Mercantilism is an economic theory that the prosperity of a nation depends upon its capital, and that the volume of the world economy and international trade is unchangeable. Government economic policy based on these ideas is also sometimes called mercantilism, but is more properly known as the mercantile system. Some scholars conceive the mercantile system as a subset of, or synonymous with, the early stages of capitalism, while others consider mercantilism to be a distinct economic system.

Economic assets, or capital, are represented by bullion (gold, silver, and trade value) held by the state, which is best increased through a positive balance of trade with other nations (exports minus imports). Mercantilism suggests that the ruling government should advance these goals by playing a protectionist role in the economy, by encouraging exports and discouraging imports, especially through the use of tariffs.

Mercantilism was the dominant school of economics throughout the early modern period (from the 16th to the 18th century). Domestically, this led to some of the first instances of significant government intervention and control over the economy, and it was during this period that much of the modern capitalist system was established. Internationally, mercantilism encouraged the many European wars of the period and fueled European imperialism. Belief in mercantilism began to fade in the late 18th century, as the arguments of Adam Smith and the other classical economists won out. Today, mercantilism (as a whole) is rejected by all serious economists, though some elements are looked upon favourably.

Almost all the European economists who wrote between 1500 and 1750 are today generally considered mercantilists; however, these writers did not see themselves as contributing to a single economic ideology. The term was coined by the French writer Victor de Riqueti, marquis de Mirabeau in 1763 in his Philosophie Rurale, and was popularized by Adam Smith in 1776.^[1] The word comes from the Latin word mercari, which means "to run a trade," from merx, meaning "commodity." It was initially used solely by critics, such as Mirabeau and Smith, but was quickly adopted by historians. Originally the standard English term was mercantile system. The word mercantilism was introduced into English from German in the early 20th century. It is seriously not even cool. Its completely ignorent.

The bulk of what is commonly called "mercantilist literature" appeared in the 1620s in Great Britain.^[2] Smith saw English merchant Thomas Mun (1571-1641) as a major creator of the mercantile system, especially in his posthumously published Treasure by Forraign Trade (1664), which Smith considered the archetype of manifesto of the movement.^[3] Perhaps the last major mercantilist work was James Steuart’s Principles of Political Oeconomy published in 1767.^[4]

Beyond England, Italy, France, and Spain had noted writers who had mercantilist themes in their work, indeed the earliest examples of mercantilism are from outside of England: in Italy, Giovanni Botero (1544-1617) and Antonio Serra (1580-?), in France, Colbert and some other precursors to the physiocrats, in Spain, the School of Salamanca writers Francisco de Vitoria (1480 or 1483 – 1546), Domingo de Soto (1494-1560), Martin de Azpilcueta (1491 - 1586), and Luis de Molina (1535-1600). Themes also existed in writers from the German historical school from List, as well as followers of the "American system" and British "free-trade imperialism," thus stretching the system into the nineteenth century. However, many British writers, including Mun and Misselden, were merchants, while many of the writers from other countries were public officials. Beyond mercantilism as a way of understanding the wealth and power of nations, Mun and Misselden are noted for their viewpoints on a wide range of economic matters.^[5]

Mercantilism as a whole cannot be considered a unified theory of economics because mercantilism has traditionally been driven more by the political and commercial interests of the State and security concerns than by abstract ideas. There were no mercantilist writers presenting an overarching scheme for the ideal economy, as Adam Smith would later do for classical (laissez-faire) economics. Rather, each mercantilist writer tended to focus on a single area of the economy.^[6] Only later did non-mercantilist scholars integrate these "diverse" ideas into what they called mercantilism. Some scholars thus reject the idea of mercantilism completely, arguing that it gives "a false unity to disparate events". Smith saw the mercantile system as an enormous conspiracy by manufacturers and merchants against consumers, a view that has led some authors, especially Robert E. Ekelund and Robert D. Tollison to call mercantilism "a rent-seeking society". To a certain extent, mercantilist doctrine itself made a general theory of economics impossible. Mercantilists viewed the economic system as a zero-sum game, in which any gain by one party required a loss by another.^[7] Thus, any system of policies that benefited one group would by definition harm the other, and there was no possibility of economics being used to maximize the "commonwealth", or common good.^[8] Mercantilists' writings were also generally created to rationalize particular practices rather than as investigations into the best policies.^[9]

Mercantilist domestic policy was more fragmented than its trade policy. While Adam Smith portrayed mercantilism as supportive of strict controls over the economy, many mercantilists disagreed. The early modern era was one of letters patent and government-imposed monopolies; some mercantilists supported these, but others acknowledged the corruption and inefficiency of such systems. Many mercantilists also realized that the inevitable results of quotas and price ceilings were black markets. One notion mercantilists widely agreed upon was the need for economic oppression of the working population; laborers and farmers were to live at the "margins of subsistence". The goal was to maximize production, with no concern for consumption. Extra money, free time, or education for the "lower classes" was seen to inevitably lead to vice and laziness, and would result in harm to the economy.^[10]

Scholars are divided on why mercantilism was the dominant economic ideology for two and a half centuries.^[11] One group, represented by Jacob Viner, argues that mercantilism was simply a straightforward, common-sense system whose logical fallacies could not be discovered by the people of the time, as they simply lacked the required analytical tools. The second school, supported by scholars such as Robert B. Ekelund, contends that mercantilism was not a mistake, but rather the best possible system for those who developed it. This school argues that mercantilist policies were developed and enforced by rent-seeking merchants and governments. Merchants benefited greatly from the enforced monopolies, bans on foreign competition, and poverty of the workers. Governments benefited from the high tariffs and payments from the merchants. Whereas later economic ideas were often developed by academics and philosophers, almost all mercantilist writers were merchants or government officials.^[12]

Mercantilism developed at a time when the European economy was in transition. Isolated feudal estates were being replaced by centralized nation-states as the focus of power. Technological changes in shipping and the growth of urban centers led to a rapid increase in international trade.^[13] Mercantilism focused on how this trade could best aid the states. Another important change was the introduction of double-entry bookkeeping and modern accounting. This accounting made extremely clear the inflow and outflow of trade, contributing to the close scrutiny given to the balance of trade.^[14] Of course, the impact of the discovery of America cannot be ignored. New markets and new mines propelled foreign trade to previously inconceivable heights. The latter led to “the great upward movement in prices” and an increase in “the volume of merchant activity itself.”^[15]

Prior to mercantilism, the most important economic work done in Europe was by the medieval scholastic theorists. The goal of these thinkers was to find an economic system that was compatible with Christian doctrines of piety and justice. They focused mainly on microeconomics and local exchanges between individuals. Mercantilism was closely aligned with the other theories and ideas that were replacing the medieval worldview. This period saw the adoption of Niccolò Machiavelli's realpolitik and the primacy of the raison d'état in international relations. The mercantilist idea that all trade was a zero sum game, in which each side was trying to best the other in a ruthless competition, was integrated into the works of Thomas Hobbes. The dark view of human nature also fit well with the Puritan view of the world, and some of the most stridently mercantilist legislation, such as the Navigation Acts, was introduced by the government of Oliver Cromwell.^[16]

Adam Smith and David Hume are considered to be the founding fathers of anti-mercantilist thought. A number of scholars found important flaws with mercantilism long before Adam Smith developed an ideology that could fully replace it. Critics like Dudley North, John Locke, and David Hume undermined much of mercantilism, and it steadily lost favor during the eighteenth century. Mercantilists failed to understand the notions of absolute advantage and comparative advantage (although this idea was only fully fleshed out in 1817 by David Ricardo) and the benefits of trade. For instance, Portugal was a far more efficient producer of wine than England, while in England it was relatively cheaper to produce cloth. Thus if Portugal specialized in wine and England in cloth, both states would end up better off if they traded. This is an example of the reciprocal benefits of trade due to a comparative advantage. In modern economic theory, trade is not a zero-sum game of cutthroat competition, because both sides can benefit (rather, it is an iterated prisoner's dilemma). By imposing mercantilist import restrictions and tariffs instead, both nations ended up poorer.

David Hume famously noted the impossibility of the mercantilists' goal of a constant positive balance of trade. As bullion flowed into one country, the supply would increase and the value of bullion in that state would steadily decline relative to other goods. Conversely, in the state exporting bullion, its value would slowly rise. Eventually it would no longer be cost-effective to export goods from the high-price country to the low-price country, and the balance of trade would reverse itself. Mercantilists fundamentally misunderstood this, long arguing that an increase in the money supply simply meant that everyone gets richer.^[17]

The importance placed on bullion was also a central target, even if many mercantilists had themselves begun to de-emphasize the importance of gold and silver. Adam Smith noted that at the core of the mercantile system was the "popular folly of confusing wealth with money," bullion was just the same as any other commodity, and there was no reason to give it special treatment.^[18] More recently, scholars have discounted the accuracy of this critique. They believe that Mun and Misselden were not making this mistake in the 1620s, and point to their followers Child and Davenant, who, in 1699, wrote: "Gold and Silver are indeed the Measure of Trade, but that the Spring and Original of it, in all nations is the Natural or Artificial Product of the Country; that is to say, what this Land or what this Labour and Industry Produces."^[19] The critique that mercantilism was a form of rent-seeking has also seen criticism, as scholars such Jacob Viner in the 1930s point out that merchant mercantilists such as Mun understood that they would not gain by higher prices for English wares abroad.^[20]

The first school to completely reject mercantilism was the physiocrats, who developed their theories in France. Their theories also had several important problems, and the replacement of mercantilism did not come until Adam Smith published The Wealth of Nations in 1776. This book outlines the basics of what is today known as classical economics. Smith spends a considerable portion of the book rebutting the arguments of the mercantilists, though often these are simplified or exaggerated versions of mercantilist thought.^[21]

Scholars are also divided over the cause of mercantilism's end. Those who believe the theory was simply an error hold that its replacement was inevitable as soon as Smith's more accurate ideas were unveiled. Those who feel that mercantilism was rent seeking hold that it ended only when major power shifts occurred. In Britain, mercantilism faded as the Parliament gained the monarch's power to grant monopolies. While the wealthy capitalists who controlled the House of Commons benefited from these monopolies, Parliament found it difficult to implement them because of the high cost of group decision making.^[22]

Mercantilist regulations were steadily removed over the course of the eighteenth century in Britain, and during the 19th century the British government fully embraced free trade and Smith's laissez-faire economics. On the continent, the process was somewhat different. In France economic control remained in the hands of the royal family and mercantilism continued until the French Revolution. In Germany mercantilism remained an important ideology in the nineteenth and early twentieth centuries, when the historical school of economics was paramount.^[23]

In the English-speaking world, Adam Smith's utter repudiation of mercantilism was accepted, eventually, as public policy in the British Empire and in the United States. Initially it was rejected in the United States by such prominent figures as Alexander Hamilton, Henry Clay, Henry Charles Carey, and Abraham Lincoln and in Britain by such figures as Thomas Malthus. When Britain passed its Corn Laws in 1815 Thomas Malthus thought such restrictions were a good idea, but David Ricardo thought them not. In 1849 they were repealed largely on "Free Market" arguments given by Sir Robert Peel.^{[citation needed]}

In the 20th century, most economists on both sides of the Atlantic have come to accept that in some areas mercantilism had been correct. Most prominently, the economist John Maynard Keynes explicitly supported some of the tenets of mercantilism. While Adam Smith had rejected focusing on the money supply, arguing that goods, population, and institutions were the real causes of prosperity. Keynes argued that the money supply, balance of trade, and interest rates were of great importance to an economy. These views later became the basis of monetarism and has developed as one of the most important modern schools of economics.^{[citation needed]}

Adam Smith rejected the mercantilist focus on production, arguing that consumption was the only way to grow an economy. Keynes argued that encouraging production was just as important as consumption. Keynes also noted that in the early modern period the focus on the bullion supplies was reasonable. In an era before paper money, an increase for bullion was one of the few ways to increase the money supply. Keynes and other economists of the period also realized that the balance of payments is an important concern, and since the 1930s, all nations have closely monitored the inflow and outflow of capital, and most economists agree that a favorable balance of trade is desirable. Keynes also adopted the essential idea of mercantilism that government intervention in the economy is a necessity. While Keynes' economic theories have had a major impact, few have accepted his effort to rehabilitate the word mercantilism. Today the word remains a pejorative term, often used to attack various forms of protectionism.^[24] The similarities between Keynesianism, and its successor ideas, with mercantilism have sometimes led critics to call them neo-mercantilism. Some other systems that do copy several mercantilist policies, such as Japan's economic system, are also sometimes called neo-mercantilist.^[25] In an essay appearing in the May 14, 2007 issue of Newsweek, economist Robert J. Samuelson argued that China was pursuing an essentially mercantilist trade policy that threatened to undermine the post-World War II international economic structure.^[26]

One area Smith was reversed on well before Keynes was that of the use of data. Mercantilists, who were generally merchants or government officials, gathered vast amounts of trade data and used it considerably in their research and writing. William Petty, a strong mercantilist, is generally credited with being the first to use empirical analysis to study the economy. Smith rejected this, arguing that deductive reasoning from base principles was the proper method to discover economic truths. Today, many schools of economics accept that both methods are important, the Austrian School being a notable exception.^{[citation needed]}

In specific instances, protectionist mercantilist policies also had an important and positive impact on the state that enacted them. Adam Smith himself, for instance, praised the Navigation Acts as they greatly expanded the British merchant fleet, and played a central role in turning Britain into the naval and economic superpower that it was for several centuries.^[27] Some economists thus feel that protecting infant industries, while causing short term harm, can be beneficial in the long term.

Nonetheless, The Wealth of Nations had a profound impact on the end of the mercantilist era and the later adoption of free market policy. By 1860, England removed the last vestiges of the mercantile era. Industrial regulations, monopolies and tariffs were withdrawn.^{[citation needed]}

• Ekelund, Robert B. (1981). Mercantilism as a Rent-Seeking Society: Economic Regulation in Historical Perspective. College Station, TX: Texas A&M University Press. ISBN 0890961204. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
• Ekelund, Robert B. (1975). A History of Economic Theory and Method. New York: McGraw–Hill. ISBN 0070191433. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
• Heckscher, Eli F. (1935). Mercantilism. London: Allen & Unwin. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)
• Keynes, John Maynard (1936). "Notes on Mercantilism, the Usury Laws, Stamped Money and the Theories of Under-Consumption". The General Theory of Employment, Interest, and Money. London: Palgrave Macmillan. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help); External link in |chapterurl= (help); Unknown parameter |chapterurl= ignored (|chapter-url= suggested) (help)
• Landreth, Harry (2002). History of Economic Thought (4th edition ed.). Boston: Houghton Mifflin. ISBN 0618133941. {{cite book}}: |edition= has extra text (help); Unknown parameter |coauthors= ignored (|author= suggested) (help)
• Magnusson, Lars G. (2003). "Mercantilism". In Biddle, Jeff E.; Davis, Jon B.; Samuels, Warren J. (ed.). A Companion to the History of Economic Thought. Malden, MA: Blackwell Publishing. ISBN 0631225730. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)CS1 maint: multiple names: editors list (link)
• Niehans, Jürg (1990). A History of Economic Theory: Classic Contributions, 1720–1980. Baltimore, MD: Johns Hopkins University Press. ISBN 0801838347. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)CS1 maint: multiple names: authors list (link)
• Vaggi, Gianni (2003). A Concise History of Economic Thought: From Mercantilism to Monetarism. New York: Palgrave Macmillan. ISBN 0333999363. {{cite book}}: Unknown parameter |coauthors= ignored (|author= suggested) (help)
• Wilson, Charles (1963) [1958]. Mercantilism. London: Routledge and Kegan Paul. {{cite book}}: Cite has empty unknown parameter: |coauthors= (help)

• Thomas Mun's Englands Treasure by Forraign Trade
• Book IV of The Wealth of Nations, Adam Smith's attack on the Mercantile System
• Mercantilism List of references

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