What is Mercantilism, And How Does It Work?
Everything you “know” about mercantilism is wrong. Dead wrong.
But don’t worry, you’re not alone. No one seems to know what “mercantilism” means—even people who pretend to, like the Mises Institute.
All they know is that “it’s bad”, according to their ideological-charged hit-piece on mercantile theory.
Why the ignorance about mercantilism?
Three reasons:
1. The Cold War polarized poisoned American political, and economic thought—to the point of absurdity.
Basically, to distance ourselves from the USSR, Americans took up antithetical positions: whatever they did, we did the opposite.
So since the Soviets were economically authoritarian and isolationist, we pushed for economic liberalism and globalization—regardless of the practical effects. We abandoned the middle ground.
2. America’s wealthiest benefit enormously from economic globalization, and radical free trade—even if deals like NAFTA hurt America as whole.
Just like how Soviet bureaucrats had a vested interest in stamping out capitalism, economic globalists want to dismiss mercantile theory.
3. Finally, it boils down to bad history. Most of the people writing about mercantilism haven’t read the primary sources—I doubt they know who Antoine de Montchrestien is.
Instead, they learned about mercantilism through (crappy) economics textbooks, and Adam Smith’s refutation in the Wealth of Nations—which is mostly a straw-man critique.
That’s why I wrote this article—it’s both a revisionist history and a jackhammer with which to pound pseudo-historians and economists.
First I’ll define the theory of mercantilism, next we’ll look at mercantilism in history, and a few examples, and then we’ll entertain a discussion of its significance.
By the end of this article, you’ll know exactly what mercantilism is (and what it’s not), and be able to place it in its historical context.
Furthermore, you’ll realize that mercantilism isn’t a dead ideology: it’s a powerful driving force in the world today.
Why?
Because it works.
What Is Mercantilism? Defining The Mercantile System.
A Definition Of Mercantilism
Let’s get a quick working definition of mercantilism down, before getting into the nitty-gritty details.
Very simply: mercantilism is the body of economic practices and policies that evolved in Europe between the 13th and 17th centuries, when it began to coalesce into a coherent theory—but not a theory in the modern sense.
No one invented mercantilism. Early writers simply recorded their observations about what worked and what didn’t: mercantilists were statesmen and businessmen, not philosophers or academics.
Mercantilism remained the dominant, if not only, economic system in Europe until the 1850s, when Great Britain became a free trader.
Although it formalized in Europe, mercantilism also evolved independently in East Asia, where it was practiced by the Chinese, culminating with the “Canton System“.
Finally, mercantilism is a form of economic nationalism, which also includes more mildly interventionist trade policies, like protectionism.
What Was The Goal Of Mercantilism?
The goal of mercantile policies was to (1) enrich and (2) empower the nation, both politically and economically.
How?
Mercantilists sought to boost domestic production, particularly of technologically advanced output, by exporting advanced output, in exchange for raw materials.
For example, in the 1700s Great Britain exported manufactured goods (like weapons and tools) in exchange for tobacco from America and cotton from India—Britain was the factory, America and India were the resource suppliers.
The purpose of mercantilism was to concentrate industry in the mother country, ensuring she retained the most profitable jobs and industries—and the political power that flowed from said production.
Mercantilists took the phrase he who has the gold (or guns) makes the rules to heart.
This concentration of industry also artificially stimulated demand for domestic labor, which promoted full employment and high wages.
To sum up: the main idea behind the theory of mercantilism is that the interests of individuals and the nation are aligned, so if the nation succeeds, so do its citizens.
Therefore, national economic interests are put before those of private citizens, if they happen to conflict—you can’t sell out your countrymen to make a buck.
Essentially, what’s good for the goose is good for the gander.
How Did The Mercantile System Work In Practice?
Like I said, mercantilism has 2 goals: (1) make the nation as rich as possible and (2) make the nation as powerful as possible.
1. How Does Mercantilism Work To Enrich The Nation?
Mercantilists want to make the economy as big and technologically advanced as they can.
They do this by maximizing the amount, and efficiency, of economic activity occurring within the nations borders—they concentrate lucrative industries in the country.
How? Their common tools include:
- Imposing high taxes on value-added imports, while limiting them on raw materials or non-competing products. For example, mercantilists will tax imported laptops, but not bananas.
- Limiting taxes on value-added exports, and imposing high taxes on exported raw materials. Basically, mercantilists won’t tax exports of things like cars, but they will tax iron ore—the point is to refine and use it at home.
- Seeking out new markets to export advanced products, in exchange for raw materials. Mercantile trade policy suggests that it’s good to sign trade deals that will let you sell more aircraft, in exchange for raw aluminum, but not the other way around.
- Investing in productivity-boosting infrastructure that will improve the economy’s overall efficiency. This one’s simple: mercantilists want to build better roads, airports, and internet infrastructure, since this make the whole economy more efficient.
- Restricting the outflow of technology (but not its inflow), thereby diminishing foreign competition. This one is just common sense: if you know how to make computers, but your rival doesn’t, why would teach him? It’s better to just keep the profits for yourself.
- Acquire monopolies in products or services via predatory trading. For example, if you and another country build all the world’s cellphones, it’s in your best interests to kill off their industry, so that you can sell your phones at a higher price. This is what Japan did in the 1970s.
Notice anything here?
Mercantilism is all about running the nation like you would a business.
Here’s what the basic mercantile trade paradigm looks like, if all goes according to plan: ideally you export advanced output, and import raw materials.
2. How Does Mercantilism Work To Empower The Nation?
In the next section I’ll talk about some of the common misconceptions surrounding mercantilism, but this is where most of them come from.
Most economic theories only focus on absolute gains, ie. do both parties benefit?
This is why liberal economic models (the Austrian School of economics) recommend highly asymmetrical, but mutually advantageous trades (eg. where China gains 10% while America gains 1%).
Mercantilism is different because it also focuses on relative gains/losses in relation to power.
This is why mercantilists reject asymmetrical trade deals—they undermine the nation’s power unduly benefiting the other country.
Some common tools mercantilists use to maintain power include:
- Acquiring national monopolies in a specific product or service. Not only is this good economically (monopolies mean higher prices), but it yields political dividends too. For example, OPEC wields way more power than it should, because it controls the balance of power in oil markets.
- Restricting the foreign ownership of domestic companies and resources. This one’s a no-brainer: if you let foreigners buy up your country, they own your country.
- Pursuing exclusive trade deals with new markets—essentially, you can trade with me, but not my rival.
Done right, a mercantile trade regime should result in the country exporting advanced products, and importing raw materials.
This artificially expands the nation’s production, leading to full employment and a shortage of labor, which creates a powerful incentive to invest in better technology—it promotes long run economic growth.
It also ensures that trading partners remain relatively weak: industry is concentrated in the mercantile nation, whereas resource extraction is delegated to its trading partners.
This creates a relationship of dependency and economic subservience, which relatively increases the power of the mercantile nation.
A good example is trade in colonial America—the colonies imported manufactured goods from Britain—everything from tools to weapons. This left them helpless and dependent.
Luckily, other European rivals (mainly France) supported the rebels by giving them guns and uniforms.
An Example Of Mercantilism
Pretend there’s a country called Camelot. There’s nothing particularly special about it, but it does have a lot of sheep.
Camelot trades freely with the surrounding regions, particularly Avalon, to whom it trades wool in exchange for woolen cloth—it gets cold in Camelot, and they love Avalonian sweaters.
In this situation, a liberal economist would say that this trade setup is ideal, since both parties are trading freely, and both are benefiting.
But King Arthur of Camelot doesn’t care what economists has to say: he looks at Avalon with envy.
“Why should they have all the advanced textile mills, and live an urban lifestyle, while my people live in the hills guarding sheep?”
To fix this, Arthur raises a tax on exporting wool, and another on importing cloth.
Not only does this make it lucrative to set up textile mills in Camelot, but Arthur also decides to reinvest these taxes in Camelot.
He builds some roads so the people of Camelot can get their textiles to market easier. Not only that, but he brings in some weavers from Avalon to teach the people of Camelot how to weave.
Pretty soon, Camelot has its own thriving weaving industry (and the urban, industrial population that comes with it), which benefits from relatively cheap wool. At the same time, Avalon’s weaving industry is dying out, since Camelot’s wool is too expensive due to the taxes.
Eventually, Camelot replaces Avalon as the weaving capital, exporting its cloth abroad—Camelot grows richer and more powerful relative to Avalon (which declines).
King Arthur pulled the ol’ switcheroo.
In the end, mercantile trade benefited Camelot enormously, because:
- It ensures that Camelot’s economy is diverse, since it no longer specializes in only exporting wool—it now refines and weaves the wool too.
- Camelot’s economy is bigger than it would otherwise be, because it’s making stuff both for itself and for export. This ensures everyone has jobs, and that most of those jobs are in value-added industries (weaving is more lucrative than shepherding).
- Camelot no longer depends on Avalon for its sweaters, and can therefore act independently—it doesn’t have to placate Avalon anymore.
And just so you know, although this example seems a little contrived, it’s not.
It’s actually exactly what England did to Flanders, beginning with the reign of King Edward III (r. 1327-1377) and continuing until the Tudors—England was Camelot, Flanders was Avalon.
An Honest Definition For Mercantilism: Let’s Bust Some Myths
Now that you know what mercantilism is, let’s talk about what it isn’t, since there are so many misconceptions and myths.
In this section, I’ll break down, one by one, all the lies you learned in school (or university) about the mercantile system, and shed some light onto why those misunderstandings happened.
Let’s bust some myths.
1. Mercantilism Is Not Bullionism—ie. It’s Not About Hoarding Gold
Mercantilism is often confused with bullionism—that is, seeking to acquire precious metals like gold, and falsely conflating gold with wealth.
Why?
Because mercantile policies tend to generate trade surpluses.
In the old days, gold or silver was physically shipped from country to country to balance the books. For example, if England sold France 100 sheep, but bought only 50 sheep’s worth of baguettes, France would have to pay for the other 50 sheep with gold or silver.
And as you can imagine, if this goes on for decade after decade, then England will inevitably accumulate a massive “hoard” of gold—much like how China gobbled up most of the world’s silver under the Canton System.
But England didn’t really want the gold: they wanted to increase the size of their sheep flocks. They wanted to employ more shepherds.
They wanted to grow their economy and get rich.
This isn’t just me talking. This is how mercantilists actually thought. This is what they wrote about.
For example, Antoine de Montchrestien, the godfather of French mercantile theory (as well as a playwright and all-around renaissance man), wrote:
…it is not the abundance of gold and silver, the quantity of pearls and diamonds, which makes states opulent… it is the supply of things necessary for life and suitable for clothing…
Mercantilists didn’t really care about acquiring gold. It wasn’t their goal.
They wanted to increase domestic industrial production and employment as much as possible, because they believed that prosperity, both for the nation and the individual, flowed from productivity (it does).
They wanted to make more stuff, not sit on mountains of metal.
2. Mercantile Trade Doesn’t Cause Colonialism Or Imperialism
This myth is just a smear-campaign, and it’s a dumb one at that: people think colonialism and imperialism are bad, so let’s link them to mercantilism so they’ll think it’s bad too.
But they’re distinct concepts, they’re logically unrelated.
Mercantilism is simply a set of economic policies, a broad-strokes trade regime, that countries use to benefit their economy.
Nothing more.
This argument is like saying that socialism is bad because Nazis were socialists, or that free trade is bad because the American south practiced slavery.
Mercantilism doesn’t lead to colonialism any more than socialism leads to Nazism, or free trade leads to slavery.
Let’s hammer this point home.
The British and the Americans both employed mercantile policies during the 19th century, however only Britain acquired a global empire—America was isolationist.
Mercantilism has nothing to do with colonialism—they’re linked because of history, not logical necessity.
3. Mercantile Capitalism Is Not Anti-Free Market
In school they try to ram down your throat the idea that liberal, globalist capitalism is the only form of capitalism—everything else takes you down the road to communism.
It’s a ham-fisted way of viewing the world. And it’s wrong.
Capitalism and mercantilism co-evolved, and were synonymous for roughly 650 years (1100-1750), until liberal capitalism was hypothesized during the Enlightenment Era.
And of course, it wasn’t until the 1850s that liberal capitalism made significant headway in global economics.
Mercantile capitalists recognize that there’s a difference between domestic and international markets (liberal capitalists don’t).
For example, during the Industrial Revolution, Great Britain had very free domestic markets (there were few regulations, people were free to travel throughout Britain), but had heavily protectionist trade policies internationally—they imposed a 50% import tariff on manufactured goods, and made it a crime to export technology or machinery to rival nations.
See how it works?
Liberal capitalism means open domestic and international markets, whereas mercantile capitalism means open domestic, but restricted international markets.
And in a counter-intuitive way, mercantile policies often protect domestic markets—they make them better.
How?
Just look at China (mercantile) and America (liberal) as an example.
Right now, America imports Chinese goods. These goods are cheap—way cheaper than it should be.
This is because China practices predatory trading via currency manipulation, wage suppression, export subsidies etc.
In the end, this cheap stuff out-competes American producers, who either have to offshore or close down.
I ask you: is America’s “free market” actually free?
No.
American companies do not compete with Chinese companies, they compete with China’s government, who crushes them with its monolithic fist. In today’s “free market” the government picks winners and losers, China’s government.
Japan’s government.
Even Canada’s government.
If the US were to adopt mercantile economic policies, we wouldn’t have this problem.
4. The Theory Of Mercantilism Evolved, It Was Not Invented
This one’s a pretty simple misconception.
There is no Adam Smith or David Ricardo we can point to and say: “he invented mercantilism”.
Instead, mercantilism evolved through trial and error over hundreds of years.
It is a collection of tricks-of-the-trade, of policies and practices that worked historically.
Like I said, it was only during the Seventeenth Century that intellectuals began to distill the lessons of economic statecraft into a coherent set of principles, and only in the Nineteenth Century, when man’s arrogance clouded his mind to the wisdom of experience, that radical alternative systems, like liberal capitalism and communism, were born.
5. Mercantile Theory Is Not Zero Sum
It’s often (incorrectly) asserted by liberal economists that mercantilism is a zero-sum economic model, meaning that mercantilists believe that when one country gains economically, another loses—the economic pie is only so big.
They point out that when two countries freely trade, they both benefit: therefore mercantilism is wrong.
But, this is a straw man fallacy: they confuse mercantilism’s economic and political components—mercantilism deals with both money and power.
Economics may not be zero sum, but politics is—the more powerful your rival is, the less powerful you are relative to them.
When dealing with power, when one country gains, another loses. Period. Power is zero sum.
Therefore, since mercantilism evolved in a period of endemic warfare, it made sense to link economic and political gains—the richer your rival was, the more powerful they were. So, if you wanted to limit their power, you needed to limit their economy.
Mercantilists aren’t necessarily opposed to asymmetrical trade relationships on economic grounds—they recognize that both partners may benefit. However, they would reject such a relationship, because it narrows the relative power differential between the two states.
For example, let’s say that America trades with China. America’s economy grows an extra 1% per year because of this trade, while China grows an extra 10% a year. Economically, both benefit—this makes liberal economists happy.
However, mercantile theory says this is a bad trade because China gains much more than America, and if it keeps up, China will eventually catch America—the US is relatively weakened by China’s strength, which is bad for America in the long run.
For example, now we have to worry about armed conflict with China in the South China Sea. If they were weak, they wouldn’t be a problem.
Examples Of Mercantilism In History
Let’s look at some of history’s most successful examples of mercantile states.
1. Jean-Baptiste Colbert & French Mercantilism
Just a heads-up: when you search for information on Jean-Baptiste Colbert (d. 1683) and French mercantilism, you will find a lot of really bad information—basically, ideologues are propagating fake history to spin their narrative.
This brief account draws heavily from Charles Woolsey Cole’s 1939 2 volume book Colbert and a Century of French Mercantilism—the most comprehensive, and balanced study of so-called Colbertism to date.
Also important: this book pre-dates the era of academic polarization, so avoids the cherry-picking of facts that often pollutes modern economic histories, that focus on Cold War ideological battles.
With that out of the way, let’s look at some of the facts: how did Colbert’s mercantilism work in France, and was it successful?
In 1662, two years before Colbert assumed office, France’s economy was a mess: the country was divided into an infinite number of small economic regions, each with their own road and waterway tolls, regulations, and tax rates.
Basically, it was a nightmare to do business, unless you never left your village.
Because of this, France relied heavily on foreign merchants, who were subject to national regulation. For example, France paid Dutch merchants 4 million livres a year to move their freight (the Crown’s national income was only 32 million livres).
France also had a massive trade deficit: they exported 12-18 million livres of goods in 1662, but imported 12 million from Holland, 12 million from Italy, and 3 million from the English, Germans, and Scandinavians.
Furthermore, they mostly exported agricultural products, and imported manufacturing (the opposite of what you want).
France’s annual trade deficit was equal to half the Crown’s yearly income. No good.
What Was Colbertism?
It was under these conditions that Colbert came to power—his job was to fix France’s economy.
To do it, he had 3 main approaches:
1. Colbert made it easier to do business in France by standardizing regulations and taxation in France.
His Council of Commerce worked to harmonize the rules governing economic guilds, regulate the banks, standardize bookkeeping practices, and clarify property alienation and bankruptcy laws.
2. He also invested heavily in infrastructure. Colbert increased government spending on roads from 40,000 livres annually, to 600,000 livres during his tenure—there was a building boom. France was crisscrossed with new roads, bridges and canals, that made the French economy more productive.
3. Colbert adopted mercantile policies. In 1664 he expanded free trade in France, while simultaneously restricting international trade (which was among the freest in Europe).
To do this, he dramatically increased tariffs on manufactured products—an average of 50% on textiles.
During this period, French manufacturing boomed, and France led Europe in industrial production, foreign commerce, and domestic trade from Colbert’s death until the French Revolution of 1789.
Colbert’s mercantile policies transformed and modernized France’s economy, and no serious scholar refutes this.
2. The Age Of British Mercantilism
Great Britain is one of Europe’s oldest mercantilist nations—as mentioned earlier, English kings began applying mercantile policies as early as the 14th century.
However, British mercantilism began to formalize in the 1600s, due to shipping competition with the Dutch.
In 1651, England passed the first of a series of legislation called the Navigation Acts, the point of which was to shut out Dutch merchants from Britain’s Atlantic colonial trade (since they couldn’t compete with the Dutch in terms of price).
For England, it was either protect their merchant marine, or lose it (like France had). They protected it.
Of course, this turned out to be a damn good idea: Britain’s shipping industry flourished, and grew with the intercontinental trade routes, soon surpassing the Dutch in terms of tonnage and number of vessels.
British mercantilism picked up steam under Prime Minister Robert Walpole, whose mercantile trade policy set the tone until the 1850s.
For example, he jacked up tariff rates on manufactured goods, which reached highs of over 50% by the early 1800s.
Let’s look at some data.
During the 18th C. (the height of British mercantilism) Britain’s economy industrialized—by the 1770s, one in five British men worked in manufacturing (which is higher than it is today, and second only to the Netherlands at the time).
This growth was driven by expanding colonial export markets.
For example, Britain’s trade surplus with the American colonies grew from £67,000 (average between 1721-30) to £739,000 (average between 1761-70)—in a few decades it grew eleven times as big.
The composition of British exports also changed: rather than exporting woolens, she began exporting manufactured products, such as tools, glass, and scientific equipment. Essentially, Britain built whatever the colonies needed (if you needed a gun, you bought from Britain).
This set the tone for Britain’s Industrial Revolution, which wouldn’t have been possible without Britain’s mercantile trade policies—Britain wasn’t a free-trading nation until later. During the Industrial Revolution Britain’s tariff rates were over 50%, and it was a crime to export technology.
Mercantile policies worked out well for Britain—they became the richest and most powerful nation on earth.
Contrary to what you’re told, it was actually the switch to economic globalism that caused Britain’s economic decline.
3. Chinese Mercantilism & Neomercantilism
As mentioned previously, China evolved a mercantile trade system independent of Europe, which speaks to its robustness—if you’re familiar with the concept of convergent evolution, you’ll know why.
The greatest test of anything is the test of time: the longer it lasts, the more useful it is. Mercantilism has stood the test of time for nearly a millennium.
The only thing that could possibly sweeten the deal are examples of the phenomena evolving multiple times—this would really speak to its success. Again, mercantilism fits the bill (China and Europe).
Not only that, but after China’s lost century (from the Opium Wars until the end of Maoism), China’s economy recovered under mercantile trade policies—well, neomercantile trade, which took advantage of American markets for rapid development.
Given that I’ve written two fairly comprehensive articles on Chinese mercantilism, I won’t say anything more about it here. Read the articles.
Why Mercantilism’s Still Significant Today
Mercantilism isn’t a historical curiosity, it’s the oldest, and most historically successful form of capitalism, from its roots in medieval Venice, to modern modern Japan.
It’s what made Great Britain the richest, and most powerful Empire on earth.
And, frankly, it’s what made America rich too.
Why?
Because mercantile policies create a natural incentive for innovation and technological development—which is what grows the economy in the long run.
How?
Mercantilism concentrates lots of higher industry in the same place, and raises the cost of labor. This creates a powerful incentive to invest in labor-saving technology, from steam engines to personal computers.
That’s just how it works.
It’s shame America embraced economic globalization, which has done nothing but damage to our nation.
But there’s still time. We can adopt time-tested policies that worked. We can embrace mercantilism.
