UNIT ONE: IMPERIALISM AND THE CAUSES OF WORLD WAR ONE
LESSON ONE: An examination of economic systems: mercantilism and capitalism
The economic theory of mercantilism
The economic theory of mercantilism was based on the ideas that countries competed for
limited resources. Countries measured if they were “winning” or “losing” based on how much
of those resources the countries possessed. Mercantilists believed that it was the job of the
government to increase the wealth of the country, even if the policies used to increase the
country’s wealth hurt individual citizens of the country.
The resources that were important measures of wealth to the mercantilists were gold, silver, and
land. In the eyes of the mercantilists, nothing else was a true measure of wealth. Because gold,
silver, and land could not be created, there was a limited amount of it in the world. Therefore,
the only way that a country could get wealthier was by taking gold, silver, or land from
another country.
Mercantilists believed that they could take wealth from other countries in several ways.
 One of the most obvious ways was to go to war with another country and take land by
force.
 Another way to take wealth away was by hiring privateers, who were essentially pirates
who were working for the government to attack ships from foreign countries and take
their cargo.
 A third way to take wealth away from other countries was to prevent citizens from
buying foreign-made products. The way this could be done was to put a tariff, or tax, on
foreign-made products.
 Mercantilists also encouraged industry by having the government spend money to
improve manufacturing and farming techniques.
 Finally, mercantilists thought that it was important to grab colonies whenever possible,
since they would add land to the country. Mercantilists also thought that the colonies
should exist only to help the “mother country,” so colonists were only supposed to buy
products from the mother country and were not supposed to make their own
manufactured items. This meant that colonists had to pay high prices for manufactured
goods and could not buy them cheaper from other countries or make them on their own.
There were several ways that mercantilist policies hurt average people and hurt some
businesses while helping others:
 Mercantilists believed that skilled workers should not be able to leave the country, as
they might take the secret of their skills to another country that would then compete with
them.
 Mercantilists believed that the government should control which companies could do
business by granting them special licenses.
 Mercantilist governments often sold monopolies to certain businesses, which meant that
only the business with the monopoly could sell certain products.
UNIT ONE: IMPERIALISM AND THE CAUSES OF WORLD WAR ONE
LESSON ONE: An examination of economic systems: mercantilism and capitalism
The Industrial Revolution and the Economic Theory of Capitalism
Capitalism is based on the idea that private individuals should own businesses and property. It is
a competitive system that rewards those who are best at what they do by allowing those
individuals and companies to profit from their own new inventions and methods of production.
Capitalists believe that this is the best way for a society to encourage production of necessary
goods and services. Capitalists believe that the law of “supply and demand” makes rare goods
and services expensive, thus encouraging more people to try to get rich providing those goods
and services. If there was a shortage of bread, for example, the price of bread (and therefore
wheat) would rise, encouraging farmers to switch from growing other crops to growing wheat.
The supply of bread would increase, and the price of bread would come down as it became a less
scarce good. The 18th century economist Adam Smith called this the “invisible hand” that
would ensure that supply and demand would balance out over time. Capitalists believe strongly
that the worst thing the government could do in the scenario above would be to pass a law
forcing merchants to sell bread cheaply, as this would provide no incentive to increase the supply
of bread, thus ensuring a perpetual (continuous) bread shortage. This idea that the government
should not interfere with economics is called “laissez-faire.”
Capitalists believe that this laissez-faire policy should apply also to imports and exports. They
believe that consumers and businesses should be able to buy from whomever they please.
Forcing domestic companies to compete with foreign companies encourages them to provide a
better product at a better price to the consumer. Capitalists believe that “protecting” domestic
businesses by putting tariffs on imports only causes them to be lazy, inefficient, and provide an
inferior and/or more expensive product to the consumer. Unlike the older system of
mercantilism, capitalism is a system that encourages trade and commerce both within a country
and between countries; if another country can produce something cheaper than we can, we
should not waste our time producing that product ourselves. Rather, we should buy the foreign
good at the cheap price and focus on doing something else that we can do better than the other
country. Also unlike mercantilists (who believed that countries can only get richer by taking
some other country’s “piece of the pie”), capitalists believe that international trade can actually
make both trading partners wealthier.
Those who believe in capitalism believe that ultimately this system is the best way to ensure that
individual consumers get the goods and services they truly want at the only “fair” price, which is
whatever the law of supply and demand dictates. Those who disagree with capitalism feel that it
encourages business owners to exploit workers and consumers. Critics also point out that many
rich people have inherited their wealth, that many poor people work hard their whole lives
without escaping poverty, and that capitalism does nothing to correct this unequal balance of
wealth (capitalists reply that this imbalance motivates workers to be inventive and hardworking
so they can improve their financial condition). In either case, countries that entered the Industrial
Revolution abandoned outdated mercantilist policies in favor of the new capitalist system, which
has remained the dominant economic model across the globe to this day.
---OVER---
UNIT ONE: IMPERIALISM AND THE CAUSES OF WORLD WAR ONE
LESSON ONE: An examination of economic systems: mercantilism and capitalism
Questions on “The Industrial Revolution and the Economic Theory of Capitalism”
1. Sum up in your own words three major beliefs in capitalism:
2. What do capitalists believe the role of government should be in economics?
3. How would a capitalist define “fair” with regards to prices merchants should charge?
What would be “fair” with regards to the distribution of wealth (in other words, should
money be divided equally? Why or why not?)
4. What do capitalists believe about trading between countries?
5. What are two ways that capitalism differs from mercantilism?