Smith vs. Mercantilism
The works of mercantilists, and later, Adam Smith were influential in the development of economic thought. Adam Smith was an academic studying within the social sciences through a philosophical lense. This is what separated him from the mercantilists and allowed readers to view economics from a fresh perspective. The mercantilists generally promoted policy or ideas that would promote their own well-being. Ironically, both Smith and the mercantilists believed that people were selfish, but only the mercantilists saw it as negatively affecting society and the economy. Smith believed humans’ self-interest could drive the society and the economy forward on its own and mercantilists thought government intervention was needed in order to deal with such a characteristic.. Both were interested in explaining the nature and causes of the wealth of nations, but their methods and conclusions were almost opposites.
One of the questions Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations asks is: What is the nature of a wealthy nation? Well, first it is wise to look at how the wealth of a nation is measured. Smith suggested wealth be measured in per capita income, whereas mercantilists believed a nation’s stock of bullion (precious metals) reflected its wealth. As a result, Smith was able to see the mutual benefits of both imports and exports, and did not agree that the country running the largest trade surplus was an indicator of its superior wealth and power. Smith would have considered a country whose government focused on laissez-faire trade policy preferable to a mercantilist inspired trade-regulating government (Landreth and Colander 90-91). Another important factor to Smith was that the purpose of production be consumption, not production itself. He says this is because the focus should be on the consumer’s interests, “and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer…, [b]ut in the mercantile system the interest of the consumer is almost constantly sacrificed to that of the producer...” (Smith 877).
The second question Smith’s Wealth of Nations poses is: What are the causes of a wealthy nation? Smith’s primary cause, which is rooted in a dependence upon capital accumulation (which would be the responsibility of the capitalists), is the division of labor (Landreth and Colander 94). This also extends to division of labor between nations, another reason for his support of free international trade. With mercantilism, due to their preference for protectionism, there could not be much room for division of labor within a single country because the extent of the market would be quite small. In addition, Smith’s division of labor, for the sake of efficiency, also requires a highly productive labor force. From his point of view labor producing a vendible commodity constituted productive labor, and those selling services were involved in unproductive labor. Productive labor adds value to the materials he worked with and unproductive labor adds to the value of nothing. Therefore, Smith saw landlords’ payment of servants useless, as well as their constant consumption and lack of savings (Smith 438). Mercantilists, on the other hand, were concerned with overproduction and underconsumption, so lack of individual saving was desirable “...because it led to lower consumption, lower output, and lower employment,” and would have praised landlords for their actions (Landreth and Colander 54).
Principle of Population Essay
Richard Malthus developed his essay based on the rising population at the time that put pressure on England’s food supply while the lower-class became more impoverished. But what ultimately inspired him to publish in 1798 was his disagreement with his father who held the same opinions as the Utopian writer Godwin. This meant his father believed the government was the source of misery, vices and evils in society and was more in favor of the peaceful sort of anarchy Godwin described (Malthus 56-57). However, Malthus, after examining Godwin’s idea, concluded it was unrealistic and simply only something of the imagination. Peaceful anarchy can only last so long before “The spirit of benevolence, cherished and invigorated by plenty, is repressed by the chilling breath of want” (Malthus 60), and it's every man for himself due to limited supply of land and increasing population growth. Malthus believed that changing the government wouldn’t solve society’s problems, and the problems could not be removed along with the institutions. He said this was because “Human institutions...are mere feathers that float on the surface, in comparison with those deeper seated causes of impurity….” (Malthus 61). Though, while government institutions do not completely rid society of miseries, they do still help mitigate them (Malthus 61).
Malthus’ principle of population was based on his idea that population grows geometrically and food supply grows arithmetically. In effect meaning that population grows much faster than food supply and as a response population checks would ensue to keep them in line with food production. There would be positive checks, increases in death tolls due to war, famines, disease and similar disasters. And there would be preventative checks, a postponement of marriage, and therefore postponement of the decision to have children. Preventative checks could be enforced by the government. However, people would likely have premarital sexual relations resulting in vice and misery. In his second edition of the essay he reconsiders the preventative check, and concludes moral restraint, postponing marriage without premarital sexual relations, could be more effective. Thereby leaving government interference and the inherent vices of people behind and no longer making the argument against the Utopian writers. Though this did not negate his original proposition that the population would continue to grow faster than the food supply, and something needed to be done about it (Landreth and Colander 115-117).
Malthus’ principle of population became important to economic analysis as it was applied by classical economist David Ricardo to Adam Smith’s wage fund doctrine as an extension to it, and eventually earned the name “iron law of wages” (Landreth and Colander 117). Smith found the wages fund to be dependent on the size of the capital stock, or the amount of inventory saved up by the capitalists in order to provide laborers with subsistence items for the duration of the production period. (Landreth and Colander 104). And Ricardo added that the size of the labor force is determined by the Mathusian population principle. Therefore, if the wages fund increases thereby raising wages and making resources more accessible, the population will increase in the short run. In the long-run the labor force will be of sufficient size that the real wages return to the cultural subsistence level. (Landreth and Colander 121-122).
Bibliography
Landreth, Harry, and David C. Colander. History of Economic Thought. Fourth ed., Houghton Mifflin Company, 2002.
Malthus, Thomas. An Essay on the Principle of Population. Printed for J. Johnson, in St. Paul's Church-Yard, 1798.
Smith, Adam. An Inquiry into the Nature and Causes of The Wealth of Nations. University Of Chicago, 1977.
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