By the end of this section, you will be able to:
- Explain the evolution of economic theories from mercantilism to capitalism
- Analyze the ways in which mechanization challenged existing social, economic, and political structures
- Discuss the ideological responses to capitalism, including Marxism
Just as colonial empires were the crucible of new political ideas and gave rise to new forms of resistance to exploitation, they also inspired new economic ideas. Mercantilism, which advocated building a nation’s power by increasing trade through exports, had originally propelled colonization. But as people around the world gained their political freedom, they also became interested in economic freedom, and mercantilism fell out of favor. Capitalism, a system in which prices and costs, not government intervention, serve to regulate the supply and demand of goods traded for individual profit, became popular. However, not everyone agreed with this new economic order; Marxists critiqued it and proposed systems focused on equality rather than profit.
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.
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?
In the late 1700s, western European nations began to adopt mechanization, the use of machines to replace the labor of animals and humans. Mechanization set the stage for the Industrial Revolution, a transition away from societies focused on agriculture and handicraft production to socioeconomic systems dominated by the manufacture of goods, primarily with machines.
People in many places, including China, Egypt, India, Greece, and Rome, had made limited use of machinery in the ancient past; however, most goods were produced by skilled artisans for local consumption. Beginning in the mid-1600s, the British enjoyed an agricultural revolution that allowed smaller numbers of farmers employing fewer farm laborers to produce a surplus of food, and that in turn led to a population increase.
In the 1700s, entrepreneurs in England found a way to make use of unemployed or underemployed farm laborers and their families. These entrepreneurs provided farm families with raw materials and asked them to produce finished goods in their cottages, a system that became known as cottage labor. Rural women spun wool or flax into thread, and men then wove it into woolen cloth or linen. Some farm families made bonnets from straw. Other people made nails, knit hosiery, or made lace. The entrepreneur collected their finished products, paid them for their labor, and sold the finished goods in towns and cities. Because the farm laborers were not skilled artisans, they could not command high wages, and the entrepreneurs reaped great profits.
In time, entrepreneurs began to gather laborers together in one location, a factory. This decision gave them greater control over production because they could hire managers to supervise the workers’ labor. It was also easier to install machines in factories than in laborers’ cottages (although laborers might be provided with or rent relatively small machines, such as knitting frames, for their cottages). Factories came to be concentrated in towns and cities. As work moved to urban areas, so too did men and women who could not find work on farms. By the late 1700s, British business owners, supported by government policies inspired by Adam Smith, were setting up factories and hiring many of these migrant workers.
During the Industrial Revolution, factories increasingly relied on machine power, most importantly the steam engine. A steam engine uses heat to transform water into steam, which expands and drives a piston to perform work. Hero of Alexandria, in Egypt, produced the first steam engine when he created the aeolipile, a simple turbine that powered toys, around the year 70 CE. Steam engines remained little more than curiosities until 1698 when the English inventor Thomas Savery used the world’s first commercial steam engine to pump water out of mines and to supply water for industrial water wheels. By 1776, British factories were powering some of their operations with improved steam engines designed by the Scottish engineer James Watt.
Locomotives and boats powered by steam engines soon delivered raw materials to the factories and transported finished goods to consumers. In 1807, American inventor Robert Fulton began operation of the first successful commercial steamboats. In 1812, Matthew Murray, an English industrialist, opened the world’s first successful steam locomotive line. Several inventors produced steam-powered vehicles that could travel on roads, but the heavy weight of steam engines and the poor conditions of most roads doomed them to failure and kept steam engines in the factories, waterways, and railroads.
Industrialization, motivated and enabled by capitalism, created tremendous wealth for business owners and middle-class professionals, but their profits often came at a high cost to workers. The production of goods shifted from the handiwork of highly skilled middle-class artisans to mechanized production done by low-paid unskilled laborers. Workers did enjoy access to new consumer goods made cheaper by industrialization, but to afford those goods they had to work long hours, in difficult and often dangerous conditions. Perhaps most importantly, workers lost control over their working conditions. Farmers and artisans, particularly those who owned their land or shops, were free to decide how and when they worked, whereas factory owners carefully regulated every aspect of their workers’ professional and even personal lives. For example, the 1848 employee handbook for the Hamilton Manufacturing Company stated that “the company will not employ any one who is habitually absent from public worship on the Sabbath, or known to be guilty of immorality.”
Some workers rebelled against industrialization, which threatened their status as skilled laborers. Beginning in 1811, a secretive group of British textile workers calling themselves Luddites began destroying textile machinery, rioting, and setting fires in response to the industrialization of their workplaces (Figure 6.19). They took their name from the mythical Ned Ludd, a worker who supposedly destroyed a mechanized loom rather than submit to industrialization. As the Luddite movement grew, so did the legend of Ned Ludd, until some workers claimed that King Ludd lived in Sherwood Forest and fought corrupt industrialists, much as Robin Hood had opposed corrupt authorities during the Middle Ages. The Luddites did not argue in favor of a specific ideology or a grander purpose. They were simply angry that industrialization was destroying their traditional way of life, and they fought back with every tool at their disposal.
British leaders reacted quickly to the Luddites, with some calling them a mob worthy of execution. In 1812, the poet and peer Lord Byron responded by pointing out that these same people worked the fields, produced the goods, and served in the armed forces of the British Empire. Byron argued that the mob “often speaks the sentiments of the people” and warned “it is the mob” that “enabled you to defy all the world and can also defy you when neglect and calamity have driven them to despair.” He urged the British government to respond to the protesting workers with “conciliation and firmness” rather than violence. Most British business and political leaders disagreed with Byron and worked to suppress the rebellion. Parliament made industrial sabotage a capital offense. British authorities hanged many Luddites and exiled more to prison colonies. By 1816, the industrialists had defeated the Luddites. Today, “Luddite” is often used as a generic description of anyone opposed to technological change.
The Luddites were British factory workers who engaged in the destruction of machines, rioting, and vandalism to resist industrialization. Following are excerpts from two primary sources on the Luddites, describing separate incidents and written from different perspectives.
West Riding of Yorkshire
The complaint of John Sykes of Linthwaite . . . taken upon oath this 6th day of March 1812 before me Joseph Radcliffe Esquire one of His Majesty’s Justices of the Peace in and for the said Riding -
Who saith that between one and two o clock this Morning a number of people came to the door of his said Master’s dwelling house and knocked violently at it, and demanded admittance or otherwise they would break the door open—to prevent which this Examinnant opened the door and 30 or more people with their faces blacked or disguised came in and asked
if there were any amunition guns or pistols in the house and where the Master was, on being told he was not at home they secured or guarded every person of the family and then a number of them took a pound of candles and began to break the tools and did break 10 pairs of shears and one brushing machine the property of his said Master, that one of them who seemed to have the command said that if they came again and found any machinery set up, they would blow up the premises, soon after which they all went away—
Sworn before me — Joseph Radcliffe
[The mark of John Sykes]
—An account of machine-breaking at Linthwaite, Yorkshire, March 1812
We mentioned some frames to be removed today from 10 miles off. They came totally unmolested. The soldiers did not go near the village, and the constables had no interruption whatever.
We have been concerned to see these instances of removing frames because it must leave some of the country people without the means of work, but it will at the same time open their eyes to the consequence of their own proceedings. For some time before these troubles broke out, in many places a fifth of the frame workers were out of employ, and this naturally induced some hosiers (not perhaps of the first reputation) to give them particular kinds of work at reduced prices; and the hosiers who were giving the higher prices found themselves undersold in certain articles at the London Market.
This again brought about new arrangements, which soured the whole body of workmen . . . resentment against those hosiers who paid the under price has been the leading feature up to the present day. They have seldom made free with other property altho’ opportunities at all times have presented themselves, and in one instance lately at Clifton, some cloths that one of the frame breakers brought away, were carefully sent back again the following day.
—A letter sent to London from a magistrate describing the situation in Nottingham, February 1812
- What are the key similarities and differences between the two accounts?
- Why do you think they provide such different views of the Luddites?
- Was the Luddite rebellion a reasonable response to the challenges posed by industrialization? Why or why not?
Karl Marx was a highly controversial intellectual and revolutionary. Born in 1818 in Trier, in what is now Germany, he grew up as the son of a successful lawyer and was baptized into the Evangelical Church when he was six years old. As a young man, he studied law at the University of Berlin, where a professor introduced him to the philosophy of Georg Hegel. Marx quickly embraced Hegel’s idealistic universal history, which suggested the world is progressing through conflicts toward greater freedom. After completing his education, he worked as a journalist and writer.
In 1848, Marx published The Communist Manifesto with his co-author Friedrich Engels. In the book, the two argued that “the history of all hitherto existing society is the history of class struggles.” Their idea, that recognizing the class struggle between workers and the ruling class is central to understanding societies, is also known as Marxism (Figure 6.20). In addition to laying out their vision of history, Marx and Engels predicted that society would eventually replace current economic systems with socialism, a system in which the public, not private companies or individuals, owns the means of production. In their view, socialism was one phase of the transition from the private ownership characteristic of capitalism to the completely classless society of communism. They called for the forcible overthrow of current societies, a statement many communists around the world embraced as a declaration of war on capitalism. The ideals of communism were inspired by the abuses of capitalism that often exploited workers.
Link to Learning
Karl Marx published The Communist Manifesto with his co-author Friedrich Engels in 1848. Many writers from across the political and ideological spectrum inaccurately portray the ideas in The Communist Manifesto to support their own ideas or to paint their opponents in a negative light. Consider reading The Communist Manifesto for yourself and drawing your own conclusions about what the work says and what it might mean to you.
Marx’s book Das Kapital, published in 1867, is one of history’s most often cited sources on economics and politics. In Das Kapital, Marx argued that the bourgeoisie, members of a social class that owned the means of production, were primarily motivated by the desire to exploit labor. In his view, employers paid wages to their workers, also known as the proletariat, that were far less than their labor was worth. They then kept the excess value produced by wage earners, in a process Marx argued was unfair to the workers. Employers used their profits to purchase additional resources and to buy political influence to ensure that the law would support the wealthy instead of the workers. The wealthy became unfit to rule as they increasingly leveraged their growing economic and political power until workers were left powerless and in poverty. Eventually the capitalist system would collapse, and the workers would reclaim control of society.
The Past Meets the Present
Marx on Capitalism and Communism
Karl Marx died almost 150 years ago, but his ideas remain widely debated. In 1867, Marx published the first volume of Das Kapital, and it quickly reached a wide audience among those interested in history, economics, and politics. After his death in 1883, Fredrich Engels, his co-author on The Communist Manifesto, published the second and third volumes of Das Kapital based on Marx’s notes. In this quote from Das Kapital, Marx explained his view of the origins of capitalism.
The economic structure of capitalist society has grown out of the economic structure of feudal society. The dissolution of the latter set free the elements of the former . . . [T]he historical movement which changes the producers into wage-workers, appears, on the one hand, as their emancipation from serfdom and from the fetters of the guilds, and this side alone exists for our bourgeois historians. But, on the other hand, these new freedmen became sellers of themselves only after they had been robbed of all their own means of production, and of all the guarantees of existence afforded by the old feudal arrangements. And the history of this, their expropriation, is written in the annals of mankind in letters of blood and fire.
—Karl Marx, Das Kapital
Long after Marx’s death, his ideas continued to provide inspiration for people dissatisfied with inequality between social classes and angered by injustices. In 1917, revolutionaries in Russia, inspired by Marx’s ideas, overthrew the government and established a new communist society that became the Soviet Union and existed until 1991. Subsequent communist revolutions gave rise to governments that still exist in China, Vietnam, North Korea, Cuba, and Laos. Even in capitalist countries, communist and socialist political parties exist and are often quite popular with voters. Senator Bernie Sanders of Vermont proudly calls himself a socialist, although as many have pointed out, he does not seek to overthrow capitalism or advocate public ownership of the means of production.
- What is capitalism, as described in this excerpt from Das Kapital? According to Karl Marx, what are its origins?
- How does Marx’s view of history agree or disagree with what you know about history?
- Are Marx’s ideas still relevant today? Why or why not?
- What would Marx say about the history of the world since his death? Have events since 1883 supported or undermined his arguments?