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Mercantilism, Laisser-Faire, and Supply & Demand

Adam Smith

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What was mercantilism?

MERCANTILISM

Economic theory of how a nation can become wealthy

Goal: Build up as much wealth as you can!!!

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What is mercantilism?

An economic policy that said a nation’s strength depended on its wealth
Five key points:

What – an economic policy
Why – money is important
Who – western nations (Europe and America)
How – For one nation to become wealthier – and therefore more powerful – it had to take wealth and power from another nation
When/Where – Europe in 1500/1600s

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How did a nation follow mercantilism?

The theory of Mercantilism offered a step by step plan for a government to follow

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What was step one of mercantilism?

How To Make A Rich and Powerful Nation�Step #1

EXPORT more than IMPORT

What you sell to other countries

What you buy from other countries

Goal: Have more money coming in than going out = favorable BALANCE OF TRADE

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With your partner, write an equation. Any subtraction equation.

Remember, equations have to balance (3-1=2)

Now think: you are a merchant selling coats.
Do you want to get out what you put in?

NO!!
Money spent = money made

Why are you selling coats?
TO MAKE MONEY!
Money made – money spent = profit OR
E – i = profit
Exports – imports = profits

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What was step two of mercantilism?

How To Make A Rich and Powerful Nation�Step #2

Build Colonies

Colonies provide:

Easy access to cash crops
Places to sell items made in your country

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What was step three of mercantilism?

How To Make A Rich and Powerful Nation�Step #3

High TARIFFS

Taxes on outside goods

Problem: people are buying goods from other countries

Solution: Charge them more money to buy foreign goods

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What was step four of mercantilism?

How To Make A Rich and Powerful Nation�Step #4

Increase exports

Don't’ let your colonies trade with other countries

They either buy an item from you or they don’t buy it at all!

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Note Taking Activity 1

Now, please spend five minutes writing what you remember without checking the previous slides. Once done, compare what you wrote to what’s in the slides.

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Laissez Faire/Supply & Demand

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Impact of the Enlightenment: Economics

One of the most important Enlightenment ideas was the theory of capitalism & laissez-faire economics by Scottish professor Adam Smith

Capitalism is an economic model based on private ownership of property & desire �to make profits

Laissez-faire is the idea that the economy thrives when the gov’t does not interfere with businesses & allows a free market to exist

According to Adam Smith, price is determined by supply & demand

The term laissez faire refers to the economic policy of letting owners of industry and business set working conditions without interference. This policy favors a free market unregulated by the government. The term is French for “let do,” and by extension, “let people do as they please.”

Laissez-faire Economics

Laissez-faire economics stemmed from French economics. Philosophers of the Enlightenment criticized the idea that nations grow wealthy by placing heavy tariffs on foreign goods. In fact, they argued, government regulations only interfered with the production of wealth. These philosophers believed that if government allowed free trade—the flow of commerce in the world market without government regulation—the economy would prosper.

Adam Smith, a professor at the University of Glasgow, Scotland, defended the idea of a free economy, or free markets, in his 1776 book The Wealth of Nations. According to Smith, economic liberty guaranteed economic progress. As a result, government should not interfere. Smith’s arguments rested on what he called the three natural laws of economics:

• the law of self-interest—People work for their own good.

• the law of competition—Competition forces people to make a better product.

• the law of supply and demand—Enough goods would be produced at the lowest possible price to meet demand in a market economy.

The Economists of Capitalism

Smith’s basic ideas were supported by British economists Thomas Malthus and David Ricardo. Like Smith, they believed that natural laws governed economic life. Their important ideas were the foundation of laissez-faire capitalism. Capitalism is an economic system in which the factors of production are privately owned and money is invested in business ventures to make a profit.

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Supply and Demand

Supply and demand explained: A short video on supply & demand

https://www.youtube.com/watch?v=8-yWKgZv9JY

Laissez-Faire Economics and the Invisible Hand

https://www.youtube.com/watch?v=ulyVXa-u4wE

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Situation #1

The economy has taken a turn for the worse. The president believes the government should get the economy moving again. He wants to pass laws that require individuals and businesses to follow the government’s advice about what should be produced.

What Would Adam Smith Say? Why?

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What Would Adam Smith Say�about Situation #1

Smith would be on the side of relying on the market to improve the economy. He definitely would prefer the invisible hand of the market to the visible boot of the government. He would be afraid that government would favor some interests over others.

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Situation #2

The Save Our jobs Coalition is working to pass a law that would penalize businesses that move jobs overseas. In addition, the law would require higher taxes to be placed on imported goods that are cheaper than those goods made in the USA.

What Would Adam Smith Say? Why?

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What Would Adam Smith Say�about Situation #2

Smith would favor free trade. He said the freer and more general the competition, the better off the public will be. Trade restrictions help certain groups at the expense of the general good. Smith was against mercantilism, just as the American colonies did. Smith supported the American position in his writings.

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Situation #3

“Stop Government Now” is a group that believes there is no legitimate role for government except providing for police and fire protection. Members believe almost all governmental functions should be privatized and run by businesses.

What Would Adam Smith Say? Why?

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What Would Adam Smith Say�about Situation #3

Smith believed the government should provide more than police and fire protection. He supported public works and education. Most importantly, government should provide justice, without which there would be chaos. However, he would be shocked by the size of government today.

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Note Taking Activity 2

Now, please spend five minutes writing what you remember without checking the previous slides. Once done, compare what you wrote to what’s in the slides.

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Personal Reflection

Spend few minutes discussing your preferred economic system. Which system will you support if you were the president of a country? Which one will you support if you were a business owner? Explain your choices in every situation.