Mercantilism is a theory broadly describing Western European economic practice from the Early Modern period to the late eighteenth century. The term was coined by the Marquis de Mirabeau in 1763 and was popularized by Adam Smith in The Wealth of Nations. Although Classical economists used it largely as a pejorative, it is now commonly used without bias. Mercantilism is also often used to refer to the economic policy of the period, a confusion which is particularly destructive given its dissimilarity with the bulk of mercantilist theory.
Mercantilism is not usually considered a unified theory of economics in the sense that Smith's and Marshall's works would come to embody, but instead a grouping of highly disparate writers bound by a concern for employment and economic growth. It arose independently in Spain, France, Italy, Austria and the United Kingdom for widely differing reasons, with each strain of mercantilism displaying concerns and assumptions unique to its country of origin.
Put simply, mercantilism was the theory that a nation’s wealth depends upon the balance of its exports over its imports, coupled with the proposal that the government should subsidize the former and restrict the latter. It was closely associated in people’s minds with bullionism, which was the belief that a nation’s wealth consisted of its possession of gold and silver. Thus, governments attempted to regulate trade (mainly through taxation) in such a way as to maximize a kingdom's wealth in bullion.
This practice was strongly attacked by Adam Smith in his 1776 work The Wealth of Nations, deprecating mercantilism in favor of free trade. In his 1937 treatise on the theory of international trade, the eminent American economist Jacob Viner analysed in detail both the theory and modern defenses of mercantilism by economic historians and others.
Mercantilism in Spain
Spanish mercantilism arose as a reaction to the failure of the Spanish economy in spite of gains from its colonial trade. Governments expected, at the time, that Spain's importation of large amounts of gold specie from the Americas would necessarily lead to great wealth, a theory known as Bullionism or the Midas fallacy. Spain instead entered a period of sharp economic decline and rapidly increasing unemployment. Mercantilist writers in Spain and elsewhere would come to attribute this to Spain's powerful monopolies, reliance on raw materials, and deindustrialization.. Although economic theorists in Spain correctly diagnosed many of the problems facing the nation, government and church suppression resulted in little policy change.
Mercantilism in France
Mercantilism in France is tied into the theories and policies of Jean-Baptiste Colbert, the Minister of Finance under King Louis XIV. Colbert was known for rapidly improving the state of French manufacturing, shipping, and colonial trade despite wars nearly bankrupting France.
Mercantilism in the United Kingdom
Mercantilism was most developed in the United Kingdom. Pamphleteers such as Dudley North, Edward Misselden, and Thomas Mun wrote sophisticated tracts evincing the quantity theory of money, theories of interest and investment, and solutions to the problem of labor immobility and unemployment caused by the Enclosure Acts.
- [http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=1414&chapter=45540&layout=html&Itemid=27 Jacob Viner, Studies in the Theory of International Trade (Harper and Brothers: 1937).
- Cosimo Perrotta, "Early Spanish Mercantilism: A First Analysis of Underdevelopment" in Lars Magnusson, ed., Mercantilist Economics (Boston: Kulwer, 1993).
- Erik S. Reinert and Sophus A. Reinert, "Mercantilism and Economic Development: Schumpeterian Dynamics, Institution-building and International Benchmarking" in K. S. Jomo and Erik S. Reinert, ed., The Origins of Development Economics (New Delhi: Tulika, 2005).