What is it?
An economic theory and practice common in Europe from the 16th to the 18th century that promoted governmental economic policy to import raw goods from a nation's colonies to the mother country, enriching the state.
How did it work?
Mercantilism contained many interlocking principles. Precious metals, such as gold and silver, were deemed indispensable to a nation's wealth. If a nation did not possess mines or have access to them, precious metals should be obtained by trade.
Colonial possessions should serve as markets for exports and as suppliers of raw materials to the mother country. Manufacturing was forbidden in colonies, and all commerce between colony and mother country was held to be a monopoly of the mother country.
A strong nation, according to the theory, was to have a large population, for a large population would provide a supply of labour, a market, and soldiers. Thriftiness and savings were regarded as virtues, for only by these means could capital be created. In effect, mercantilism provided the favourable climate for the early development of capitalism and was the beginnings of modern management techniques.
What happened to this, "ism"?
Later, mercantilism was severely criticized. Advocates of laissez-faire argued that there was really no difference between domestic and foreign trade and that all trade was beneficial both to the trader and to the public. They also maintained that the amount of money or treasure that a state needed would be automatically adjusted and that money, like any other commodity, could exist in excess. They denied the idea that a nation could grow rich only at the expense of another and argued that trade was in reality a two-way street.