the history of economic thought

Mercantilism is economic nationalism for the purpose of building a wealthy and

powerful state. Adam Smith coined the term “mercantile system” to describe the

system of political economy that sought to enrich the country by restraining

imports and encouraging exports. This system dominated Western European

economic thought and policies from the sixteenth to the late eighteenth

centuries. The goal of these policies was, supposedly, to achieve a “favorable”

balance of trade that would bring gold and silver into the country and also to

maintain domestic employment. In contrast to the agricultural system of the

physiocrats or the laissez-faire of the nineteenth and early twentieth century’s,

the mercantile system served the interests of merchants and producers such as

the British East India Company, whose activities were protected or encouraged

by the state. The most important economic rationale for mercantilism in the

sixteenth century was the consolidation of the regional power centers of the

feudal era by large, competitive nation-states. Other contributing factors were

the establishment of colonies outside Europe; the growth of European commerce

and industry relative to agriculture; the increase in the volume and breadth of

trade; and the increase in the use of metallic monetary systems, particularly gold

and silver, relative to barter transactions. During the mercantilist period, military

conflict between nation-states was both more frequent and more extensive than

at any other time in history. The armies and navies of the main protagonists

were no longer temporary forces raised to address a specific threat or objective,

but were full-time professional forces. Each government’s primary economic

objective was to command a sufficient quantity of hard currency to support a

military that would deter attacks by other countries and aid its own territorial

expansion. Most of the mercantilist policies were the outgrowth of the

relationship between the governments of the nation-states and their mercantile

classes. In exchange for paying levies and taxes to support the armies of the

nation-states, the mercantile classes induced governments to enact policies that

would protect their business interests against foreign competition.