You're getting a bit closer. You can see the problem, you just can't get a grip on the principle.

Mercantilism, as you understand it, is the use of government power by commercial entities to advance their own interests.

This is not free market capitalism, either.

If it's State Capitalism, it ain't capitalism.

It is not a free market when a state can grant land or exclusive rights to a single commercial entity. It is not a free market when a commercial entity can call on state armed forces to suppress competition or force people to deal with it. If you look at almost all the abuses of companies and commercial interests through history it's because there was no separation of government and economic interest.

It's not a free market when one competitor gets to use a gun.

Don't you understand that the conditions you abhor are the inevitable and natural result of the premise that government has the right to control economic behavior? What other result COULD there be?

Everyone bitches about the government/industrial complex, but nobody wants to take that power away, because they all have fantasies of using it themselves for whatever their own whims are. If government doesn't have the power any more, how will we force people to use the "right" lightbulbs, eat the "right" foods, or buy the "right" cars?

Fans of big government make noises about not liking the big corporations, but in truth the government, as you point out, gets along fine with the big boys. Ever wonder why there are so many taxes and regulations that weed out independent businesses, or penalize the self-employed? They know the score. Do you?

There should be separation of economics and state for the exact same reason as separation of church and state. Without the latter, the inevitable result in history has been churches with the powers of governments.

Nobody worries in the United States about the Catholic Church becoming a coercive monopoly that people have to deal with. Yet there are no anti-trust laws on churches, or even any taxes. It's because they don't have a gun any more. Why wouldn't this be a good thing in economics?