Difference Between Mercantilism & Capitalism
Capitalism, by definition in the book, Capitalism: A Very Short Introduction, written by James Fulcher, is essentially the investment of capital in the expectation of making a profit. But what is capital? Capital, as we learned in class, is wealth accumulated by specific people in society. Capital comes in various forms. Capital is wealth in the form of money or any asset, which could include stocks, bonds, real estate, infrastructure, etc., as we learned in class. Capital is not only wealth but also a coercive class relation in the working domain. Capital is a class relation because it involves the owners of the means of production, which are the capitalists, and the non-owners of the means of production, which are the workers.
Today we live in a majorly capitalistic world. Being able to understand how historical change comes about in society is a critical part of approaching the present. Being able to comprehend that social changes have taken place over time, notifies us that if society has not always been the same, then it may change. Before capitalism, during the 1600s in Europe, a form of production and exploitation was introduced, mercantilism. As we learned in class, mercantilism is a political system that believes in the benefits of profitable trading, which favors the subsidizing of exports and imposing high trade tariffs for imports, also known as commercialism. Mercantilism included when a country’s national wealth and power was being measured by how much bullion they possessed. Mercantilism promoted the government’s regulation of the nation’s economy by use of absolutism and divine right. As learned in class, the use of absolute power is when the royals would instruct their ministers to direct the merchants and lower class to do the will of the king because he possesses the divine right, which is the theory that his right to rule is God-given. During this time, mercantilism was the rise of the successful middle class. This middle class was the merchants, they were still under aristocrats, but above farmers. The merchants would accumulate wealth by purchasing foreign and local goods for cheap and selling them for profit to their aristocrats and foreigners, acting as a link from producer to consumer. As we learned in class, mercantilism engaged in colonialism and imperialism. Merchants looking for the cheapest goods on the market would lead to an increase of competition by the craftsmen nationally, which led to affecting the aspects of production, consumption, and pricing. Merchants would bring forth methods of making money such as what is now known as ‘making a down payment’, supplying raw materials and wages for workers in production. As learned in class, merchants would monopolize markets and begin to promote manufacturing through direct subsidies but would limit their wages of labor. Mercantilism would grow merchants that would eventually create a form of capitalism.
Following mercantilism, in the sixteenth century came capitalism. There are three forms of capitalism that Fulcher mentions in his reading which include merchant, industrial, and finance capitalism. All these forms are created because of the progress of the prior and worked throughout history from the sixteenth century to the twenty-first century from Europe. From the sixteenth through the eighteenth century, merchant capitalism consisted of the spice trading overseas with the East-India company that would include high investments in the trade of loaded ships of goods, with no guarantee of the ships completing the journey. To spread the risks of failure in this trade, they created a stock company that would help prevent major losses for companies. Monopolizing also became a key way to secure high profits during this period, as we learned in class.
Later in the nineteenth century began industrial capitalism. As we learned in class, this time period is known for the introduction of machines. Fulcher uses an example of the Scot brother’s cotton industry of the 1800s that advanced technology to enable an increase of production by investing in new machinery such as power looms. To keep up with their growing pace, the cotton industry would depend on the exploitation of workers, whom were paid poorly, mostly consisting of children working hours on end. Issues such as conflict over wages would be settled with worker’s unions and would introduce class struggle. Although workers do suffer in labor, they need money, therefore they continued to work, and companies relied on them to keep the business going.
From the twentieth century to now, finance capitalism is introduced. In finance capitalism, banks, insurance companies, and securities such as trade-able assets including debt securities and derivatives are created. This introduced how it takes money to make money, by saving to invest in the future.
Capitalism in these three forms mentioned all involves the investment of money in order to make a profit. Which is what capitalism is all about. Capital is money invested in order to earn more. In capitalism, production is very dependent on the exploitation of labor and wages, which in return fuels the company, but also funds customers for the products created.
Personally, I think a strength of mercantilism would include how they did not have the issue of worker exploitation as much as in capitalism, because it is the backbone of their money-making. Another strength in mercantilism would be how the businesses seemed to use local resources before foreign, which I thought was wise to do because it supports locals. A weakness I would say is the effect of general social class struggle, because it may cause war or resentment.
According to Adam Smith in his writing of The Wealth of Nations, and what we have learned in class, Smith’s main argument concerning the role of the division of labor and free trade in producing national wealth is that it increases production. Smith argues that the role of the division of labor increases production for the nation because of three circumstances including the increase of the dexterity of workers, saving time consumption lost in passing from one species of work to another, and the technological innovation and invention of new machines and its use of being able to do the work of many with one man.
In The Wealth of Nations, Smith uses an example of how the making of one single pin can take up to eighteen different operations. With the division of labor, all together Smith says they could make forty-eight thousand pins a day, compared to maybe not even one if it were made by one person. Smith argues that the division of labor is important for capitalist development because the division of labor increases productivity, thus creating more wealth, and the wealth is then filtered down to the lowest in society, so everyone gets paid, and therefore everyone gains from it.
As read in Adam Smith’s excerpt of the “Invisible Hand”, his main argument concerning the role of free trade in producing national wealth is that if every worker were to pursue their own interest of business and work, they would promote that of the society more effectually than when he really tends to promote it. Smith is saying that the use of free trade would lead workers to promote national wealth because workers would have a business of their own self-interest, leading to their own constant improvement and progress, thus leading every person to only obtain what other people in the society can supply them, and the only way to obtain it is by offering their own service in exchange. Each worker would be trading for something that has more value to them than what is being asked from them in the trade. The trades are also domestic and it would boost their support of their own country. As we learned in class, Smith says that free trade is important for the development of capitalism because if everyone were to create something to fit all the market niches, then the economy would balance out and regulate by means of competition, supply, demand and self-interest.
