms and were in essence suzerains.  If EIC or British empire would try to just loot and massacre everyone most likely they would get overthrown. Indeed that could have had happened when the EIC became too corrupt and extractive which sparked the Indian rebellion and was the reason why India was took from them under direct British rule.</p>
</li>
<li><p>As already explained the dominant thinking during the time was mercantilism. If you would be a king/emperor and called the most renowned  experts on economics at the time and ask them what you should do to make your country wealthy they would say export as much as possible import as little as possible. As already explained, this in retrospect wasn't actually good economics but scholars at the time believed this is the correct way of managing the economy.</p>
</li>
</ol>

CC BY-SA 4.0
2023-01-07T16:01:54.057Z
2023-01-07T16:15:35.340Z
2023-01-07T16:15:35.340Z
1muflon1
<p>It is commonly discussed that one way the empires of 16-18th would receive wealth from colonies is:</p>
<ol>
<li>Get raw materials from a colony</li>
<li>Transport them to the empire</li>
<li>Make more sophisticated products out of raw goods</li>
<li>Transport the finished goods to colonies and sell them there.</li>
</ol>
<p>For example <a href="https://www.investopedia.com/ask/answers/041615/how-did-mercantilism-affect-colonies-great-britain.asp" rel="nofollow noreferrer">here</a> I read that</p>
<blockquote>
<p>... the prevailing economic wisdom suggested that the empire's colonies could supply raw materials and resources to the mother country and subsequently be used as export markets for the finished products.</p>
</blockquote>
<p>For me it is clear how you benefit from getting raw materials from colonies. But why would an empire transport finished goods back to colonies?</p>
<p>Why would an empire establish trade and exchange relations with a colony at all if it can just take all the resources for free (given that an empire is more advanced in technology and weapons)?</p>
<p>In other words, why would an empire need to bring back some finished goods to get something if it can just come to a colony and take everything?</p>

<international-trade><foreign-exchange><economic-history>
How did empires make wealth out of empire-colony trade?
Антон Бугаев
# How did empires make wealth out of empire-colony trade?

(Asked by: username_0 on 2023-01-07)

It is commonly discussed that one way the empires of 16-18th would receive wealth from colonies is:

1. Get raw materials from a colony
2. Transport them to the empire
3. Make more sophisticated products out of raw goods
4. Transport the finished goods to colonies and sell them there.

For example [here](https://www.investopedia.com/ask/answers/041615/how-did-mercantilism-affect-colonies-great-britain.asp) I read that

> ... the prevailing economic wisdom suggested that the empire's colonies could supply raw materials and resources to the mother country and subsequently be used as export markets for the finished products.

For me it is clear how you benefit from getting raw materials from colonies. But why would an empire transport finished goods back to colonies?

Why would an empire establish trade and exchange relations with a colony at all if it can just take all the resources for free (given that an empire is more advanced in technology and weapons)?

In other words, why would an empire need to bring back some finished goods to get something if it can just come to a colony and take everything?

**Tags:** international-trade, foreign-exchange, economic-history

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## 2 answers

### Answer by username_2 on 2023-01-07. Score: 2 | Accepted answer

> But why would an empire transport finished goods back to colonies?

During the time the prevailing economic theory was mercantilism. According to mercantilism the way how country progresses and gets wealthy is by accumulating species of rare metals (gold and silver). Since these metals are rare in nature the easiest way of doing this is by running huge trade surpluses which means you have to export more than you import. Hence, following the expert consensus at the time countries tried their best to encourage exports and discourage imports. In fact, mercantilist would discourage even the imports of raw materials unless it was considered necessity (see more detailed overview in Grant and Brue the History of Economic Thought).

However, you should note this theory is now discredited. In fact going by current modern understanding of international trade such mercantilist policies reduce the wealth of a country (e.g. see discussion in Krugman et al International Trade Theory and Policy ch 3 and 10). So it is a misconception to say that the empires themselves received wealth from the colonies using this system as although merchant class for sure benefited (but they are private individuals not the whole country) country as a whole would be richer if it would opted for more sensible trade policy.

> Why would an empire establish trade and exchange relations with a colony at all if it can just take all the resources for free (given that an empire is more advanced in technology and weapons)?

Several reasons:

1. First you are not entirely correct. Some empires did just that. For example, in South america Spanish conquistadors did effectively just plunder local population.

   However, this is clearly not sustainable model of running economy. In fact it even lead to economic decline of Spain's economy after initial period of boost (see discussion in Ferguson Ascent of Money). The reason for this is two fold first the sort of genocidal plundering that conquistadors did is one-off thing. After you get gold and other valuables during initial plundering, this 'wealth' won't get renewed as you destroyed the society that created it in the first place, and removed any incentive of local people to accumulate new wealth.

   Next, flooding an economy by some commodity (such as the Spain's gold inflow) just destroys the value of that commodity, it also encourages wasteful spending and can also lead to [dutch disease](https://en.wikipedia.org/wiki/Dutch_disease). You can read more about that in the source mentioned above, or I also found this [history.se](https://history.stackexchange.com/questions/9060/how-did-the-gold-of-the-new-world-cause-the-spanish-empire-to-collapse) answer to have quick summary.
2. In 16-18 century Africa was not colonized. European colonies were limited to primarily the New World and lesser extent Asia.

   After the period of initial plundering in the New World (especially in South and Central America since North American societies were mostly just hunter gatherer societies without much to be plundered) the colonies were predominantly composed not of native population but by Europeans (most natives would live outside colonies).

   Hence there wasn't any big technological difference. European settlers had pretty much the same level of technology as home countries. Hence they could much more easily resist mother countries that tried to extract too much resources out of them. Famously, thirteen colonies humiliated the British empire which was at the time of American war for independence number 1 super power over excessive taxation (and mind you this *excessive* taxation was on average 1-1.5% and much smaller than taxes levied back home in Britain - see [Miller](https://www.mountvernon.org/george-washington/colonial-life-today/early-american-economics-facts/)).

   When it comes to Asia and British conquest of India, there wasn't extremely large technological difference between Mughal Empire and East India Company, and various different political entities in India had support from other European powers such a France or Portugal. East India Company conquered India by some clever diplomacy, having trained professional army and exploiting the decay of Mughal empire which was not directly caused by the company itself (see [Cartwright 2022](https://www.worldhistory.org/East_India_Company/)). Moreover, the way how an administration in India worked was that for a most part local rulers stayed in place they just pledged their allegiance to the company and later British rule. There wasn't any modern concept of an Indian nation, nationalism was not invented yet (that came in 19th century). Individual princes ruled their feudal princedoms and were in essence suzerains. If EIC or British empire would try to just loot and massacre everyone most likely they would get overthrown. Indeed that could have had happened when the EIC became too corrupt and extractive which sparked the Indian rebellion and was the reason why India was took from them under direct British rule.
3. As already explained the dominant thinking during the time was mercantilism. If you would be a king/emperor and called the most renowned experts on economics at the time and ask them what you should do to make your country wealthy they would say export as much as possible import as little as possible. As already explained, this in retrospect wasn't actually good economics but scholars at the time believed this is the correct way of managing the economy.


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### Answer by username_1 on 2023-01-08. Score: 1

Here are a few reasons why an empire might choose to establish trade and exchange relations with its colonies rather than just take resources by force:

First, trade can be more efficient than the direct extraction of resources. It may be more cost-effective for the empire to allow the colonies to produce certain goods and then trade them for finished products rather than attempting to produce everything itself. This is a [comparative advantage](https://en.wikipedia.org/wiki/Comparative_advantage) consideration.

Second, trade can be more politically stable than direct resource extraction. If the empire can establish mutually beneficial trade relationships with its colonies, it may be able to maintain better relations with those colonies and avoid conflict. (A geo-political risk consideration).

Finally, trade can be a way for the empire to influence the colonies and shape their development. By controlling the terms of trade and the flow of goods and resources, the empire could influence its colonies' economic and political development.

So, overall, establishing trade and exchange relations with colonies can be a way for an empire to maximize its wealth and influence while minimizing the costs and risks associated with direct resource extraction. Having said that, as 1muflon1 points out in his answer, mercantilism, the dominant theory at the time did not fully recognize all these aspects, but they are still good reasons.


---

