What is "mercantilism"

1834, from French mercantilisme; see mercantile + -ism. Related: mercantilist.

n. An economic theory that holds that the prosperity of a nation depends upon its supply of capital, and that the global volume of trade is "unchangeable".

1. n. an economic system (Europe in 18th C) to increase a nation's wealth by government regulation of all of the nation's commercial interests [syn: mercantile system]

2. transactions (sales and purchases) having the objective of supplying commodities (goods and services) [syn: commerce, commercialism]

Mercantilism was an economic theory and practice, dominant in modernized parts of Europe during the 16th to the 18th century, that promoted governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers. It was the economic counterpart of the previous medieval version of political power; divine right of kings and absolute monarchy. Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance of trade, especially of finished goods. Historically, such policies frequently led to war and also motivated colonial expansion. Mercantilist theory varies in sophistication from one writer to another and has evolved over time. High tariffs, especially on manufactured goods, are an almost universal feature of mercantilist policy. Other policies have included

• forbidding colonies to trade with other nations
• monopolizing markets with staple ports
• banning the export of gold and silver, even for payments
• forbidding trade to be carried in foreign ships
• subsidies on exports
• promoting manufacturing through research or direct subsidies
• limiting wages
• maximizing the use of domestic resources
• restricting domestic consumption through non-tariff barriers to trade.

Mercantilism in its simplest form is bullionism, yet mercantilist writers have emphasized the circulation of money and reject hoarding. Their emphasis on monetary metals accords with current ideas regarding the money supply, such as the stimulative effect of a growing money supply. Specie concerns have since been rendered irrelevant by fiat money and floating exchange rates. In time, the heavy emphasis on money was supplanted by industrial policy, accompanied by a shift in focus from the capacity to carry on wars to promoting general prosperity. Mature neomercantilist theory recommends selective high tariffs for "infant" industries or to promote the mutual growth of countries through national industrial specialization.

The term "mercantile system" was used by its foremost critic, Adam Smith, but "mercantilism" had been used earlier by Mirabeau.

While many nations applied the theory, one example was France, economically the most important state in Europe at the time. King Louis XIV followed the guidance of Jean Baptiste Colbert, his controller general of finances (1665–83). It was determined that the state should rule in the economic realm as it did in the diplomatic, and that the interests of the state as identified by the king were superior to those of merchants and everyone else. The goal of mercantilist economic policies was to build up the state, especially in an age of incessant warfare, and the state should look for ways to strengthen the economy and weaken foreign adversaries.