Overview

Before Capitalism, there was Mercantilism. The idea was: “Wealth is Gold.” To get rich, a country must sell (export) more than it buys (import), and pile up the gold in the King’s vault. This led to wars, colonization, and slavery. Adam Smith wrote The Wealth of Nations specifically to destroy this idea.

Core Idea

The core idea is Trade is Zero-Sum. If I win, you lose.

  • Mercantilism: We must crush our rivals and take their gold.
  • Capitalism: We can both trade and both get rich.

Formal Definition

An economic policy designed to maximize the exports and minimize the imports for an economy. Dominant in Europe from the 16th to the 18th century.

Intuition

  • The Hoarder: Imagine a guy who sells everything he owns and fills his house with cash. He is “rich” in money, but he has no bed, no food, and no friends. That is a Mercantilist country.
  • The Consumer: Real wealth is stuff (houses, food, cars), not gold.

Examples

  • The British Empire: They forbade the American colonies from trading with France. The colonies had to sell cotton to England (cheap) and buy cloth from England (expensive). This caused the American Revolution.
  • China (Modern): Some accuse China of “Neo-Mercantilism.” Keeping their currency cheap to boost exports and hoarding US Dollars.

Common Misconceptions

  • Trade Deficits are bad: Trump argued this. “We have a deficit with China, so we are losing.” Economists say: “No, we get cheap iPhones, they get green pieces of paper. We are winning.”
  • Protectionism: Tariffs and quotas. The tools of Mercantilism.
  • Bullionism: The obsession with gold and silver.

Applications

  • Trade Wars: When countries start raising tariffs to hurt each other.

Criticism / Limitations

  • It works for a while: It helped England become a superpower. But eventually, it leads to inflation and war.

Further Reading

  • Heckscher, Eli. Mercantilism.