Mercantilism was very profitable for the government, and a few lucky citizens. It was however, detrimental to society. The common man profited least mercantilism because of the government’s monopoly of trade and distribution. Lateral movement from the lower class to the middle class was also unlikely because the government seized all business opportunities. Mercantilist states favored issuing low wages, believing that this would discourage imports, and contribute to the export surplus. The gap between the rich and poor rose along with social unrest.
The fundamental problem with mercantilism is in its belief that the real wealth of a nation is the size of its gold and silver treasuries. Increasing gold and silver hoards did provide short-term economic stimulus, however it was only short term. A long-term measure of a countries value is in its ability to produce, similar to the gross national product of today.
Intercontinental trade was a major mercantilist market. The problem with a monopoly on trade was that since the government restricted competition, there would be only one supplier for imported goods. Meaning that the prices for these goods will rise to the highest point people were willing to pay. The population of Britain, an island nation, depended heavily on imported goods. Imports that mercantilism was all too happy to provide, at high prices with no alternatives. The population was held captive by the political economy.
Adam Smith, author of the “Wealth of Nations” believed in an alternative, a natural order of economics. His book, “Wealth of Nations” was an all out attack on mercantilism. With his laissez-faire, or “let it be” philosophy Adam Smith proposed a limited government role in the economy. He believed that government interference should be limited solely to the reassurance of free markets. Adam Smith’s economy was a capitalistic market economy based on private ownership of production and distribution of goods. Smith stated that, “capitol is best employed for the production and distribution of wealth under conditions of governmental noninterference, laissez-faire, and free trade.” The opposite of the government monopoly style found in mercantilism, Smith wanted perfect competition among all citizens of the state. Perfect competition would allow many competitors to enter the market, thus driving inflated prices down. New competition would also encourage innovation.
Adam Smith saw this as having limitless market capabilities. The principle of the invisible hand was coined to describe, “How every individual in perusing his of her own good is led, as if by an invisible hand, to achieve the best good for all.” Smith meant that no single statesman or council should be given authority over the business market. Smith’s new economy promoted new business, price competition, and economic stability. Free competition protected the population form price gouging and product shortages. The adaptation of capitalism resulted in a stimulation of production and increased market activity. With capitalism, society as a whole benefited by enjoying a higher standard of living due to increased entrepreneurial income. The only losers were the bloated treasuries of big government businesses.
