Mercantilism
This article is part of the Intermediate course on Libertarianism and the Austrian School of Economics -> Module 2: Mercantilism
Last updated: 2026-06-03
Mercantilism
Mercantilism was the dominant set of economic ideas and policies in Europe, among the absolutist states (Spain, Portugal, England, France, Holland), between the sixteenth century and the mid-eighteenth century (approximately 1500–1750).
It was not a formal “school” with a single central theorist, but a pragmatic set of practices and recommendations directed at absolutist monarchs to strengthen the power of the emerging nation-state.
Adam Smith pejoratively baptized it the “mercantile system” in Book IV of The Wealth of Nations, and made it his principal target of critique.
Main ideas of mercantilism
- Objectives: accumulate precious metals, protect national industry with tariffs, prohibitions, and subsidies, and create monopolies.
Wealth = precious metals (Bullionism)
- This idea is a consequence of Bullionism
- The prosperity of a nation was measured by the quantity of gold and silver that the State or the kingdom possessed.
- Metallic money was not only a medium of exchange, but the very form of wealth.
Favorable balance of trade
- To accumulate metals, it was essential to export more than was imported.
- A “positive balance of trade” brought gold into the country; a negative one took it out.
- World trade was seen as a zero-sum game: what one gains, another loses (Montaigne’s Fallacy).
- The State must intervene strongly to achieve a favorable balance of trade (export more than is imported).
Protectionism and intense state regulation
- High tariffs and prohibitions on imports of finished manufactures.
- Subsidies to exports.
- Royal monopolies granted to privileged companies (such as the British East India Company or the Indies companies).
- Restrictions on the export of raw materials (so that national industry would process them).
- Population control: foster demographic growth in order to have cheap and numerous labor.
- Navigation laws (Navigation Acts in England) that obliged goods to be transported in one’s own ships.
Colonialism as an economic instrument
- The colonies were to supply cheap raw materials to the metropolis (the colonizing country) and buy exclusively its finished manufactures. The colonies were not allowed to compete industrially with the mother country.
- Colonialism and Transatlantic Slavery are a direct consequence of Mercantilist ideas.
Summary
- Mercantilism was an economic nationalism in the service of state power.
- The economy was subordinated to State policy.
- Mercantilism: wealth = gold + balance of trade + strong State.
Adam Smith’s principal critique
Smith destroyed the ideas of mercantilism with several key arguments:
-
The true wealth of nations is not gold, but the productive capacity of the people:
- goods and services that satisfy human needs (the famous phrase: “consumption is the sole end and purpose of all production”).
-
Trade is not a zero-sum game.
- Both parties gain when they exchange voluntarily according to their advantage (though Smith did not yet use the term “Theory of comparative advantage”, which David Ricardo would develop later).
-
The “invisible hand” and well-channeled self-interest
- generate a spontaneous order far more efficient than any Central Planning.
-
Restrictions on trade benefit privileged producers and merchants at the expense of consumers and of the nation as a whole.
- Smith was especially hard on merchants: “people of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”
Smith dedicates the whole of Book IV to dismantling the “mercantile system” and, within it, colonialism as its most absurd and costly expression.
- The British colonial empire (and others) was created “only to raise a nation of customers” obliged to buy at monopolistic prices.
- The cost of defending and maintaining colonies fell on British taxpayers, while the benefits went to a handful of monopolists.
- Free trade would make the colonies unnecessary: wealth arises from the division of labor and voluntary exchange, not from conquering territories.
According to Adam Smith: mercantilist colonialism is the living proof that interventionism impoverishes and generates suffering.
This article is part of the Intermediate course on Libertarianism and the Austrian School of Economics -> Module 2: Mercantilism
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Last updated: 2026-06-03
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