Mercantilism, Capitalism, and Adam Smith and Summary
Overview
Statewide Dual Credit Modern World History: Unit 6, Lesson 3
A discussion of 18th-century Enlightenment thinkers and their contributions to the social sciences, focusing on Adam Smith's economic theories and his opposition to mercantilism.
The Enlightenment and the Social Sciences adapted from Statewide Dual Credit World History | CC By-SA
Enlightenment thinkers of the 18th century used their analytical skills to examine their societies as these rapid changes took place. David Hume (1711 – 1776) and other Scottish Enlightenment thinkers developed a science of man that was expressed historically in works by authors including James Burnett, Adam Ferguson, John Millar, and William Robertson, all of whom merged a scientific study of how humans behaved in prehistoric and ancient cultures with a strong awareness of the determining forces of modernity. Against philosophical rationalists like René Descartes, Hume held that passion rather than reason governs human behavior. He argued against the existence of innate ideas, positing that instead that all human knowledge is ultimately derived from experience. While Hume emphasized the foundational role of experience, he also acknowledged the importance of other mental processes, such as imagination and inference, in shaping human understanding. According to Hume, genuine knowledge must either be directly traceable to objects perceived in experience or result from abstract reasoning about relations between ideas derived from experience. Modern sociology largely originated from this “science of man” movement.
One of the most influential thinkers of the Scottish Enlightenment was Adam Smith (1723 – 1790). He published The Wealth of Nations in 1776, which is often considered the first work on modern economics. It had an immediate impact on economic policy that continues into the 21st century.
Adam Smith
Adam Smith used real-world observations to study economics, the creation and distribution of wealth. Like Newton's laws of physics, Smith identified principles governing human economic activity, particularly the exchange of goods. He argued that prices should be determined by supply and demand: high demand and low supply drive prices up, while low demand and high supply drive them down. When supply and demand operate freely in a market economy, Smith believed this “invisible hand” generates increasing wealth.
Smith strongly opposed mercantilism, the prevailing European economic system. Mercantilist governments used their power to artificially set prices, preventing the free operation of supply and demand. For instance, high import tariffs inflated prices, encouraging consumers to buy cheaper domestic goods. This system aimed to accumulate precious metals for the state, which imports depleted.
Smith also objected to government-granted monopolies, like that of the English East India Company, and to guild monopolies controlling trade or manufacturing. He argued these monopolies artificially controlled supply, allowing them to set prices against the natural forces of supply and demand. Smith advocated for a “hands-off” (laissez-faire) approach, where the “invisible hand” of the free market would drive wealth creation as people freely buy and sell at market-determined prices.
In the centuries following his publication of The Wealth of Nations, capitalists embraced Smith’s ideas of free markets and laissez-faire. In the 19th and 20th centuries, proponents of “Classical Economics” argued that trade unions and minimum wage laws interfered with free markets and hindered economic progress.
SUMMARY
Although the Enlightenment enriched the minds and improved the lives of millions, it retained a dark underside. A faith in rationality and scientific progress allowed for the creation of ever more violent military weapons used in increasingly bloody wars. Although French Revolutionaries initially created a republic with a moderate constitution, they later embraced violence and executed people for challenging the government or having royalist ties. Although the Napoleonic Wars spread Enlightenment ideas throughout Europe, it did so at the cost of millions of casualties. Furthermore, as the American Revolution proved, creating a nation based on natural rights did not end the enslavement of millions of people of African descent or the dispossession of hundreds of Native American tribes.