Mercantilism is an economic theory that measures a nation’s wealth by its availability of capital, such as gold or silver. It believes that the global supply of wealth is fixed, and any gain by one nation represents a loss by another. The ideal form is a nation that exports only finished products in exchange for capital, meeting all the needs of its citizens domestically. Colonies were a source of raw resources and a captive market. Mercantilism fell out of favor as free-market ideology became ascendant.
Mercantilism is a mostly historical economic theory that holds a nation’s wealth can be measured by its ready availability of capital, generally held in a concrete form such as gold or silver. Mercantilism states that the global supply of wealth is a fixed amount and that therefore any gain in wealth by one nation must necessarily represent a loss by another. Mercantilism is thus in many ways the opposite of the later laissez-faire capitalism promoted by economists such as Adam Smith.
The theoretically ideal form of mercantilism was a nation that bought nothing from outside countries, instead exporting only finished products in exchange for capital and steadily building its wealth. This would be accomplished by meeting all the needs of its citizens domestically, extracting the raw resources from the country itself or from the colonies, and then finishing them within the country before exporting them. In practice, this ideal could never exist, and therefore mercantilism was concerned with trying to get as close to the ideal as possible.
Indeed, there was no truly cohesive theory of mercantilism during the era in which its ideals were in the ascendant, from the sixteenth to the nineteenth century. Various economic philosophers and government officials have focused on different aspects of what is now called mercantilism, but it was not until strong opposition began to form, from free-market economists such as Adam Smith, that the term is been used to describe the disparate collection of targets. In hindsight, however, it is easy to see how the different strands of thought all worked towards a similar ideal, and thus appeared to form an outspoken mercantilism.
One of the fundamental tenets of mercantilism was that the global economy was a zero-sum game: if one nation gained, another lost. This meant that minimizing capital exports and maximizing capital imports was crucial. Then nations would remove taxes and trade barriers within their own countries and put up huge barriers to all exports. It also became imperative to try to extract every ounce of raw resource domestically and turn that raw resource into finished products that could be exported at a great profit. If the raw materials were not immediately available, it was acceptable to import them, then finish them in the country and export them at a profit.
Colonies also played an important role in mercantilism, as a constant source of raw resources and a captive market. Resources could be extracted from subjugated colonies, shipped to the mother country, processed into finished products, then sold to the colony market, which would often enact laws to ensure favorable trading treatment for the mother country over any other nations wishing to trade. The export of capital indicators, such as gold and silver, was particularly restricted by mercantilism, as it was seen as a measure of a nation’s direct wealth.
Eventually, theories of mercantilism fell out of favor as free-market ideology became ascendant. In free market theory, the free and prompt exchange of goods was seen as beneficial to all parties involved, with the global economy seen as an almost unlimited resource, rather than the mercantilism of the zero-sum closed game promoted. Although some pockets of mercantilist thinking persisted into the early 20th century, by the mid-20th century it was virtually abandoned by all serious economists.
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