Created by Ms. Susan M. PojerCreated by Ms. Susan M. Pojeredited by Tony Nassiveraedited by Tony Nassivera

Created by Ms. Susan M. PojerCreated by Ms. Susan M. Pojeredited by Tony Nassiveraedited by Tony Nassivera

From Mercantilism From Mercantilism to to

Adam Smith:Adam Smith:

The EvolutionThe Evolutionof theof the

Modern Capitalist SystemModern Capitalist System

From Mercantilism From Mercantilism to to

Adam Smith:Adam Smith:

The EvolutionThe Evolutionof theof the

Modern Capitalist SystemModern Capitalist System

MercantilismMercantilismMercantilismMercantilism

Characteristics of MercantilismCharacteristics of MercantilismCharacteristics of MercantilismCharacteristics of Mercantilism1.1. ““Bullionism”Bullionism” the eco. health of a nation the eco. health of a nation

could be measured by the amount of could be measured by the amount of precious metal [gold or silver] which it precious metal [gold or silver] which it possessedpossessed.. ‘‘Hard’ money was the source of prosperity, Hard’ money was the source of prosperity,

prestige, and strength for a nation.prestige, and strength for a nation. Bullionism dictated a Bullionism dictated a “favorable balance of “favorable balance of

trade.”trade.” • Export more than you import [a trade Export more than you import [a trade

surplus].surplus]. High tariffs on imported manufactured

good. Low tariffs on imported raw materials.

2.2. Each nation must try to Each nation must try to achieve economic achieve economic self-sufficiency.self-sufficiency. Those founding new industries should be Those founding new industries should be

rewarded by the state.rewarded by the state.

Characteristics of MercantilismCharacteristics of MercantilismCharacteristics of MercantilismCharacteristics of Mercantilism

3.3. Thriving agriculture should be Thriving agriculture should be carefully encouraged.carefully encouraged.

Less of need to import foods.Less of need to import foods. Prosperous farmers could provide a Prosperous farmers could provide a

base for taxation.base for taxation.

4.4. Sea power was necessary to control Sea power was necessary to control foreign markets.foreign markets.

Less need to use the ships of other Less need to use the ships of other nations to carry your trade goods.nations to carry your trade goods.

Your own fleet adds to the power and Your own fleet adds to the power and prestige of the nation.prestige of the nation.

5.5. Impose internal taxes of all kinds.Impose internal taxes of all kinds.

Characteristics of MercantilismCharacteristics of MercantilismCharacteristics of MercantilismCharacteristics of Mercantilism6.6. Colonies would provide Colonies would provide captive captive

markets for manufactured goods & markets for manufactured goods & sources of raw materials.sources of raw materials.

7.7. Trade is a Trade is a “zero-sum” game.“zero-sum” game. A nation can gain in international trade A nation can gain in international trade

only at the expense of other nations.only at the expense of other nations.

Manufactured goods

Raw materials

Mother

Country

Mother

Country

Colony

Colony

Cheap labor

Characteristics of MercantilismCharacteristics of MercantilismCharacteristics of MercantilismCharacteristics of Mercantilism

8.8. A large population was needed to A large population was needed to provide a domestic labor force to provide a domestic labor force to people the colonies.people the colonies.

9.9. Luxury items should be avoidedLuxury items should be avoided They took money out of the economy They took money out of the economy

unnecessarily.unnecessarily.

10.10. State action was needed to regulate State action was needed to regulate and enforce all of these economic and enforce all of these economic policies.policies.

State-sponsored trade monopolies.State-sponsored trade monopolies.

Jean Baptiste Colbert Jean Baptiste Colbert [(1619-[(1619-1683)1683)

Jean Baptiste Colbert Jean Baptiste Colbert [(1619-[(1619-1683)1683)

£ Architect of French Architect of French mercantilism or mercantilism or “Colbertism.”“Colbertism.”

£ He was a bullionist.He was a bullionist.£ There are four There are four

professions of professions of importance to the importance to the nation:nation:

AgricultureAgriculture TradeTrade ArmyArmy NavyNavy

£ Uniform weights & Uniform weights & measures.measures.

£ Opposed tolls on Opposed tolls on internal trade.internal trade.

Jean Baptiste Colbert Jean Baptiste Colbert [(1619-[(1619-1683)1683)

Jean Baptiste Colbert Jean Baptiste Colbert [(1619-[(1619-1683)1683)£ Supported mandatory labor on national Supported mandatory labor on national

roads.roads.£ Favored a large population.Favored a large population.

Father of 10 or more children would be Father of 10 or more children would be exempt from taxes.exempt from taxes.

£ Favored low wages and child labor.Favored low wages and child labor.

Colbert & Louis XIVColbert & Louis XIV

Who Benefited Most From Who Benefited Most From Mercantilism?Mercantilism?

Who Benefited Most From Who Benefited Most From Mercantilism?Mercantilism?

£ Monarchs.Monarchs.

£ Merchant capitalists.Merchant capitalists.

£ Joint-stock companies.Joint-stock companies.

£ Government officials.Government officials.

TheThePhysiocratsPhysiocrats

((The The ““Government of Government of NatureNature”)”)

TheThePhysiocratsPhysiocrats

((The The ““Government of Government of NatureNature”)”)

Francois Quesnay Francois Quesnay (1694-1774)(1694-1774)Francois Quesnay Francois Quesnay (1694-1774)(1694-1774)

£ A surgeon who A surgeon who turned to medicine turned to medicine because of failing because of failing eyesight.eyesight.

£ He began publishing He began publishing economics treatises economics treatises at the age of 62.at the age of 62.

£ No single document No single document or book summarizes or book summarizes his economic his economic system.system.

£ He was concerned He was concerned about the state of about the state of the French the French economy, especially economy, especially of French of French agriculture.agriculture.

QuesnayQuesnay’’s Economic Theoriess Economic TheoriesQuesnayQuesnay’’s Economic Theoriess Economic Theories£ Tableau ÉconomiqueTableau Économique

[1759].[1759]. A reaction against the A reaction against the

extreme mercantilist extreme mercantilist policies of Colbert.policies of Colbert.

£ Three economic Three economic classes:classes:

1.1. ““Proprietary class” Proprietary class” landowners.landowners.

2.2. ““Productive class” Productive class” agricultural laborers.agricultural laborers.

3.3. ““Sterile class” Sterile class” artisans & merchants.artisans & merchants.

£ Productive work was Productive work was the source of national the source of national wealth.wealth.

QuesnayQuesnay’’s Economic Theoriess Economic TheoriesQuesnayQuesnay’’s Economic Theoriess Economic Theories£ Therefore, Therefore, the wealth of the nation the wealth of the nation

was derived from agriculture.was derived from agriculture. Agriculture was the productive sector Agriculture was the productive sector

of an economy.of an economy.

£ Tax only the landowning class.Tax only the landowning class.

What founding father What founding father favors this theory of favors this theory of

Economics?Economics?

What founding father What founding father favors this theory of favors this theory of

Economics?Economics?

Alexander Alexander HamiltonHamilton

Thomas Thomas JeffersonJefferson

Thomas Thomas JeffersonJefferson

CapitalismCapitalismCapitalismCapitalism

Adam Smith Adam Smith (1723-1790)(1723-1790)Adam Smith Adam Smith (1723-1790)(1723-1790)

£ Appointed to the chair of Appointed to the chair of logic in 1751 at the logic in 1751 at the University of Glasgow, University of Glasgow, Scotland.Scotland.

£ In 1752 he transferred to In 1752 he transferred to the chair of philosophy.the chair of philosophy.

£ On his travels to France, On his travels to France, he was influenced by the he was influenced by the writings of the writings of the physiocrats.physiocrats.

£ 1776 1776 The Theory of The Theory of Moral Sentiments and an Moral Sentiments and an Inquiry Into the Nature Inquiry Into the Nature of Causes of the of Causes of the Wealth Wealth of Nations of Nations was was published.published.

A vehement attack of A vehement attack of the mercantilist the mercantilist system.system.

The Wealth of Nations The Wealth of Nations (1776)(1776)The Wealth of Nations The Wealth of Nations (1776)(1776)

Adam SmithAdam Smith’’s Attack on s Attack on MercantilismMercantilism

Adam SmithAdam Smith’’s Attack on s Attack on MercantilismMercantilism

£ He was making a He was making a political argument, political argument, NOT an economic one.NOT an economic one. Part of the argument was for new economic Part of the argument was for new economic

policy, but..policy, but.. An essential part of the argument was for new An essential part of the argument was for new

social and political arrangements.social and political arrangements.

£ He argued that He argued that the basic unit for social the basic unit for social analysis should be the analysis should be the nation, not the statenation, not the state..

£ He was against the belief that He was against the belief that tradetrade was a was a zero-sum gamezero-sum game It was a positive-sum game.It was a positive-sum game. Both nations gained.Both nations gained.

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

1.1. Goods and services are produced for Goods and services are produced for profitable exchange.profitable exchange.

2.2. Human labor power is a commodity for Human labor power is a commodity for sale sale LABOR IS THE SOURCE OF VALUELABOR IS THE SOURCE OF VALUE..

BusinessesBusinesses HouseholdsHouseholds

Goods & Service

Goods & Service

Labor & Investments

Labor & Investments

Consumer SpendingConsumer Spending

WagesWages

“THE greatest improvement in the productive powers of labour, and the greater part of the skill, dexterity, and judgment with which it is anywhere directed, or applied, seem to have been the effects of the

division of labour...This great increase of the quantity of work which, in consequence of the division of labour, the same number of

people are capable of performing, is owing to three different circumstances; first, to the increase of dexterity in every particular

workman; secondly, to the saving of the time which is commonly lost in passing from one species of work to another; and lastly, to the

invention of a great number of machines which facilitate and abridge labour, and enable one man to do the work of many. (From

the Wealth of Nations) 

Division of Labor – Organizing the production of a good into its separate tasks.

Specialization – Focusing an individual’s efforts on a particular product or a single task

Lets look at a Modern Lets look at a Modern ExampleExample

Lets look at a Modern Lets look at a Modern ExampleExample

£ Picture a visit to McDonald’s. Picture a visit to McDonald’s. “Let’s see, I’ll have a Big Mac, an “Let’s see, I’ll have a Big Mac, an order of fries, and a chocolate order of fries, and a chocolate milkshake.” About a minute later milkshake.” About a minute later your order is ready. It would take your order is ready. It would take you about an hour to make a you about an hour to make a homemade version of this meal.homemade version of this meal.

£ McDonald’s breaks down food McDonald’s breaks down food preparation into various tasks and preparation into various tasks and has individuals specialize in these has individuals specialize in these separate tasks.separate tasks.

3.3. The The “Invisible Hand”“Invisible Hand” of the market of the market ProblemProblem How do we survive in a How do we survive in a

world where we must depend on world where we must depend on many others, but where humans are many others, but where humans are by nature self-interested individuals??by nature self-interested individuals??

SolutionSolution the free marketthe free market, while , while appearing chaotic and unrestrained, appearing chaotic and unrestrained, is is actually guided to produce the right actually guided to produce the right amount and variety of goods by a so-amount and variety of goods by a so-called called “invisible hand.”“invisible hand.”

Therefore, the basicTherefore, the basicmarket mechanism is market mechanism is self-regulatingself-regulating!!

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

4.4. Individuals seeking success are driven Individuals seeking success are driven by self-interest by self-interest Profit MotiveProfit Motive

5.5. The The Law of Supply and DemandLaw of Supply and Demand Individuals who are free to pursue their Individuals who are free to pursue their

self-interest will produce goods and self-interest will produce goods and services that others want, at prices others services that others want, at prices others will be will be willing to paywilling to pay..

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

6.6. Law of CompetitionLaw of Competition The competitive market system compels The competitive market system compels

producers to be increasingly efficient, producers to be increasingly efficient, and to respond to the desires of and to respond to the desires of consumers.consumers.

7.7. A social division of labor will maximize A social division of labor will maximize the satisfaction of individual wants and the satisfaction of individual wants and needs, given scarce resources.needs, given scarce resources.

8.8. Government should interfere minimally Government should interfere minimally with the free and efficient workings of with the free and efficient workings of the marketthe market

Laissez faireLaissez faire [“Leave things alone.”] [“Leave things alone.”]

Under the Market System, Under the Market System, voluntary choices based on voluntary choices based on

rational self interest are made rational self interest are made in unrestricted markets to in unrestricted markets to

answer the questions answer the questions what, what, how, and for whomhow, and for whom

Under the Market System, Under the Market System, voluntary choices based on voluntary choices based on

rational self interest are made rational self interest are made in unrestricted markets to in unrestricted markets to

answer the questions answer the questions what, what, how, and for whomhow, and for whom

There, there it is again—the invisible hand of the marketplace giving us the

finger.

There, there it is again—the invisible hand of the marketplace giving us the

finger.

How did the Supreme Court How did the Supreme Court decisions under John Marshall decisions under John Marshall

place the economy of the place the economy of the nation above that of the nation above that of the

state?state?

How did the Supreme Court How did the Supreme Court decisions under John Marshall decisions under John Marshall

place the economy of the place the economy of the nation above that of the nation above that of the

state?state?

£ Dartmouth College Dartmouth College v. Woodwardv. Woodward

£ Fletcher v. PeckFletcher v. Peck£ Gibbons v. OgdenGibbons v. Ogden

Contract ClauseContract Clause

CommercCommerce Clausee Clause