Mercantilism
The dominant economic theory of European powers from the 16th to 18th centuries: national wealth is measured by accumulation of gold and silver, trade should maximize exports and minimize imports (achieving a trade surplus), and colonies exist to supply raw materials and consume manufactured goods from the mother country, establishing the original logic of empire as economic extraction.
Mercantilism was not a unified doctrine but a cluster of policies and assumptions that dominated European economic thinking and policy from roughly 1500 to 1776 (when Adam Smith's Wealth of Nations systematically attacked it). Its core premise: wealth is a fixed quantity in the world, gold and silver, so one nation can only become richer by making other nations poorer. International trade is a zero-sum competition; a trade surplus (exporting more than you import) accumulates wealth; a trade deficit drains it.
Policy implications: governments actively managed trade to produce surpluses, tariffs on imports, subsidies for export industries, monopoly trading companies (Dutch East India Company, British East India Company) with exclusive rights to particular trade routes, and tight regulation of currency outflows. The colonies' role was explicit: provide cheap raw materials to the mother country and consume manufactured goods in return, the raw materials could not be manufactured locally, and manufactured imports from other countries were banned.
The Spanish example (as analyzed in Predictive History): Spain extracted enormous silver from the Americas, mercantilist logic said this made Spain rich. But because Spain didn't develop its own manufacturing capacity (it bought manufactured goods from England, France, and the Dutch with its silver), the silver mostly passed through Spain to others. The Dutch, French, and English, who got Spain's silver in exchange for manufactured goods, developed their industrial and commercial economies; Spain remained structurally dependent and declined.
Adam Smith's critique: mercantilism assumes trade is zero-sum. Smith showed it is positive-sum, both parties gain from voluntary trade (comparative advantage). Nations become wealthy not by accumulating gold but by developing productive capacity. The Wealth of Nations (1776) demolished mercantilism's intellectual foundations, though mercantilist instincts survive in protectionist policy today (tariffs, 'buy American' requirements).
Related articles
Related terms
Frequently asked questions
What is mercantilism in simple terms? ＋
The theory that national wealth = accumulated gold/silver, and since wealth is fixed, trade is zero-sum: your surplus is my deficit. Policy goal: maximize exports, minimize imports (trade surplus), use colonies as raw material suppliers and captive markets. This was the economic logic of European empires, colonies didn't exist to improve colonized people's lives but to feed the mercantilist system.
How did mercantilism lead to Spain's decline? ＋
Spain accumulated enormous silver from the Americas but didn't develop manufacturing. Under mercantilist logic, the silver should have made Spain powerful. Instead, Spain used the silver to buy manufactured goods from England, France, and the Dutch, who then developed their industrial economies while Spain remained dependent on silver extraction. When the silver declined, Spain had no productive economy to fall back on. The Predictive History lesson: extracting wealth is not the same as creating productive capacity.