Capitalism

Laissez-Faire Capitalism

Market capitalism is associated with classical liberals such as Adam Smith and David Ricardo who promoted the doctrine known as laissez-faire or free market economics. Smith's exegesis, titled The Wealth of Nations, was released in the late 18th century during the heyday of a doctrine known as mercantilism. Under mercantilism, the state acted as both the principal entrepreneur and the principal agent that was in charge of regulating the economy. These dual roles were jointly undertaken by the government for the explicit purpose of maximizing state power. Holding to the view that the free market was the most efficient mechanism for allocating the world's wealth, Smith challenged the mercantilist assumption that free trade meant that one country's gains were realized at the direct expense of another's loss. Alternatively, Smith argued that the role of the state in the economy should be limited to preventing powerful firms from establishing oligopolies or monopolies that would pose a threat to free markets. Smith held that the purpose of the state, therefore, was to protect and defend market competition.

Sharing Smith's views on the free market, Ricardo articulated a theory known as comparative advantage that proposed that countries should specialize in certain areas of production where they enjoyed relatively superiority. Accordingly, since England enjoyed a relative abundance of machine-intensive industries when compared with India in the 17th and 18th centuries, England could produce manufactured goods such as finished textiles more efficiently. And since India, in contrast, enjoyed an abundant supply of labor and agricultural-producing land relative to England, India could produce raw cotton more efficiently. According to Ricardo's theory, India should specialize in growing and harvesting raw cotton and sell it to Britain. India could then turn around and use its newly realized profits to purchase finished cloth produced in Britain. Ricardo argued that the result of such an arrangement was a win-win outcome for both involved parties. Moreover, even if a given country could produce both raw cotton and finished cloth more efficiently than all others, Ricardo's theory suggested that countries focus their energies and resources in particular areas where they enjoyed a comparative advantage.

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