ARTIFICIAL INTELLIGENCE

“Mercantilism is an economic theory and policy from the 16th-18th centuries where governments heavily regulated trade to build national wealth and power by maximizing exports, minimizing imports, and accumulating precious metals like gold and silver.” – Mercantilism

Mercantilism is an early, modern economic theory and statecraft practice (c. 16th–18th centuries) in which governments heavily regulate trade and production to increase national wealth and power by maximising exports, minimising imports, and accumulating bullion (gold and silver).^3,4,2

Comprehensive definition

Mercantilism is an economic doctrine and policy regime that treats wealth as finite and international trade as a zero-sum game, so that one state’s gain is understood to be another’s loss.^3,6 Under this view, the purpose of economic activity is not individual welfare but the augmentation of state power, especially in competition with rival nations.^3,6

Core features include:

• Bullionism and wealth accumulation
  Wealth is measured primarily by a country’s stock of precious metals, especially gold and silver, often called bullion.^3,1,2 If a nation lacks mines, it is expected to obtain bullion through a “favourable” balance of trade, i.e. persistent export surpluses.^3,2
• Favourable balance of trade
  Governments strive to ensure exports exceed imports so that foreign buyers pay the difference in bullion.^3,2,4 A favourable balance of trade is engineered via:
• High tariffs and quotas on imports
• Export promotion (subsidies, privileges)
• Restrictions or bans on foreign manufactured goods^2,4,5
• Strong, interventionist state
  Mercantilism assumes an active government role in regulating the economy to serve national objectives.^3,4,5 Typical interventions include:
• Granting monopolies and charters to favoured firms or trading companies (e.g. British East India Company)⁴
• Regulating wages, prices, and production
• Directing capital to strategic sectors (ships, armaments, textiles)^2,5
• Enforcing navigation acts to reserve shipping for national fleets
• Colonialism and economic nationalism
  Mercantilism is closely tied to the rise of nation-states and overseas empires.^2,4,3 Colonies are designed to:
• Supply raw materials cheaply to the “mother country”
• Provide captive markets for its manufactured exports
• Be forbidden from developing competing manufacturing industries
  All trade between colony and metropole is typically reserved as a monopoly of the mother country.^3,4
• Population, labour and social discipline
  A large population is considered essential to provide soldiers, sailors, workers and domestic consumers.³ Mercantilist states often:
• Promote thrift and saving as virtues
• Pass sumptuary laws limiting luxury imports, to avoid bullion outflows and keep labour disciplined³
• Favour policies that keep wages relatively low to preserve competitiveness and employment in export industries⁴
• Winners and losers
  The system tends to privilege merchants, merchant companies and the state over consumers and small producers.⁴ High protection raises domestic prices and lowers variety, but increases profits and state revenues through custom duties and controlled markets.^2,5

As an overarching logic, mercantilism can be summarised as “economic nationalism for the purpose of building a wealthy and powerful state”.⁶

Mercantilism in historical context

• Origins and dominance
  Mercantilist ideas emerged as feudalism declined and nation-states formed in early modern Europe, notably in England, France, Spain, Portugal and the Dutch Republic.^1,2,4 They dominated Western European economic thinking and policy from the 16th century to the late 18th century.^3,6
• Practice rather than explicit theory
  Proponents such as Thomas Mun (England), Jean-Baptiste Colbert (France) and Antonio Serra (Italy) did not use the word “mercantilism”.³ They wrote about trade, money and statecraft; the label “mercantile system” and later “mercantilism” was coined and popularised by Adam Smith in 1776.^3,4,6
• Institutional expression
  Mercantilist policy underpinned:
• The Navigation Acts and the rise of British sea power
• French Colbertist industrial policy (textiles, shipbuilding, arsenals)
• Spanish and Portuguese bullion-based imperial systems
• Chartered companies such as the British East India Company, which fused commerce, governance and military force under state-backed monopolies⁴
• Transition to capitalism and free-trade thought
  Mercantilism created conditions for early capitalism by encouraging capital accumulation, long-distance trade networks and early industrial development.³ But it also prompted a sustained intellectual backlash, most famously from Adam Smith and later classical economists, who argued that:
• Wealth is not finite and can be expanded through productivity and specialisation
• Free trade and comparative advantage can benefit all countries, rather than being zero-sum^2,4

Critiques and legacy

Classical and later economists criticised mercantilism for:

• Confusing money (bullion) with real wealth (productive capacity, labour, technology)²
• Undermining consumer welfare through high prices and limited choice caused by import restrictions and monopolies^2,5
• Fostering rent-seeking alliances between state and merchant elites at the expense of the general public^4,6

Although mercantilism is usually considered a superseded doctrine, many contemporary protectionist or “neo-mercantilist” policies—such as aggressive export promotion, managed exchange rates, and strategic trade restrictions—are often described as mercantilist in spirit.^2,5

The key strategy theorist: Adam Smith and his relationship to mercantilism

The most important strategic thinker associated with mercantilism—precisely because he dismantled it and re-framed strategy—is Adam Smith (1723–1790), the Scottish moral philosopher and political economist often called the founder of modern economics.^2,3,4,6

Although Smith was not a mercantilist, his work provides the definitive critique and strategic re-orientation away from mercantilism, and he is the thinker who named and systematised the concept.

Smith’s engagement with mercantilism

• In An Inquiry into the Nature and Causes of the Wealth of Nations, Smith repeatedly refers to the existing policy regime as the “mercantile system” and subjects it to a detailed historical and analytical critique.^3,4,6
• He argues that:
• National wealth lies in the productive powers of labour and capital, not in the mere accumulation of gold and silver.^2,6
• Free exchange and competition, not monopolies and trade restraints, are the most reliable mechanisms for increasing overall prosperity.
• International trade can be mutually beneficial, rejecting the zero-sum assumption central to mercantilism.^2,4
• Smith maintains that mercantilism benefits a narrow coalition of merchants and manufacturers, who use state power—tariffs, monopolies, trading charters—to secure rents at the expense of the wider population.^4,6

In strategic terms, Smith redefined economic statecraft: instead of seeking power through hoarding bullion and favouring particular firms, he proposed that long-run national strength is best served by efficient markets, specialisation and limited government interference.

Biographical sketch and intellectual formation

• Early life and education
  Adam Smith was born in Kirkcaldy, Scotland, in 1723.³ He studied at the University of Glasgow, where he encountered the Scottish Enlightenment’s emphasis on reason, moral philosophy and political economy, and later at Balliol College, Oxford.^3,6
• Academic and public roles
  He became Professor of Logic and later Moral Philosophy at the University of Glasgow, lecturing on ethics, jurisprudence, and political economy.⁶ His first major work, The Theory of Moral Sentiments, explored sympathy, virtue and the moral foundations of social order.
• European travels and observation of mercantilist systems
  From 1764 to 1766, Smith travelled in France and Switzerland as tutor to the Duke of Buccleuch, meeting leading physiocrats and observing French administrative and mercantilist practices first-hand.⁶ These experiences sharpened his critique of existing systems and influenced his articulation of freer trade and limited government.
• The Wealth of Nations and its impact
  Published in 1776,The Wealth of Nations systematically:
• Dissects mercantilist doctrines and practices across Britain and Europe
• Explains the division of labour, market coordination and the role of self-interest under appropriate institutional frameworks
• Sets out a strategic blueprint for economic policy based on “natural liberty”, moderate taxation, minimal trade barriers and competitive markets^2,4,6

Smith died in 1790 in Edinburgh, but his analysis of mercantilism reshaped both economic theory and state strategy. Governments gradually moved—unevenly and often incompletely—from mercantilist controls toward liberal, market-oriented trade regimes, making Smith the key intellectual bridge between mercantilist economic nationalism and modern strategic thinking about trade, growth and state power.

References

1. https://legal-resources.uslegalforms.com/m/mercantilism

2. https://corporatefinanceinstitute.com/resources/economics/mercantilism/

3. https://www.britannica.com/money/mercantilism

4. https://www.ebsco.com/research-starters/diplomacy-and-international-relations/mercantilism

5. https://www.economicshelp.org/blog/17553/trade/mercantilism-theory-and-examples/

6. https://www.econlib.org/library/Enc/Mercantilism.html

7. https://dictionary.cambridge.org/us/dictionary/english/mercantilism