Question

Explain the theory of capitalism as defined by Adam Smith, including the factors of supply and demand. How does capitalism contrast with the mercantilist system pursued by European countries during the Age of Exploration? (5 points)

Answer 1

Adam Smith’s theory of capitalism consisted of the belief that given a stable of commerce and evaluation individuals would respond to the incentive of earning money by specializing their production. The invisible hand was the automatic pricing and distribution mechanisms in the economy.

This was the contrary system of Mercantilism. He was a heavy critic of this system because of economic protectionism in which tariffs, trade regulations, and other legal barriers only were applied to merchants and manufacturer to further their own economic interests on the expense of the mass of consumers who would have to pay higher prices for commodities.