Samuel Gregg of the American Institute for Economic Research (who is also a Capital Matters contributor) has written an excellent essay on mercantilism over at Law & Liberty that is worth your time. Gregg lays out the presumption upon which mercantilism is based and the conclusions that flow from it:
What’s clear from the extant literature is that mercantilism’s economic vision did not emphasize economic growth. Rather, economies were considered largely static. Wealth was thus not believed to come through entrepreneurship, competition, and free exchange. For mercantilists, countries prospered by acquiring as much of the world’s existing wealth as they could.
That basic conviction translated into several things. One was an effort by states to snap up as much territory and dominate as many trade routes as they could handle. Practically speaking, this meant European states like Britain encouraging or organizing colonial settlements around the world and barring British goods from being carried on non-British ships. These policies were backed up by a willingness to use force to protect territorial gains and enforce trade prohibitions.
Part of mercantilism’s wealth-acquisition strategy involved governments giving charters to joint-stock companies which conferred upon them a monopoly of a country’s trade in particular parts of the world. This produced outfits like the Hudson Bay Company, the Dutch East India Company, and the French East India Company. The most famous of such enterprises, the British East India Company, was created in 1600. By the mid-eighteenth century, it was exercising powers akin to a sovereign state throughout modern-day India and Bangladesh. The East India Company’s monopoly of British trade in these regions was gradually accorded subtle and, when necessary, unsubtle protection by British soldiers and the Royal Navy. Such were the close links that mercantilism forged between governments and many merchants.
A second byproduct of mercantilism’s static view of wealth was a fixation with balance of trade questions: more specifically, ensuring that you exported more than you imported. Countries went to enormous lengths to try and secure a positive balance of trade. This makes sense if you believe that the sum-total of wealth in the world is finite.
Every time you imported a good from abroad, mercantilist arguments went, you exported wealth in the form of payments of gold and silver. To try and reduce imports, governments sought to create or bolster numerous domestic industries via subsidies and regulation, as well as tariffs on imports to discourage people from buying foreign-made products. In some cases, gold and silver exports were banned. Conversely, exports of goods were encouraged and often subsidized, because this meant that Frenchmen were paying, say, British merchants for British goods, thereby bringing more precious metals into Britain.
Gregg clearly lays out the illogic at the center of the mercantilist worldview, and then provides the cure to that illogic, as propounded by Adam Smith in Book IV of The Wealth of Nations.
Read Gregg’s whole piece here.