Mercantilism is an economic theory that holds there is a fixed amount of wealth in the world and that a nation's prosperity depends on its success in accumulating wealth by exporting more than it imports, thereby earning profits from its exports.

Europe and its Colonies

European nations of the 17th to 19th centuries attempted to put it into effect through commercial policies designed to produce a favourable balance of trade, through acquisition and development of colonies as exclusive markets and sources of raw materials, and, in England, through the Navigation Acts, which made the shipping and marketing of colonial goods the monopoly of British merchants and shippers.

Mercantilism was intended to benefit European powers, but it was not wholly disadvantageous to the colonies. It provided a protective mantle for early development in many places. However, it has been argued that mercantilist policies left colonial economies dependent on staple production (see Staple Thesis) and obstructed their industrial development.

Though less rigid than the French system, English mercantilism brought no fundamental changes to the colonial economy in British North America after the conquest of New France in 1760.

The system was eventually dismantled with the repeal of both the Corn Laws in 1846 and the Navigation Acts in 1849, and the elimination of duties that had favoured colonial timber.

Critics of Mercantilism

Scottish economist Adam Smith criticized mercantilism. In The Wealth of Nations, he argued that trade between two nations can benefit both parties.

Smith also argued that certain countries or regions could specialize in production and thereby benefit from economies of scale to produce cheaper products. He said collusion between state and industry, a key part of mercantilism, was harmful for the general population.

Smith’s work challenged the accepted view that a nation’s wealth could be measured in terms of the country’s store of gold and silver. This view creates a situation where a nation does not want to spend its precious metal on goods (importing), but wants to collect more precious metal by selling its goods (exporting).

Smith believed that a better system would see both sides freely exchanging to mutual benefit. A nation’s value is not its collection of gold and silver, he argued, but rather the total of its production and commerce. The same idea is expressed today by measuring Gross National Product to determine a country’s wealth.