Mercantilism

Mercantilism refers both to the economic policies of European nation-​states from roughly the mid-​16th to mid-​18th centuries and to the constellation of economic theories that were used to justify those policies. The term mercantilism, although not employed by Adam Smith, derives from his discussion and critique of the “mercantile system” in the Wealth of Nations (1776). Characterized by Smith as “in its nature and essence a system of restraint and regulation,” this system was called the mercantile (or commercial) system because Smith believed it served the special interests of domestic merchants and manufacturers at the expense of laborers, landowners, and consumers generally.

According to Smith, merchants and manufacturers frequently opposed free markets because their rate of profit was systematically lowered by unfettered competition. They therefore attempted to maintain their profits at artificially high levels by persuading their government to enact tariffs, bounties, and other special privileges that benefited the commercial classes at the expense of everyone else. It is through mercantilist policies that commercial interests are able to impose “an absurd tax upon the rest of their fellow citizens.”

Whereas Adam Smith viewed mercantilism as a self-​serving ideology promoted by merchants and manufacturers, modern historians have provided a broader perspective. Many agree with Eli Heckscher—whose two-​volume work, Mercantilism (1931), remains the definitive work in its field—that the primary purpose of mercantilist policies was to unify economic activity under state control. Mercantilism, according to Heckscher, “concentrated on the power of the state.”

Owing to the fierce and often violent competition among nation-​states, it was commonly argued in the 17th and 18th centuries that a country must constitute a self-​contained economic unit to remain strong and that essential economic activities must be subordinated to the state’s authority. This economic nationalism (as mercantilism is sometimes called) is required if a state is to successfully wage war, just as colonies must be established to ensure a reliable supply of raw materials.

These military and colonial ventures required enormous amounts of wealth, which in turn presupposed an economic system capable of producing it. As a leading German mercantilist put it in 1696, a “prince must first procure for his subjects a good livelihood if he will take anything from them.”

Before the term mercantilism was coined in the 19th century, this approach was sometimes called Colbertism after Jean Baptiste Colbert, minister of finance under Louis XIV from 1663 to 1683. Colbert undertook to systematically implement a mercantilist agenda in France. Foreign trade, which often was regarded as a type of warfare, was heavily regulated to ensure a surplus of exports over imports. Manufacturing industries deemed essential to the welfare of the state, especially those necessary for the waging of war, were heavily regulated, and royal monopolies and other privileges were granted to private companies and entrepreneurs. Meanwhile, an earlier prohibition on the export of precious metals was allowed to remain in effect. The basic purpose of these regulations was succinctly expressed by Colbert: “Trade is the source of finance and finance is the vital nerve of war.”

According to an early version of mercantilism (known as bullionism), the wealth of a nation consists of its precious metals. This doctrine, which led to a ban on the export of bullion and even coined money in some countries, was criticized by later mercantilists, such as Thomas Mun, who pointed to the detrimental effects of such prohibitions on foreign trade. In England’s Treasure by Foreign Trade (1664), Mun argued that, given the absence of mines in England, “we have no means to get treasure but by foreign trade.” He further maintained that this enrichment can be accomplished “by making our commodities which are exported yearly to over balance in value the foreign wares which we consume.”

This balance of trade doctrine, according to which the total amount of a nation’s wealth can be increased only when the value of its exports exceeds that of its imports (because payments for the difference will result in a net gain of specie), was a key component of later mercantilist theory. Although there were other facets to mercantilist policy, among them governmental manipulation of currency, maximum wage rates, a system of mandatory labor, and the regulation of interest, it was the balance of trade doctrine that received the most attention and the one that was the object of sustained criticism from Dudley North, David Hume, Adam Smith, and other critics of mercantilism.

Inasmuch as the nation was viewed as a single economic unit, it followed that a nation’s gain from international trade was measured in terms of a net gain in specie, or coined money. Domestic trade, which circulated money and commodities within a nation, was regarded as advantageous to private interests, but not to the nation as a whole, because it did nothing to augment the total amount of wealth. Wealth could be increased only through foreign trade and only when the total value of a nation’s exports exceeded the value of its imports, thereby resulting in a net gain of specie through payments from other countries.

It is important to keep this point in mind if we are to appreciate Adam Smith’s devastating critique of mercantilism in Book IV of the Wealth of Nations. Smith has been widely criticized for supposedly misrepresenting his mercantilist adversaries. We are told that, contrary to Smith’s inaccurate caricature, the more sophisticated mercantilists did not commit the crude fallacy of equating wealth with money. Smith, however, was not guilty of this misrepresentation. On the contrary, he expressly noted that, according to some of the better mercantilists, “the wealth of a country consists, not in its gold and silver only, but in its land, houses, and consumable goods of all different kinds.” But as Smith goes on to point out, and this notion is the core of his critique, this more sophisticated theory of wealth is inconsistent with the balance of trade doctrine. According to this latter theory, a favorable balance of trade is required for a net increase in a nation’s wealth, but there is no way to measure this favorable balance except in terms of money.

It follows, as Smith pointed out, that mercantilists cannot have it both ways. They cannot repudiate the crude theory that identifies wealth with money while insisting that a nation can increase its wealth only through the importation of money attained through a favorable balance of trade.

Further Readings

Cole, Thomas Woolsey. Colbert and a Century of French Mercantilism. 2 vols. New York: Columbia University Press, 1939.

Ekelund, Robert B., and Robert D. Tollison. Politicized Economies: Monarchy, Monopoly, and Mercantilism. College Station: Texas A&M University Press, 1997.

Heckscher, Eli. Mercantilism. Mendel Shapiro, trans. 2 vols. New York: Macmillan, 1962.

Mun, Thomas. “England’s Treasure by Foreign Trade.” The Western Tradition. Vol. 2. 4th ed. Eugen Weber, ed. Lexington: D.C. Heath, 1990.

Smith, Adam. The Wealth of Nations. Book V. Indianapolis, IN: Liberty Fund, 1981.