In our previous discussions, we’ve explored what capitalism is (private ownership of capital with the freedom to use it as you choose), where it came from (organic human exchange), how it’s regulated (both by government and market forces), and how it affects issues like inequality and poverty. Today, let’s look at something different but related: mercantilism.
Mercantilism is a term you may have heard before, but it’s not usually explained in-depth in most modern social studies classes. That’s because it fell out of favor among governments centuries ago—and for good reason. While it might have benefited certain groups of people, particularly the social elites, it ultimately hurt the majority of those living in mercantilistic countries. In fact, Adam Smith’s The Wealth of Nations was a direct challenge to mercantilism, which was very much the economic norm at the time.
As we’ve established, capitalism is about individuals owning and freely making decisions about their property and capital. Mercantilism takes a fundamentally different approach. Instead of focusing on individual freedom and voluntary exchange, mercantilism views international trade as a zero-sum game where one nation’s gain must be another’s loss. The central goal becomes increasing national wealth and power—not individual prosperity.
Think of it this way: in capitalism, when two individuals trade, both benefit (otherwise, why would they trade?). In mercantilism, if two nations trade, only one can “win” by exporting more than it imports.
This difference creates a cascade of policy implications. While capitalism thrives on minimal government interference in markets, mercantilism embraces government control. Historically, mercantile governments granted monopoly rights to favored companies, controlled wages and production, and determined which industries deserved support.
Does that sound familiar? It should. When we talked about cronyism, we were essentially describing modern versions of mercantilistic thinking—government officials picking winners and losers rather than letting market competition decide.
Although the United States has always leaned toward capitalism, it has never fully shed its colonial mercantilistic roots. Tariffs—which are simply taxes on imported goods and materials—are one of the hallmarks of mercantilism, and the U.S. has always had them. In fact, the Tariff Act of 1789 was the second bill signed by President Washington, allowing Congress to impose a fixed tariff of 5% on all imports, with a few exceptions.
Since then, the rates have fluctuated, and the specific imports they’ve applied to have changed, but tariffs have never disappeared. And they remain a hotly contested topic, as all forms of protectionism tend to be.
This is particularly relevant in our modern age, when technology and automation are rapidly changing how everybody works. It can be really difficult for people who’ve staked their entire livelihoods on skills and industries that are less expensive to outsource than to maintain domestically. Cold economic analysis regarding comparative advantage, creative destruction, and long-term trends isn’t any comfort when the factory that was the lifeblood of your hometown shuts down.
None of this explanation is intended to dismiss those very real concerns. But when discussions about tariffs arise—which they historically have and certainly will again—it’s important to understand what we’re actually talking about: whether we want more capitalism or more mercantilism in our economy.
Tariffs and other protectionist policies might provide short-term relief for specific industries and communities, but they come with broader costs that are often hidden from view. When governments impose tariffs, they essentially tax their own citizens by increasing prices on imported goods. These higher prices affect not just consumers but also domestic manufacturers who use imported components.
This returns us to a theme we’ve stressed throughout this series: the importance of individual freedom of choice. Under capitalism, consumers and producers freely decide what to buy and sell. Under mercantilism, government officials make many of those decisions for you, either directly through regulations or indirectly by manipulating prices through tariffs and subsidies.
The historical record shows that mercantilism’s zero-sum approach to trade ultimately leaves nations poorer than they would be under freer trade. When countries specialize in what they do best and trade for other goods—as we do naturally when free markets operate—the total economic pie grows larger. Protectionism may redistribute slices of that pie, but it usually shrinks the pie overall.
This doesn’t mean that concerns about job displacement and community devastation aren’t valid. They absolutely are. But problems like these rarely have a singular source. So, rather than reaching for mercantilist tools that provide temporary relief at the cost of broader economic damage, we might be better served by addressing the human costs of economic transitions through other means.
The debate between protectionism and free trade isn’t just academic—it’s deeply personal for millions of workers and their families. Understanding the mercantilist roots of these policies helps us see them clearly for what they are: well-intentioned attempts to protect particular interests that often come at the expense of broader prosperity.
Learn more about capitalism here.
