Mercantilism

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

For roughly three centuries, European governments treated trade the way a besieged army treats supplies: as a fixed store to be hoarded rather than a process that could grow. Mercantilism held that a nation's wealth was measured chiefly by its stock of gold and silver, and that international trade was a zero sum contest in which one country's gain was necessarily another's loss. A government that wanted to grow richer, on this view, had only one honest path: sell more to foreigners than it bought from them, and use the state's own power, tariffs, subsidies, chartered monopolies, colonial law, to make sure that balance tipped its way. Unlike the ideologies that came after it, mercantilism never claimed an independent theory of who should rule or why; it took the sovereign's authority for granted and asked only how that authority should be used in the economic sphere. The answer was: to make the nation stronger relative to its rivals, whatever the cost to the individual merchant, consumer or colonial subject caught inside the system.

Jean-Baptiste Colbert, Louis XIV's controller-general of finances from 1665 to 1683, gave the doctrine its most complete practical expression, so much so that French historians still call the approach colbertisme. He raised tariffs on foreign manufactures, chartered state-favoured companies with monopoly trading rights, subsidised domestic industries judged strategically important, and built a navy and merchant marine capable of enforcing France's colonial trade laws. Those laws were the doctrine's sharpest edge: colonies existed, under mercantilist theory, to supply raw materials the mother country could not produce itself and to buy back finished goods manufactured at home, with foreign trade legally closed off in both directions. A Caribbean sugar planter or a Massachusetts merchant did not choose this arrangement; it was imposed as the logical extension of a doctrine that measured the colony's whole value in terms of what it added to the mother country's bullion reserves.

That imposition carried consequences its architects did not intend. Historians link the resentment built up under mercantilist trade restriction directly to the revolutionary movements that followed it, the American Revolution most prominently among them, in colonies that had spent generations paying prices set by a metropole they had no vote in. The doctrine's intellectual death came from a different direction entirely: Adam Smith's 1776 Wealth of Nations argued that wealth was not a fixed stock to be captured but something trade itself could create, so that voluntary exchange between nations, like exchange between individuals, could leave both sides better off rather than one richer at the other's expense. Laissez-faire capitalism took shape in direct opposition to everything mercantilism had assumed, and though no government has ever practiced Smith's doctrine in its pure form, no serious economic theory has defended mercantilism's zero sum premise since.

This article records tradition as it has been passed down and reported. Its sources are not yet part of the atlas's verified catalogue.

When Adam Smith sat down to write An Inquiry into the Nature and Causes of the Wealth of Nations, published in 1776, the target he had most immediately in view was not an abstract economic error but roughly two centuries of European state practice. Book Four of the Wealth of Nations is a sustained argument against what Smith called the mercantile system, the doctrine that had shaped trade policy in Britain, France, Spain, Portugal and the Netherlands since the sixteenth century, and it remains one of the most successful acts of intellectual demolition in the history of economics: no government has seriously defended mercantilism's core premises since.

Smith's central move was to attack the doctrine's founding assumption, that a nation's wealth is measured by its stock of gold and silver. Gold and silver, he argued, are simply commodities like any other, useful for buying things but not themselves the substance of wealth; a nation's real wealth is the goods and services its labour and land can produce, which trade increases rather than merely redistributes. From that single correction, the rest of mercantilist policy unraveled. If wealth is not a fixed stock, then trade between nations is not the zero sum contest mercantilism assumed; both trading partners could genuinely gain from an exchange each valued differently, the same logic Smith applied to trade between individuals within a single country. Tariffs designed to protect favoured domestic industries, on this account, did not enrich the nation as a whole; they enriched the protected industry at the expense of everyone who had to pay higher prices for what that industry produced, a less efficient, more costly outcome than simply buying the goods from whoever could make them most cheaply.

Smith's own term for the alternative he favoured, though not the one history remembers him by, was a system of natural liberty: government confined to defence, justice and a limited set of public works, leaving prices, wages and the direction of trade to the competitive market. Later economists and popular usage folded that position into the older French term laissez-faire, and it became, over the following century, the dominant governing philosophy across much of the industrializing world. Smith himself was more cautious than the doctrine that grew from his name; he defended some government intervention, in banking regulation and public education among other areas, that self-described laissez-faire advocates would later drop. The Wealth of Nations did not end government involvement in the economy. What it ended, more durably, was the intellectual respectability of the belief that had organized European trade policy for two hundred years.