In the eighteenth century, Enlightenment thinkers increasingly applied reason to economic life, questioning older systems of state control and arguing that wealth, trade, and productivity grew best under fewer restrictions and broader commercial freedom.

Mercantilism and the Older Economic Order

Before new economic thinking gained influence, European states often followed mercantilism, which treated economic policy as a tool of state power. Governments tried to strengthen the state by regulating trade, encouraging exports, discouraging imports, and building colonial systems that served the mother country. Wealth was often measured by stores of bullion, especially gold and silver, so rulers sought a favorable balance of trade.

Line chart of the U.S. trade balance (goods and services) over time, showing how a “trade balance” can be positive (surplus) or negative (deficit) in measured dollar terms. Although the data are modern, the visualization clarifies the same core concept mercantilists emphasized: tracking exports minus imports as a sign of national economic strength. Source

Mercantilist policies encouraged chartered companies, colonial monopolies, and tariffs on foreign goods. They also assumed that international trade was a competition in which one state's gain was often another's loss. This approach matched an age of dynastic rivalry and imperial expansion, but it also limited commercial flexibility and often protected powerful interests.

Why Economic Thinking Began to Change

By the eighteenth century, some writers and reformers began to argue that older economic controls were inefficient. Expanding commerce made it clearer that regulations, monopolies, and internal barriers could slow exchange rather than strengthen prosperity. Enlightenment confidence in natural laws also shaped economic thought: if the physical world operated according to discoverable laws, perhaps economic life did as well.

This shift encouraged a different understanding of wealth. Instead of seeing wealth mainly as precious metals stored by the state, critics increasingly linked wealth to production, labor, and the movement of goods. They questioned whether governments should direct economic life so closely, especially when regulations mainly benefited privileged groups instead of society as a whole.

Main criticisms of mercantilism

• It confused state treasure with overall economic prosperity.

• It relied on tariffs and monopolies that protected special interests.

• It assumed trade was always a zero-sum contest.

• It restricted the freedom of merchants, producers, and consumers.

Adam Smith and the Attack on Economic Regulation

The most important figure in this new economic thinking was Adam Smith, whose 1776 work The Wealth of Nations became a foundational text of modern economics.

Portrait of Adam Smith (the “Muir portrait”), an iconic later depiction of the Scottish Enlightenment thinker whose Wealth of Nations (1776) argued that national wealth comes primarily from productive labor and exchange rather than hoarded bullion. Using a portrait here anchors the abstract policy debate (mercantilism vs. freer markets) in a concrete historical figure. Source

Smith argued that wealth came not simply from hoarded bullion but from the productive labor of a society. A nation grew richer when it increased output and allowed exchange to occur more freely.

Smith believed that individuals pursuing their own economic interests could unintentionally promote wider prosperity. Competition pushed producers to improve efficiency, while markets helped direct resources toward goods people actually wanted. In this view, the economy did not need constant micromanagement by the state.

Smith also emphasized the division of labor, the breaking of production into smaller specialized tasks. He argued that specialization increased productivity, making economies more efficient and raising total wealth. This helped shift attention from the state's stock of treasure to the broader capacity of society to produce goods.

At the same time, Smith did not argue for a completely absent state. He still saw important roles for government, especially in protecting the nation, enforcing justice, and supporting public works that private individuals might not provide on their own. His critique was aimed chiefly at unnecessary restrictions, monopolies, and trade barriers.

Free Trade and Freer Markets

Smith supported free trade, meaning fewer tariffs and fewer government barriers to the movement of goods between countries. He argued that when trade was more open, each country could focus on what it produced most efficiently and buy other goods more cheaply from elsewhere. In this way, trade could benefit multiple societies rather than merely shift wealth from one to another.

He also favored freer markets within countries. That meant reducing regulations that interfered with buying, selling, and production, especially when those rules protected privileged corporations or politically connected interests rather than the public good.

Writers influenced by this perspective often used the term laissez-faire.

Freer markets did not mean complete equality or modern capitalism in a fully developed form. Instead, they represented a major intellectual shift: economic life was increasingly viewed as something that followed regular patterns and could work better when less constrained by inherited privilege and state direction.

Historical Importance and Limits

These ideas challenged one of the central assumptions of earlier European governments: that national strength depended on strict economic control. By criticizing tariffs, monopolies, and state-managed trade, new economic thinkers weakened the intellectual foundations of mercantilism.

Their importance also lay in method. Economic policy became part of the broader Enlightenment habit of using reason to question tradition. Just as political thinkers criticized arbitrary power, economic thinkers criticized arbitrary regulation. They asked whether long-standing restrictions were actually useful or simply customary.

Even so, mercantilism did not disappear immediately. Many rulers still valued tariffs, colonial exclusivity, and commercial regulation because these seemed to serve military power and state revenue. As a result, new economic thinking mattered less as an instant transformation than as a powerful challenge to the older belief that governments should tightly direct commerce.