Relationship Between Adam Smith And Mercantilism

Adam Smith and mercantilists had very different views on the role of government in the economy. Adam Smith strongly believed that government intervention should be kept at a minimum and that for the majority of the time, it is unnecessary because the markets will balance out themselves due to his theory of the ‘invisible’ hand. This theory is that all goods have a ‘natural’ price and that the market price naturally gravitates towards this natural price. The market price of goods may at times be higher or lower than the natural price and many other factors will affect the price, but over time, it will return back to the natural price, determined through the price of labour. He also believed that competition plays a crucial role in the determination …show more content…
Adam Smith believed that the economy is based off the people and exists for the benefit of the people. He was opposed to high unemployment as it meant that the economy was not working to its full potential. In the same train of thinking, he also believed in high wages. Only if the people have money to spend will they be able to contribute to the economy through spending. He also believed that self interest is favourable towards society. By companies innovating in order to make more profit, this benefits consumers so they receive higher quality of goods, and we can advance society through the creations of new technology and goods. This is in direct contrast with mercantilist thinking. Mercantilists believed that acting in self-interest is selfish and should be avoided at all costs. They strived to have rapid population growth so there would be high unemployment. This in turn would result in being able to pay lower wages which would bring down the costs of production. By doing this, companies would have less expenses and would be able to lower the costs of goods. Mercantilisms believe that the people work for the economy and not vice versa, unlike Adam