In short, mercantilists posited fundamental disharmony among competing economic interests domestically and internationally. The disharmony was so acute that governments needed to regulate and control all aspects of economic life. Two concrete examples illustrate typical mercantilist policies.
Navigation acts required all trade to be carried in ships of the regulating country. In this way a country could collect income from all trade conducted between it and other countries regardless of the origin of the goods traded. (British use of such navigation acts provided American colonists one irritant in their relations with the mother country that would eventually lead to the Declaration of
Independence.) A second example of mercantilist policy was the chartering of trading companies granted monopoly privileges by the government. The British East India Company established in
1600 is the classic example of such an arrangement.3
One of the earliest challenges to mercantilist ideas was provided by Adam Smith’s Wealth of
Nations published in 1776. His school subsequently labeled economic liberalism or laissez-faire, sought to explain why mercantilist regulation was unnecessary and indeed might be positively harmful to the economy. Underlying the ideas of economic liberalism are two assumptions that provide a stark contrast to those made by mercantilists. First, economic growth does occur which means that economic competition is not zero-sum and conflict over finite supply is muted if not eliminated. For Smith, the division of labor is the most important factor that generates economic growth. Further, because of economic growth, the need for government regulation to reconcile conflict is minimized.
The second assumption made by economic liberals relates to