From Mercantilism From Mercantilism to to

Capitalism:Capitalism:

Adam Smith and the Adam Smith and the

Capitalist SystemCapitalist System

From Mercantilism From Mercantilism to to

Capitalism:Capitalism:

Adam Smith and the Adam Smith and the

Capitalist SystemCapitalist System

Characteristics of MercantilismCharacteristics of MercantilismCharacteristics of MercantilismCharacteristics of Mercantilism

1.1. ““Bullionism”Bullionism” the economic health the economic health of a nation could be measured by the of a nation could be measured by the amount of precious metal [gold or amount of precious metal [gold or silver] which it possessed.silver] which it possessed. ‘‘Hard’ money was the source of Hard’ money was the source of

prosperity, prestige, and strength for prosperity, prestige, and strength for a nation.a nation.

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

be rewarded by the state.be 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 powerSea power was necessary to control 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 captive Colonies would provide 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 State action was needed to regulate and enforceregulate and enforce all of these all of these economic policies.economic policies.

State-sponsored trade monopolies State-sponsored trade monopolies (East India Company…)(East India Company…)

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.

CapitalismCapitalismCapitalismCapitalism

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

£ Attended the Attended the University of University of Glasgow, Scotland Glasgow, Scotland and Oxford and Oxford University. University.

£ It took him 10 years It took him 10 years to complete his 1776 to complete his 1776 masterpiece, masterpiece, The The Theory of Moral Theory of Moral Sentiments and an Sentiments and an Inquiry Into the Inquiry Into the Nature of Causes of Nature of Causes of the the Wealth of Wealth of NationsNations . . An attack of the An attack of the

mercantilist mercantilist system.system.

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

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

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

£ 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 (the social and political arrangements (the government should not stand as it was).government should not stand as it was).

£ He argued that the basic unit of the He argued that the basic unit of the government and economy should be the government and economy should be the nation (individuals and businesses), not the nation (individuals and businesses), not the state (government and gov-run businesses)state (government and gov-run businesses)..

£ He argued that through new trade and He argued that through new trade and arrangements, all people and nations arrangements, all people and nations gained.gained.

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

1.1. Goods and services are produced for profitable Goods and services are produced for profitable exchange (profit).exchange (profit).

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

1.1. The more labor intensive the commodity, the The more labor intensive the commodity, the more value it has.more value it has.

BusinessesBusinesses HouseholdsHouseholds

Goods & Service

Goods & Service

Labor & Investments

Labor & Investments

Consumer SpendingConsumer Spending

WagesWages

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 market, while the free market, while appearing chaotic and unrestrained, is appearing chaotic and unrestrained, 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-regulating!self-regulating!

• People want to buy and sell!People want to buy and sell!

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

4.4. Individuals seeking success are driven by self-Individuals seeking success are driven by self-interest 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 services that self-interest will produce goods and services that others want, at prices others will be willing to others want, at prices others will be willing to pay.pay.

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

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

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

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

Laissez faireLaissez faire [layzay-fair; “Leave things [layzay-fair; “Leave things alone.”]alone.”]

Basic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist PrinciplesBasic Capitalist Principles

Check Yourself!Check Yourself!Check Yourself!Check Yourself!

Please answer the following questions as homework. Please answer the following questions as homework. Bring them to our next class!Bring them to our next class!

£ Why do you think nations like Britain wanted colonies Why do you think nations like Britain wanted colonies rich in natural resources (metals in particular)?rich in natural resources (metals in particular)?

£ Who was in control of the economy under the Who was in control of the economy under the mercantilist system? Why did Smith have a problem mercantilist system? Why did Smith have a problem with this?with this?

£ Adam Smith was not popular among some merchants Adam Smith was not popular among some merchants and upper-class during his time. Explain why.and upper-class during his time. Explain why.

£ Part of Smith’s idea was the “invisible hand.” What is Part of Smith’s idea was the “invisible hand.” What is this? Do you think this still exist today, and why?this? Do you think this still exist today, and why?

£ A second part of Smith’s idea was “laissez-faire.” A second part of Smith’s idea was “laissez-faire.” What is this? What could be some potential problems What is this? What could be some potential problems with this idea among consumers? Producers?with this idea among consumers? Producers?