While we have seen liberalism at work in early American history,
particularly in the Declaration of Independence , there is another area
of significance greatly influenced by liberalism. That area is
economics, where one might be able to ask whether early capitalism is
liberalism extended into the marketplace .
In ancient Greece and Rome, the revered examples of our civilized
past, the basic industry was agriculture; the producing unit was the
household, and the labor force was the slaves.
Little changed when we move from Greece and Rome into the Middle
Ages: the basic industry continues to be agriculture; the producing
and consuming units are still the household, and the labor force is
predominately serfs, one step up from slaves.
The economic scene, however, changes significantly in the middle of
the fifthteenth century. Here begins the era of the merchants; what is
also called merchant capitalism or mercantilism .
Mercantilism lasted about 300 hundred years, to the middle of the
eighteenth century (roughly 1450 1750) which marked two important
events in economics:
1) the beginning of the industrial revolution.
2) the publication of Adam Smith's Wealth of Nations
Both of these events were at least in part in stern reaction to the
economic policies and practices of the mercantilists.
WHAT IS MERCANTILISM?
There is no good, single definition of mercantilism. But from the
beginning of the Middle Ages trade had been expanding within the
European lands, between them and the eastern Mediterranean. In the
age of the merchants this trading greatly increased, as did the
markets for trading. Banks appear, first in Italy; these are money
exchanges, where the coins of different countries could be weighed
and exchanged. They became a regular feature of commercial life.
1 Value of coins was determined by the amount of gold or silver in each
Of course, one of the major developments leading up to mercantilism
was exploration the voyages of discovery to America and the Far
East. The result of these explorations was an increase in new and
exotic products for Europe. These products created demands for
goods and thus gave merchants merchandise to sell.
More important, a flood of gold and silver from the mines of the New
World brought more and more people the possibility of possessing
money, often lots of money. Thus people were more and more
motivated to seek money for its own sake.
The pursuit of money became respectable: Christopher Columbus
said: "Gold is a wonderful thing! Whoever possesses it is
master of everything he desires. With gold, one can even get
souls into paradise."
Before this flood of gold and silver, money was monopolized by
monarchs and their courts, or by the churches. Remember the
importance of “indulgences” for the Catholic Church (and for Luther;
see Ball & Dagger, 5051). Gold and silver almost enabled various
monarchs to finance their wars without needing to tax, and thus risk
alienating, the people.
The merchants, those involved in trading, became a respectable social
group with access to lots of money. The merchant towns Venice,
Florence, Amsterdam, London had merchant communities of
distinction. Indeed, merchants begin to compete for social status with
the landed aristocracy. So great became the prestige and power of the
merchants that soon they were not simply influential in the
government of their cities; they were the government of their cities.
National governments, which at this time were monarchies, were also
beholden to the merchants. It was the merchants who enabled these
governments to gain monopolies and to hold power by providing the
state with the economic resources MONEYthat enabled state
authorities to consolidate and sustain internal and external power. So
the merchants helped to consolidate authority into the modern state.
Their reward was often in the form of political influence by the
monarchs in helping the merchants into political offices.
Thus the state can be seen as the creation of warring commercial
interests whose only common aim was to have a strong state,
provided the merchants could manipulate it to their exclusive
2 WHAT BROUGHT THE END OF MERCANTILISM?
1. First was the merchants' negative attitude toward competition. In
short, they couldn't stand it, for it limited their wealth and thus their
power. So they sought to establish monopolies , to control prices and
production. To do this they used the power of the state, and their own
political influence and offices, to intervene in the markets. Thus their
personal pursuit became governmental policy: to accumulate money
gold and silver. Governments, in collusion with merchants, were most
often happy to lend a hand.
Thus what occurs is the precursor to some of what we see in advanced
industrial countries today:
•state intervention on behalf of
•the beginnings of the modern
That is, merchants joined their efforts or money with others on some
voyage. The Crown assured them that they would have a monopoly
so that no other merchants would have monarchical support. The
Crown protected the merchants’ ships, mines, plantations, etc. and
gave the merchants political power in the colonies. In return the
merchants brought the Crown gold and silver and goods.
This arrangement thereby assured a noncompetitive price for the
resulting products when they were purchased and sold. A share of
this noncompetitive price went to the government. These
arrangements between Crown and merchants later become
permanent, permanent support of operations = Dutch East India
Company and British East India Company, which lasted over 250 years
2. But what brought mercantilism to an end was the beginning of
economics and that begins with the work of Adam Smith.
Early industrial revolution
During the age of merchants, production was considered a secondary
action, limited in scope. The traditional guild system was adequate
for it, as the state guaranteed the guilds a monopoly of production
and all products had to pass certain standard tests. One could not be
a bricklayer or weaver, a baker or a miller, a witch burner or a skilled
craftsman or worker of any kind without belonging to a guild.
3 The guilds were like early unions; no one could work in a trade without
being in one. And no one could work that trade without progressing
through the steps of apprentice, journeyman, up to master craftsman.
At the same time, production was regulated by local consumption ;
labor was decentralized; capital supplied was small; labor was
specialized; artisans, craftsmen, masters, and apprentices all had
clearly defined rights and duties.
Production took place in individual settings, usually country
cottages. This was the time of "cottage industry ," when merchants
took their raw materials to village cottages where peasants turned
that material into finished goods. These cottages were isolated,
Building the Pyramids :
If you want to see how large the projects of cottage industries could
be, look to the building of the pyramids in ancient Egypt. To create
the pyramids Egypt didn’t have huge factories spitting out block after
block to be moved into place. Nor did they have some kind of massive
assembly line producing bread for the workers. Instead, the pattern
for baking bread was the same as creating the blocks for the
pyramids: The pattern for both was simply to duplicate the household
process for baking bread, over and over and over again throughout
the environment surrounding the pyramids.
Who were the thousands of workers who built the pyramids?
Research shows that they were not slaves. They were laborers who
were incredibly well fed. The amount of cattle bone found at sites on
the Giza plateau was enough to feed several thousand people.
Yet if the workers were not slaves, why would they toil under the
hot desert sun, working long hours at arduous tasks? They did so out
of a sense of community obligation. It was part of their social and
religious upbringing. This was the norm and the expectation. There
was no thought to avoiding the work; it was part of one’s bak or
community obligation. Think back to the concept of ascribed status .
That’s what we see when looking at who built the pyramids. What was
the community then? It wasn’t Egypt. It was the local community,
under the protection and oversight of the Pharaohs. “This is what our
local village is doing—making the pyramids. That’s what we do
because our village wills it.”
Back to our story: In the second half of the 18th century, however,
things began to change. WHAT HAPPENED?
4 • Technical advances such as mechanical spinning and weaving, the
steam engine, and the use of coal to extract and work iron
transformed old cottage industries.
• Machinery replaced specialized skills and allowed for an influx of
labor. Machines centralized work in factories, thus concentrating labor
and vastly increasing the overhead of business. People had to move
from farms to factories in order to get work.
• Machines increased production beyond local consumption so that
local consumption was no longer equal to the supply, thus
necessitating the discovery of wider markets and the extension of the
chain of middlemen to link producers and consumers.
Guilds were threatened by the power of the machinery. Woolen
merchants and guilds conspired to erect protectionist measures
against machine production. But this led to the rise of the cotton
industry, as entrepreneurs looked for a substitute for wool and freely
used machines and used labor unconnected to the guilds. INDEED,
ADAM SMITH REBUKED THE UNPROGRESSIVE AND PROTECTED
WOOLEN INDUSTRY AS EARLY AS 1776.
So what was the result? Now COMPETITION and NOT GUARANTEES OF
THE STATE could police the production and quality of goods. Shoddy
products would not be purchased, so manufacturers had to be sure
their products were of high quality. Competition becomes the
consumers' best defense: It reduced prices, forced manufacturers to
produce quality goods, forced them to keep prices down by upgrading
their machines and thereby cutting costs thus increasing their
So, the capital that had once been invested by merchants in sending
raw materials to villages to be turned into finished goods was now
invested more and more in factories and machinery in the cities. The
dominant figure is no longer the merchant whose interest was in
the purchase and sale of goods but the industrialist , interested in
the production of goods. This happened because the manufacturers'
power replaced merchants' power.
WHY DID THE INDUSTRIAL REVOLUTION HAPPEN IN ENGLAND AND
So what sorts of ideas, political ideas, appeal to these industrialists
and even the merchants? LIBERAL IDEAS and LIBERAL IDEOLOGY.
5 Thus in England , where the industrial revolution began and grew, the
middle class, the backbone of liberalism, was an industrial middle
class ; whereas on the continent the middle class was still tied to
agriculture and land.
Whereas the English middle class was individualistic relying on the
factory and not on the state, the continental middle class especially
the French still looked to the state for the boundaries of its land ,
and thus of influence, set by the state. This difference travels down
into the 19th century.
Why is it important that people in England were individualistic and
those in France were bound to the land? It is important because it
tells us why the industrial revolution happened in England and not in
France, which knew about the new technologies and inventions, did
not develop industrially as early as England did. Why not? Because
rights for Frenchmen came historically from the King. The feudal
hierarchy was more difficult to break in France since the King was the
source of rights and power. Therefore, the King of France reinforced
the feudal hierarchy that required serfs and peasants, through
ascribed status, to remain tied to the land.
Why was the King in France the source of rights and power? In France
the monarch was weak in comparison to the kings of England. In
order to secure and maintain power, the French kings therefore
formed alliances with the French nobility against the burghers or
merchant class (the middle class). That alliance was powerful and
served to limit the commercial interests and power of the middle
In England, on the other hand, the king was strong. Therefore the
English nobility formed its alliances with the middle class against the
King. The result, for example, was the Magna Carta in 1215, when this
early alliance forced the King to grant to English noblemen certain
unabrogated rights and the establishment of an influential Parliament.
The English, therefore, had a rich tradition of rights resting on the
individual, dating for all people as far back, of course, as 1651 and
So in France the French monarchy claimed a monopoly of political
right, while in England Parliament claimed to be sovereign. The result
was that in France the idea of rights flowed from the King to the
people. The control of the country was entirely in the hands of the
King and his agents. People had to do whatever the king said.
6 In England rights were seen as personal possessions, and thus a sense
of independence arose. So when the industrial revolution led to the
consolidation of labor in factories, the English, without needing
permission from the Crown, could move from their homes in the
country and go to the cities. To the French, such movement might be
seen as a threat to the power of the King.
There is another side to this “story,” which is not so, well, “glowing.”
The English government passed a series of “enclosure” laws, which
required farmers to fence off or enclose their property. But fences
were expensive, and many farmers could not afford to do it. So
because they couldn’t build the fences, the farmers were in defiance
of the governmental edict, and their property was seized. Where were
these dispossessed farmers to go for work?
What was the life of the workers like in the industrial revolution?
Before the advent of machines workers were protected by the statutes
of their guilds, assuring them at least permanence of labor and
livelihood. With machines, this protection is lost.
But this loss was proclaimed "freedom." The laborer was free of the
old guilds. Now laborers could associate with whom they pleased,
with any level of workingmen. Yet this freedom also had costs.
Without the protection of the guilds the laborer was deprived of the
means of subsistence and the tools of labor; his freedom, as one
commentator put it, was merely the freedom to sell himself into
•hours of labor multiplied;
•employment of women and children lowered
•competition between workingmen cheapened
• no longer tied to their land, but free to move,
travel, and congregate where they were most in
demand, workers drifted and swelled the ranks of
the unemployed as crises struck due to unstable
consumption. Hegel referred to the unemployed as
“the rabble of paupers.”
Thus begins the formation of a class separate from and increasingly
hostile to the middle class, a class Marx would call the "proletariat,"
and one we shall study in Unit Seven.
7 Out of the industrial revolution emerge "the two most celebrated
figures in the history of economics," as economic historian John
Kenneth Galbraith claimed. Though both were giants in economics,
they worked the opposite sides of the street, as we shall see. One was
Adam Smith, whom we’ll look at now. The other was Karl Marx, whose
ideological system is the topic, as already indicated, of Unit Seven.
Adam Smith studied the changes that the new technologies and
entrepreneurship would have, and were already having, on England.
When he published The Wealth of Nations in1776, the shops and
mines of the industrial age were already in evidence in England. It
was that book, more than any other single influence, that would
destroy the old world of mercantilism. In it he argued persuasively
that competition, not the state, should regulate markets.
Adam Smith was hired in 1751 by the University of Glasgow as a
professor of logic and a year later became a professor of moral
philosophy. Smith could not have been hired to be teach economics,
because at this time there was no such discipline.
Smith first attracted attention with his publication in 1759 of The
Theory of Moral Sentiments . How is it, he asked, that humans,
creatures of selfinterest, can form moral judgments in which self
interest is not the most important consideration? If you want to know,
read the book [The answer lies in our desire for the approval of others.
If a third party, an impartial observer (whom Smith called “the
Impartial Spectator”), were watching our actions, from, say, the
mother ship hovering above Earth, how should we act to gain that
observer’s approval? Smith thinks that our behavior shouldn’t be, and
thus wouldn’t be, selfish. For Smith, of course, the impartial observer
isn’t in a mother ship outside of ourselves, but is found within us, to
guide our actions with regard to how this observer will see them. This
internal “person,” this “tribunal within the breast,” as Smith called it,
is easier to cajole and even fool than someone actually outside of us.]
One of the persons highly impressed with this book was Charles
Townsend, later as Chancellor of the Exchequer (our Secretary of the
Treasury) responsible for helping to start the American Revolution by
refusing to permit the Colonists the right to elect their own judges and
by imposing a heavy tax on tea, some of which the colonists dumped
into Boston Harbor.
8 On the strength of his thoughts about The Theory of Moral Sentiments ,
Townsend recommended that Smith tutor his stepson, the Duke of
Buccleuch. So in 1764, in part because of ill health brought on by
overwork (Who says professors don’t work hard?), Smith resigned his
position at the university to become the tutor of the young Duke of
Buccleuch. The post carried a good salary and a pension at the end.
Smith's first tutorial duty was to take his young charge on a tour of
While in France Smith stayed in the chateau of Voltaire,
considered the preeminent man of reason. For both Smith and
Voltaire reason required that one reach conclusions not by recourse
to religion, rule, prejudice, or passion, but by bringing the mind fully to
bear on all relevant information and evidence. [See the connection
here to liberalism?] This procedure, as it did for such men of the
Enlightenment as Voltaire, Diderot, and Jefferson, led Smith to new
paths, including the revolutionary view that morals need not be based
At the time of Smith's visit France was primarily an agricultural
society. Her leading economic philosophers were known as the
physiocrats , those who believed that all wealth originates in
agriculture [See Ball & Dagger, p. 63.]. Wealth, they taught, lay not in
gold and silver but in agricultural production, which flows throughout
the nation, from hand to hand, replenishing the country like blood in
the body. The leading Physiocrat, not surprisingly, was Quesnay, a
While the Physiocrats advocated "laissez faire ""leave it alone" for
marketing produce, they felt that only in agriculture, as the gift of
nature, did productive effort yield a surplus over cost. In other words,
only agricultural labor produced wealth for a n