From Mercantilism
to
Adam Smith:
The Evolution
of the
Modern Capitalist System
Ms. Susan M. Pojer
& Dr. A. Maxeiner
Mercantilism
Mercantilism: Root Latin
mercant buyer
£ Mercantilism is an economic
theory that states a nation
becomes stronger by keeping
strict control over its trade. ƒ
£ It also states that a nation
should have more exports than
imports.
Whoever has the most treasure
wins.
Characteristics of Mercantilism
£ “Bullionism”  the economic health of a nation
could be measured by the amount of precious
metal [gold or silver] which it possessed.
 Each nation must try to achieve economic
self-sufficiency; a “favorable balance of trade.”
 High tariffs on imported manufactured goods.
 Low tariffs on imported raw materials.
 A “tariff” is a tax on imported
goods.
Characteristics of Mercantilism
£ Thriving agriculture should be carefully
encouraged.
£ Sea power was necessary to control
foreign markets.
£ Impose internal taxes of all kinds.
£ A large population was needed to provide
a domestic labor force to people the
colonies.
£ Luxury items should be avoided.
£ State action was needed to regulate and
enforce all of these economic policies.
Characteristics of Mercantilism
£ Colonies would provide captive markets for
manufactured goods & sources of raw
materials.
Manufactured goods
Mother
Country
Colony
Raw
materials
Cheap labor
£ Trade is a “zero-sum” game.
 A nation can gain in international trade only
at the expense of other nations.
Pie theory
Mercantilism
Capitalism
Who Benefited Most From
Mercantilism?
£ Monarchs.
£ Merchant capitalists.
£ Joint-stock companies.
£ Government officials.
And Smugglers!
Key Dates
£ 1651 First
Navigation Act
£ 1688 or 1714 the
beginning of
“salutary neglect”;
the British Empire
doesn’t enforce
its laws.
£ 1764 Sugar Act:
end of salutary
neglect
£ Currency Act 1764
Colonists could not
issue their own
paper money.
Two Cows Mercantilism
£ You have two
cows. Your
neighbor has
none.
£ You send the
milk to England.
It is made into
cheese and sent
back to you, at a
high price.
£ Your neighbor
goes hungry.
Two Cows Capitalism
£ You have two cows. Your neighbor
has none.
£ You sell one cow and buy a bull.
£ You breed them, and sell your
neighbor a new cow for a profit.
Capitalism
Adam Smith (1723-1790)
NOT AMERICAN
£ Professor of moral
philosophy at the
University of Glasgow,
Scotland.
£ On his travels to France, he
was influenced by the
writings of the physiocrats.
£ 1776  The Theory of
Moral Sentiments and an
Inquiry Into the Nature of
Causes of the Wealth of
Nations was published.
 A vehement attack of the
mercantilist system.
The Wealth of Nations (1776)
Though gold and silver, therefore, could not
be had in exchange for the goods destined
to purchase them, the nation would not be
ruined. It might, indeed, suffer some loss
and inconveniency, and be forced upon some
of those expedients which are necessary for
supplying the place of money. The annual
produce of its land and labour, however,
would be the same, or very nearly the same,
as usual, because the same, or very nearly
the same consumable capital would be
employed in maintaining it.
And though goods do not always draw money
so readily as money draws goods, in the
long-run they draw it more necessarily than
even it draws them. Goods can serve many
other purposes besides purchasing money,
but money can serve no other purpose
besides purchasing goods. Money, therefore,
necessarily runs after goods, but goods do
not always or necessarily run after money.
The man who buys, does not always mean to
sell again, but frequently to use or to
consume; whereas he who sells, always
means to buy again. The one may frequently
have done the whole, but the other can
never have done more than the one-half of
his business. It is not for its own sake that
men desire money, but for the sake of what
they can purchase with it.
Adam Smith’s Attack on
Mercantilism
£ He was making a political argument, NOT
an economic one.
 Part of the argument was for new economic
policy, but..
 An essential part of the argument was for new
social and political arrangements.
£ He argued that the basic unit for social
analysis should be the nation, not the state.
£ He was against the belief that trade was a
zero-sum game
 It was a positive-sum game.
 Both nations gained.
Basic Capitalist Principles
1. Goods and services are produced for
profitable exchange.
2. Human labor power is a commodity for
sale  LABOR IS THE SOURCE OF VALUE.
Goods & Service
Consumer Spending
Businesses
Households
Wages
Labor & Investments
Basic Capitalist Principles
3. The “Invisible Hand” of the market
 Problem  How do we survive in a world
where we must depend on many others,
but where humans are by nature selfinterested individuals??
 Solution  the free market, while appearing
chaotic and unrestrained, is actually guided
to produce the right amount and variety of
goods by a so-called
“invisible hand.”
 Therefore, the basic
market mechanism is
self-regulating!
Basic Capitalist Principles
4. Individuals seeking success are driven by
self-interest  Profit Motive
5. The Law of Supply and Demand
 Individuals who are free to pursue their
self-interest will produce goods and services
that others want, at prices others will be
willing to pay.
Basic Capitalist Principles
6. Law of Competition
 The competitive market system compels
producers to be increasingly efficient, and
to respond to the desires of consumers.
7. A social division of labor will maximize the
satisfaction of individual wants and needs,
given scarce resources.
8. Government should interfere minimally
with the free and efficient workings of
the market
 Laissez faire [“Leave things alone.”]