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Mercantilism was the prevalent theory of economics during Europe's Colonial Period. The basis for the theory was Bullionism, essentially the perception that precious metals equated to wealth. The only real reason precious metals ever came to be of any value was the simple fact that they were so rare that market demand gave them a high value for low quantity, creating a medium of commerce that could be easily transported in, say, a pocket. Because of this, precious metals did roughly equate to wealth, though for reasons that might not have justified Mercantilist economics.

Based on Bullionism, the ideas behind Mercantilism were that 1.) European countries are in direct competition, and 2.) Whichever country has the most bullion wins that competition. The key corollary to this precept, which would define international relations for centuries, was that the key for a country to gain more precious metals was for that country to export more goods and services than it imported, unless of course it could just produce a lot of it's own precious metals. England established colonies in the western hemisphere, for example, in part so that they could have an internal source of lumber, rather than Scandinavia. Another key motivator was that because Spain had added so many bullion producing colonies, England ought to counter by, if not adding their own bullion-rich colonies, at least their own colonies that could produce goods to trade to Spain for their newfound piles of bullion. Many would say that Mercantilist theory drove European powers to colonialism, under the believe that a large empire was the key to wealth.

One key complaint of American revolutionaries in the late 18th century was the British use of tariffs. It logically follows Mercantilist theory that if one wants as much gold as possible in one's empire, it wouldn't do for one's colonies to give gold to others for those others' goods. Thus, trade restrictions limited commerce with outside powers, forcing colonials to buy finished goods only from their ruling power, and keeping prices higher than Adam Smith would have liked.

Adam Smith's Invisible Hand, and Liberal theory of economics gradually put an end to the dominance of Mercantilism. Liberalism and Mercantilism were fundamentally at odds on one key issue. Mercantilism stated that all the worlds people must compete for the world's limited wealth. Adam Smith believed that wealth and trade was a Non-Zero Sum Game, which essentially means that because needs are different, two parties involved in a transaction could each actually gain, because the exchanged items were more valuable to their new owners. Bullionism dictated that gold was gold was gold. Period. Smith felt that gold was really nothing more than yellow rock that was valuable only because there wasn't much of it. Most economists now agree with Smith. ( Note: The "Invisible Hand" actually refers to the progress generated by economic competition, an idea embodied by the theory of Capitalism. At the time, most people thought economic competition was very bad, leading to dishonesty, sabotage, and other unpleasant things. This and the international markets thing Liberalism deals with are all tightly linked. Mercantilism, however, didn't dictate corporate monopolies, which is why this part is in parenthesis and the other part is outside of parenthesis. )*

Elements of Mercantilist theory have still remained in economic discourse throughout the years, despite the general demise of Mercantilism on the whole. One still cannot argue that there is a limited amount of gold in the world, and more importantly today, a limited amount of oil. A key element of Japan's World War II expansionism, for example, was the need to bring more natural resources under the control of the mineral/timber/oil/rubber/etc. poor Japanese homeland. Latin America's Cold-War Populism, and Import-Substitution economic schemes, along with past and present Marxist theories are based on the belief that the colonial economic structures still remain in place, with raw goods exporters at odds with what equates to finished goods exporters. ( McDonalds, for example, is in it's own way a sort of a finished good. )

  • Note on the Note: It's possible that I'm wrong here about the specific terminology.