Mercantilism is an economic theory and practice that emerged in Europe during the 16th century, prominently shaping the policies of the major colonial powers until the late 18th century. This theory holds that the wealth of a nation is primarily determined by the accumulation of precious metals like gold and silver. Under mercantilism, a country's economic health was measured by the size of its reserves of these metals, which were thought to be finite in quantity worldwide. To maximize wealth, mercantilist policies advocated for a positive balance of trade, where a country would export more goods than it imported, thereby bringing more gold and silver into the country and preventing any outflow.
The application of mercantilist policies led to significant government intervention in the economy. Governments imposed strict regulation of businesses and economic activities, set high tariffs to discourage imports, and granted monopolies to favored industries and companies. Subsidies were often provided to domestic industries to help them compete against foreign imports. Furthermore, the colonies were seen as both sources of raw materials and as markets for the mother country's manufactured goods. This one-way flow ensured that wealth was extracted from the colonies and retained by the colonial powers, reinforcing their economic dominance.
Mercantilism also had profound impacts on global trade patterns and the structure of empires. The desire to accumulate wealth from colonies spurred European nations into a fierce competition for colonial acquisition, leading to numerous wars and the redrawing of global boundaries. This imperial competition often resulted in the exploitation of colonized regions, both economically and socially. Native populations were frequently subjugated, and their resources extracted to benefit European economies, without much consideration for the development or well-being of the colonized territories.
The decline of mercantilism began in the late 18th century, giving way to the principles of free trade and market-driven economics advocated by classical economists like Adam Smith. Smith criticized mercantilism for its overemphasis on gold and silver as measures of wealth, arguing instead that true wealth came from a nation's overall production and commerce—what he termed the "wealth of nations." He believed that free trade, without heavy government constraints, would lead to a more efficient allocation of resources and greater wealth overall. Despite its decline, the legacy of mercantilism is still evident in modern economic policies that favor protectionism and government intervention in certain sectors. The shift from mercantilism to free trade marked a significant turning point in economic theory and policy, highlighting the dynamic nature of economic thought and practice through history.