The theory and practice of mercantilism in early modern Europe were densely entwined with both the emergence of capitalism and the formation of overseas empires. Briefly, capitalism can be defined as an economic system in which goods and services, produced by individuals and privately owned firms, are bought and sold in markets, thus benefiting individual owners of capital and private property.

In early modern Europe, mercantilism extended this notion regarding capitalist production and exchange to the level of the state. More specifically, it refers to the theory and practice of how the early modern European states and nation-states related to each other and to their respective colonies.

The basic theory behind mercantilist practice was fairly simple. The whole point of creating overseas colonies was to augment the economic, political, and military power of the colonizing state, often referred to as the “mother country,” though this locution is deceptive, since the unit of analysis is less a “country” than a specific state apparatus.

Colonies were to serve the colonizing state in two principal ways: as a market for manufactured goods produced in the home country, and as a source of raw materials from which the nation-state’s private producers would create manufactures.

An ideal mercantile relationship was thus conceived as hierarchical, reciprocal, and exclusive; the colonizing power was to be dominant, the colony subordinate. Manufactures were to flow in one direction, raw materials in the other. At the same time, rival colonizing states were to be excluded from this relationship.

It would not serve the English state’s mercantile interests, for instance, for its rivals (e.g., Spain or France) to trade with its colonies. From the perspective of any given colonizing state, the whole point of creating overseas colonies was to enhance its own power vis-à-vis competing states.

It would therefore be counterproductive for a colonizing state to permit its rivals to benefit by trading with its colonies by either exporting manufactures to them or receiving raw materials from them. The exclusionary nature of the ideal mercantilist relationship was thus just as important as its hierarchical and reciprocal qualities.

Finally, mercantilism also called for low wages and minimal consumption in the home country and for maximizing of exports, thus encouraging industrial development and permitting the greatest percentage of money and resources to be kept in the hands of the state.

Mercantilist practice often deviated from mercantilist theory, however, depending on time, place, and circumstance. Spain, the New World’s first colonizing power, endeavored relentlessly to forge an exclusive mercantile relationship with its colonies, with decidedly mixed success.

Despite an abundance of laws and decrees intended to ensure an exclusive relationship, smuggling, contraband, and other forms of illicit trade made Spain’s mercantile system, hermetically sealed in theory, exceedingly leaky in practice. In addition, Spain did not have the industrial base with which to meet its own or its colonies’ demands for manufactured goods.

As a result, much of the silver and gold plundered from its New World colonies slipped through the fingers of the Spanish state on its way to Dutch, Flemish, and English merchants, who were able to provide the industrial manufactures that Spanish merchants were not.

The English were more successful in achieving the mercantilist ideal, principally through a series of Navigation Acts (most notably in 1651 and 1660) that required England’s colonies to trade exclusively with the mother country. But here, too, smuggling and contraband poked many holes in the system, rendering mercantilist practice a far cry from the ideal.

The Dutch state, committed to free trade and frequently encouraging its capitalist class to invest in its rivals’ colonies, rarely adhered to mercantilist theory, yet Dutch merchants and the Dutch state succeeded in amassing vast quantities of capital during the colonial period.

Principally because their domestic economies had undergone the most extensive transition to capitalism, by the end of the colonial period the English and French states had become the most successful in employing mercantilist theory and practice to augment their own economic, political, and military power, and, by extension, the power and prestige of their respective nation-states.