Mercantilism vs Capitalism

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Mercantilism vs Capitalism Powered By Docstoc
The main economic system used during the sixteenth to eighteenth centuries. The main
goal was to increase a nation's wealth by imposing government regulation concerning all of the
nation's commercial interests. It was believed that national strength could be maximized by
limiting imports via tariffs and maximizing exports
This approach assumes the wealth of a nation depends primarily on the possession of precious
metals such as gold and silver. This type of system cannot be maintained forever, because the
global economy would become stagnant if every country wanted to export and no one wanted
to import. After a period of time, many people began to revolt against the idea of mercantilism
and stressed the need for free trade. The continued pressure resulted in the implementation of
laissez faire economics in the nineteenth century

Capitalism is a difficult, problematic term; it applies to a diversity of phenomenon spread across
disparate historical cultures with substantially variable world views. However, the term is an
Enlightenment European term used to describe European practices; so the term "capitalism"
means more than just a body of social practices easily applied across geographical and historical
distances, it is also a "way of thinking," and as a way of thinking does not necessarily apply to
earlier European origins of capitalism or to capitalism as practiced in other cultures.

  The earliest forms of capitalism—which we call "mercantilism"—originate in Rome, the
Middle East, and the early Middle Ages. Mercantilism might be roughly defined as the
distribution of goods in order to realize a profit. Goods are bought at one site for a certain price
and moved to another site and sold at a higher price. As the Roman empire expanded,
mercantilism correspondingly expanded. But the contraction of the Roman empire from the fifth
century onwards also contracted mercantilism until, by the 700's, it was not a substantial aspect
of European culture, that is, European economies tended to localize. Arabic cultures, on the other
hand, had a long history of mercantilism, living as they did on the trade routes between three
great empires: Egypt, Persia, and later Byzantium. As Islam from the seventh century A.D.
onwards spread like wildfire across Northern Africa, Spain, the Middle East and Asia, Arabic
mercantilism assumed an unprecedented global character. The medieval Europeans essentially
learned mercantilism from their Islamic neighbors, evidenced in large part by the number of
economic terms in European languages that are derived from Arabic, such as tariff and traffic.
From the 1300's, Europeans would begin expanding their mercantile practices, resulting in a
social mobility hitherto unseen in European culture as well as pushing Europeans, as it did the
Muslims, to explore distant parts of the globe. The voyages of discovery were entirely driven by
mercantile ambitions.
Adam Smith and The Wealth of Nations: AD 1776

                 During the second half of the 18th century visible changes are occurring in
Britain as a result of the developing Industrial Revolution. Where previously land has been the
traditional source of wealth, and the purchase of land the natural investment for anyone with a
spare fortune, money is now being put into manufacturing enterprises.

In 1771 the greatest of the new entrepreneurs, Richard Arkwright, opens the first custom-built
and water-powered cloth mill at Cromford. In the same decade the investment of another
entrepreneur, Matthew Boulton, shows signs of prospering. He has put money into the
manufacture of James Watt's steam engines. The first batch are delivered to their purchasers in

                The wealth of the nation is being diverted into new and productive channels, in a
process which will lead eventually to the emergence of a society organized on capitalist
principles. The process is observed with a clear analytical eye by the Scottish philosopher Adam
Smith. In the year when Boulton and Watt deliver their first engines, Smith publishes a treatise
which becomes the definitive statement of classical capitalism and the free market.

In the five books of his Inquiry into the Nature and Causes of the Wealth of Nations (1776)
Smith ranges over many of the basic concerns of political economy.

Smith comes down strongly against the prevailing theory of mercantilism, which takes for
granted that there is an economic advantage in protecting one's own trade by restrictive measures
against other nations' goods or merchant ships.

Smith argues instead that economic benefit derives from the natural competition of the market
place, where people should be free to follow their own best interests without government
interference. He believes, with the optimism of the 18th century, that public good will follow
naturally from the untrammelled pursuit of private interest.

Smith recognizes the necessary role of government in many fields - defence, justice, and the
infrastructure of canals and roads. His arguments against interference relate to the economic
sphere, where the government should merely prevent monopolies (which distort the market). His
treatise profoundly influences the laissez faire policy of the 19th-century and its revival in the
Thatcher-Reagan era.