Capitalism vs. Mercantilism — What's the Difference?

Capitalism champions the idea of private ownership of the means of production and the operation of free markets where goods and services are traded based on supply and demand. In this system, competition is encouraged as a means of fostering innovation and efficiency, with minimal government intervention in economic affairs. Conversely, mercantilism, which prevailed from the 16th to the 18th centuries, prioritizes national wealth as a path to state power. It advocates for a strong governmental role in regulating the economy, emphasizing the accumulation of wealth through a favorable balance of trade, often at the expense of rival nations.

Under capitalism, the goal of individuals and firms is to maximize profit, which theoretically leads to resource allocation in the most efficient manner possible, as determined by market forces. This profit motive drives innovation, with consumers benefiting from a variety of goods and services. Mercantilism, on the other hand, views the global economy as a zero-sum game where one nation's gain is another's loss, thus advocating for the accumulation of gold and silver, and the establishment of colonies as sources of raw materials and markets for finished goods.

Capitalism relies heavily on the concept of free trade, with the belief that open markets and minimal restrictions on exports and imports lead to economic growth and consumer benefits. In contrast, mercantilism employs protectionist policies, such as tariffs on imports and subsidies for exports, to protect domestic industries and increase exports over imports. These measures are intended to enhance national wealth and power but can lead to inefficiencies and higher prices for consumers.

The role of the state under capitalism is largely to maintain the rule of law, protect property rights, and ensure contracts are enforced, creating a stable environment for economic transactions. Mercantilism, however, sees the state actively involved in economic planning, directing capital to favored industries, and restricting foreign competition to build up domestic sectors and maintain a trade surplus.

While capitalism has evolved to dominate global economies, incorporating aspects like welfare policies to address its shortcomings, mercantilist policies still emerge in modern economic strategies, especially in times of trade wars and when national security concerns are tied to economic interests. The balance between free trade and protectionism continues to be a central theme in international economic policy discussions.