From the 15th to the 18th century, when the modern nation- state was being born, capitalism not only took on a commercial flavor but also developed in another special direction known as mercantilism. This peculiar form of capitalism attained its highe st level in England.
The mercantilist system rested on private property and the use of markets for the basic organization of economic activity. Unlike the capitalism of Adam Smith, the fundamental focus of mercantilism was on the self-interest of the sovereign (that is, the state), and not the self-interest of the individual owners of economic resources. In the mercantilist era, the basic purpose of economic policy was to strengthen the national state and to further its aims. To this end the government exercised muc h control over production, exchange, and consumption.
The most distinctive feature of mercantilism was the state’s preoccupation with accumulating national wealth in the form of gold and silver. Because most nations did not have a natural abundance of such precious metals, the best way to acquire them w as through trade. This meant striving for a favorable trade balance—that is, a surplus of exports over imports. Foreign states would then have to pay for imports in gold or silver. Mercantilist states also favored maintaining low wages, believing tha t this would discourage imports, contribute to the export surplus, and thus swell the influx of gold.
More sophisticated proponents of the mercantilist doctrine understood that the real wealth of a nation was not its hoard of precious metals, but its ability to produce. They correctly saw that the influx of gold and silver from a favorable trade bala nce would serve as a stimulus to economic activity generally, thus enabling the state to levy more taxes and gain more revenue. Only a few states that practiced mercantilism, however, understood this principle.