World History 2 89 - 6.3.1 From Mercantilism to Capitalism

In 1681, the French finance minister Jean-Baptiste Colbert asked a group of French business owners led by a man named Thomas Le Gendre how the government could help them. Le Gendre reportedly told Colbert, “Laissez nous faire,” meaning “let us do it.” This gave rise to the concept of laissez-faire economics, which argues that market forces alone should drive the economy and that governments should refrain from direct intervention in or moderation of the economic system. The idea of laissez-faire economics was consistent with the logistical realities of global empires. It was effectively impossible for leaders in Europe to micromanage economic operations that were on the other side of an ocean. Therefore the evolution to a laissez-faire economic model might have been as much a practical necessity as an ideological shift.

Adam Smith was a Scottish political economist and philosopher best known for writing the book An Inquiry into the Nature and Causes of the Wealth of Nations (1776), often referred to by its shortened title The Wealth of Nations (Figure 6.18). Earlier scholars had written about various aspects of economics, but with this book Smith became the first person to produce a comprehensive philosophical examination of the way nations should manage their economies.

A drawing of a profile of a man is shown on a white background. He has white hair with two tight curls on the sides and the long hair in the back is tied with a bow. His eyes are very round, he has a pointed nose, and wears a dark coat with large buttons over a white shirt.
Figure 6.18 This nineteenth-century etching of the Scottish economist Adam Smith is based on a portrait created from life by James Tassie in 1787. (credit: “Profile of Adam Smith” by Adam Smith - Vanderblue Collection/Wikimedia Commons, Public Domain)

In The Wealth of Nations, Smith argued that the “invisible hand” of the marketplace guided people when they made their own economic decisions. By doing the work that would bring them the greatest profit, he explained, people inadvertently tended to produce the goods and services most needed by society. To allow the invisible hand to work, Smith advocated the reduction of tariffs and most forms of governmental regulation. His work was based on rational choice theory, the idea that people understand their options and make rational choices that will help them achieve reasonable objectives. In Smith’s view, this form of selfishness is often good for the individual and for society.

Although Smith did not use the term, preferring to call his system commercial society, he and his supporters promoted the idea later known as capitalism, an economic system in which private individuals and companies typically own the means of production such as factories and farms, and free (unregulated) markets set the value of most goods and services based on supply and demand.

Smith was a critic of slavery. He believed slavery was inefficient and suggested it was doomed to fail if markets were truly free. Because the cost of feeding, clothing, and housing enslaved people, however poorly, was passed on to consumers, Smith also noted that goods made using enslaved labor were more expensive. Free labor could produce goods more inexpensively because the employer did not have to pay for his laborers’ upkeep. However, Smith also used rational choice theory to minimize slavery’s horrors. In The Wealth of Nations, he acknowledged that the enslaved people living in the British Caribbean were “in a worse condition than the poorest people either in Scotland or Ireland,” but he justified their suffering on the basis that “it is the interest of their master that they should be fed well and kept in good heart in the same manner as it is his interest that his working cattle should be so.”

Whether sugar plantations on which enslaved people labored were themselves capitalist enterprises has been a matter of debate among historians. One the one hand, capitalism presupposes freedom on the part of all actors engaged in an economic transaction. Merchants are free to sell what they wish at the prices they wish to charge, and consumers are free to pay the price that is set or to refuse to buy the product. Employers are free to set hours and wages for employees, and employees are supposedly free to accept the employer’s terms or hold out for better ones.

The workforce on sugar plantations, however, consisted of enslaved people who could legally be coerced to do whatever labor their owners decided for whatever compensation they chose to give (usually the minimum of food, clothing, and shelter required to keep the laborers alive). On the other hand, plantation owners behaved in much the same way as owners of other industrial enterprises, by setting production goals, for example. Many have pointed out that the highly regimented system of labor on sugar plantations was much like that in capitalist enterprises like textile factories. The debate is ongoing. What no one disputes is that the profits earned from the sale of sugar and other plantation products grown by enslaved people were often invested in capitalist enterprises, including the factories that were coming into existence in the eighteenth century.

Adam Smith’s ideas challenged the established mercantilist economic order and attracted critics. Some governmental leaders were understandably hesitant to surrender their power to the free market. They questioned the wisdom of reformers like Smith who disagreed with the favorable-balance emphasis of mercantilism. Conservative critics pointed out that while mercantilism might not have been perfect, it had delivered tremendous wealth to Europe, or at least to Europe’s ruling classes.

Other world leaders, most notably in Great Britain, rejected conservative critics and embraced Smith’s ideas, which promised greater potential freedoms and profits for the nation’s wealthiest citizens, and they became the dominant force in British economic reforms. The wealthy House of Commons leader Charles James Fox praised Smith’s ideas in Parliament, although he later admitted he had not read The Wealth of Nations and thought it far too long. In 1777, Prime Minister Fredrick North proposed a revised tax code based on Smith’s work. In 1792, Prime Minister William Pitt praised Smith’s work as “the best solution to every question connected with the history of commerce, or with the systems of political economy.”

Smith’s ideas spread across the Atlantic, and in 1807 President Thomas Jefferson wrote “Smith’s Wealth of Nations is the best book to be read.” As Smith’s ideas took root, governments reduced tariffs, cut back on economic regulations, and led their nations’ transition from the quest for favorable balances of trade to the search for personal profit.

Smith’s ideas remain influential, but modern scholars often criticize them. In contrast to his reliance on rational choice theory, they argue that people do not always behave rationally or make the best decisions. Others condemn the moral failings of the invisible hand, which sacrificed the lives and wellbeing of enslaved people, poor workers, and colonial subjects to provide elites with profit.

In Their Own Words

The Wealth of Nations

An Inquiry into the Nature and Causes of the Wealth of Nations is better known by its shortened title The Wealth of Nations. Published by the Scottish scholar Adam Smith in 1776, it was probably the first comprehensive study of economic philosophy. Always controversial, it remains an influential work today. As you read this excerpt from it, look for Smith’s definition of the “invisible hand.”

As every individual, therefore, endeavors as much as he can both to employ his capital in the support of domestic industry, and so to direct that industry that its produce may be of the greatest value; every individual necessarily labours to render the annual revenue of the society as great as he can. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it.

—Adam Smith, The Wealth of Nations

  • How would you explain the idea of the invisible hand in your own words?
  • What are some potential benefits and drawbacks to a society’s reliance on the invisible hand?
  • Do you always act in your own economic best interests? Do others? Does the invisible hand work better for some people than others? Why or why not?

The content of this course has been taken from the free World History, Volume 2: from 1400 textbook by Openstax