Nicolai went to Frankfurt an der Oder, where he learned his father's bookselling business and became acquainted with English literature. On his return to Berlin (1752), he took part in a literary controversy over John Milton by defending the English poet against the grammarian Johann Christoph Gottsched. Nicolai's Briefe über den jetzigen Zustand der schönen Wissenschaften in Deutschland (1755; “Letters on the Current State of the Fine Arts in Germany”), published anonymously, was directed against both Gottsched and Gottsched's Swiss opponents, the critics Johann Jakob Bodmer and Johann Breitinger. Nicolai's enthusiasm for English literature gained him the friendship of Lessing (Lessing, Gotthold Ephraim) and Mendelssohn (Mendelssohn, Moses). He cofounded, with Mendelssohn, the periodical Bibliothek der schönen Wissenschaften (1757–60; “Library of Fine Arts”) and, with both Lessing and Mendelssohn, Briefe, die neueste Litteratur betreffend (1761–66; “Letters on the Modern Literary Question”). He also edited the Allgemeine deutsche Bibliothek (1765–92), the organ of the “popular philosophers” who fought against authority in religion and what they conceived to be extravagance in literature. Nicolai showed a complete incomprehension of the new movement of ideas represented by Goethe, Schiller, Johann Gottfried von Herder, and Johann Gottlieb Fichte.

Nicolai wrote many independent works. His Charakterischen Anekdoten von Friedrich II (1788–92), an account of events in the court of Frederick II the Great, has some historical value. His romances are forgotten, although Das Leben und die Meinungen des Magisters Sebaldus Nothanker (1773–76; “The Life and Opinions of Master Sebaldus Nothanker”) and his satire on Goethe's Werther, Die Freuden des Jungen Werthers (1775; “The Joys of Young Werther”), were well known in their time. Die Beschreibung einer Reise durch Deutschland und die Schweiz, 12 vol. (1788–96; “The Description of a Journey Through Germany and Switzerland”), a record of his reflections on man and the state of science, religion, industry, and morals, was widely read by 1796 and reflects the rather narrow conservativism of his later views.