Transformation, Economic

Mercantilism

Mercantilism appeared in the context of the formation of the first European nation-states during the 16th and 17th centuries. The central idea of this theory, as it was applied in France and England, was that the state had to support the development of trade and industry in order to expand its economic power, which was the principal support of its military and political strength. To this end, the state had to promote the growth of production by subsidies, privileges, monopoly concessions, and maintaining the lowest wages possible. The state also had to encourage the conquest of colonies, which provided a source of primary goods and an opportunity for manufacturing; this involved the construction of a powerful navy to protect trade between colonies and the homeland and to block out rival nations. While this economic model enabled all the European colonial empires to expand, only in countries such as the Netherlands and England, which practiced a form of commercial and financial mercantilism, was the development of a capitalist economy dominated by a rich bourgeoisie in the manufacturing, trading, and banking sectors favored. Over time, this bourgeoisie became more and more hostile toward the [Page 2657]constraints of mercantilism, such as laws that forbade the concentration of businesses, limitations on the importation of primary goods, and the iron law of wages, which hindered consumption, provoked overproduction crises, and lowered investments and profits. This conflict was the root cause of the revolution of 1688, which allowed the English bourgeoisie to implement a new economic model inspired by classical liberal economics.

Liberalism

According to classical liberalism, conceptualized notably by John Locke, Adam Smith, and David Ricardo, all individuals are rational and naturally seek to improve their economic well-being at the least possible cost. It is from this common desire that the market is created, a place where producers attempt to sell the largest number of goods at the most advantageous price and where consumers seek to purchase the goods that they need at the lowest possible price. The free market naturally tends toward equilibrium between supply and demand and between the growth of production and income. It is the state's interference in the market that causes the misallocation of resources (unemployment or a lack of manpower), imbalances between supply and demand (overproduction or a shortage of goods), and excessive rises and falls in prices (inflation or deflation). According to this theory, free trade—not only within but between nations—is the source of wealth. Since nations do not possess all the three main requisites of capitalism (raw materials, capital, and manpower), they must specialize their economies according to their comparative advantages to reap the maximum benefits of free trade. Liberal theory became the dominant economic model between 1750 and 1920 because of the British Empire's supremacy and the adoption of the theory by other European colonial powers following the overthrow of absolutist regimes by revolutionary movements led by national bourgeoisies.

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