HIST 363
Assessment 1: Comparing Economic Theories
Answer Guide
The exact wording and length of your answer are not as important as whether you can
identify and explain the key term(s) from each answer.
1. What are the MAJOR features of mercantilism from roughly 1600–1800?
Mercantilism is a theory of economic nationalism designed to consolidate state
power at the expense of other nations. The objective of a national government
operating under mercantilist theories would be to limit imports and increase
exports to obtain a positive balance of trade. According to mercantilist theorists,
this favorable balance of trade would result in a net gain of precious metals, such
as gold and silver, which were considered to be the true source of wealth in the
world.
Key Terms: economic nationalism, balance of trade
2. What was the economy theory that Adam Smith so strongly opposed in his
classic book, The Wealth of Nations, and what did Smith say was actually
responsible for prosperity in Book, I Chapter I, of The Wealth of Nations?
Adam Smith was opposed to mercantilism because it mostly benefitted
governments and merchants. He instead argued that governments should
promote free trade, which would benefit the entire nation by creating new
markets and enabling commodities to circulate freely and thus more cheaply.
Smith believed that the division of labor accounted for the generation of wealth in
a society. He wrote that the increasing diversity of industrial production
consequently created a more elaborate division of labor that enabled wealth and
prosperity to extend throughout society. Greater division of labor meant cheaper
and more efficient production of manufactured goods, which meant more material
wealth for everyone.
Key Terms: mercantilism, free trade, division of labor
3. Which theorist argued that religious affiliation could explain the successful
adoption of capitalist principles, and which religion did he say was most
compatible with capitalist ideals?
Max Weber argued in The Protestant Ethic and the Spirit of Capitalism that the
religious beliefs of Protestants were more conducive to adopting capitalist
principles. After providing several examples of Protestant capitalist success
relative to Catholics, Weber concluded that the explanation for this difference is a
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result of the intrinsic character of the religious beliefs of Protestantism and
Catholicism and not in the historical circumstances of their existence.
Key Terms: Max Weber, Protestants
4. George Frederich List was one economist who challenged Adam Smith’s theory
of free trade on the grounds that during certain stages of a nation’s economic
development, “protective measures” from foreign trade were beneficial and
appropriate. What were List’s four periods of economic development, and when
did he believe it was and was not appropriate for a government to restrict
external trade?
List’s first period of economic development is when a nation is primarily
agricultural and thus exports agricultural products and imports nearly all of its
manufactured goods. His second period is when a nation begins manufacturing
its own items “at home” but still relies on foreign imports to meet demand. The
third period is when “home” manufacturing is productive enough to meet
domestic needs. The fourth and final period is when a country is able to export
manufactured goods in exchange for the importation of raw materials and
agricultural products. List argued that protective tariffs can be justified if foreign
imports prevent a market forming for a nation’s own manufactured goods, that is,
during the third period.
Key Terms: home and foreign manufacturing
5. Marx and Engels’ Communist Manifesto is a classic example of a “stage” theory
of history. What are the features of the capitalist stage of history, and what stage
do they say is next?
Marx argues that capitalism is a stage of history in which a small group, or “class”
or people, controls the “means of production,” that is, the financial and material
power to make things. The commodities themselves are produced not for an
individual’s use but for exchange. This process of commoditization extends to
workers themselves, as their labor itself becomes a commodity, thereby making
the relationship between people appear to be a relationship between things, or
what Marx calls “commodity fetishism.” This process ultimately creates the
proletariat, an alienated workforce of wage laborers. Ultimately, Marx argues
that capitalism is inherently an unstable system and will collapse, leading to the
next stage of human history, socialism, in which the proletariat will overthrow the
capitalist class and enable workers to control the means of production.
Key Terms: class, means of production, commodity fetishism, proletariat
socialism
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6. What theorist argued for the importance of studying social value, and which type
of society did he say best represented social value?
Joseph Schumpeter famously argued that only in a communistic society would
the concept of “social value” be able to represent the needs of the entire
community in economic terms. While Schumpeter thought that the concept
would still be useful for analyzing non-communistic societies, he considered it a
“scientific fiction” to apply that term outside of a communistic setting.
Key Terms: Joseph Schumpeter, communistic
7. According to W.W. Rostow, what are the five stages of economic growth and
their most important features?
Rostow’s five stages are the traditional society, the preconditions for take-off, the
take-off, the drive to maturity, and the age of high mass-consumption. The
traditional society had limited production capabilities because it lacked modern
scientific and technical knowledge. The preconditions for take-off were defined
by new agricultural and industrial productivity which led to an expansion in world
markets. The take-off is characterized by technological advancement which
allows for high and sustained rates of economic growth. The drive to maturity
leads a country to diversify its industrial production and participate more fully in
the world economy. Finally, the age of high mass-consumption is when
economic production is geared toward consumer goods and services.
Key Terms: traditional society, preconditions for take-off, take-off, drive to
maturity, high mass-consumption.
8. What is the concept of underdevelopment?
Underdevelopment is a concept that is essential to dependency theory.
Underdevelopment is the idea that a nation’s or region’s resources are being
actively used by another dominant state or region, with the result that the nation
or region which possesses the resources grows weaker and poorer while the
nation using the resources grows wealthier and more powerful, thus helping to
perpetuate the situation. This is not to be confused with “undeveloped” in which
a nation’s or region’s resources are not being used at all.
Key Term: dependency theory
9. Many of the theorists you have read in this unit would agree that free-trade
capitalism is a (if not the) defining feature of the global economy. However, they
would strongly disagree about what this means for the world as a whole. Based
on your answers to questions 1–8, explain what Adam Smith, George Frederich
List, Karl Marx, and a dependency theorist such as Andre Gunder Frank would
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most likely say about how the rise of global capitalism affects the world.
Adam Smith would likely argue that as the barriers to free trade and the division
of labor come down, the entire world will benefit and grow wealthier. Smith
believed that ultimate prosperity results from the most efficient division of labor
possible, thus one global free trade market would be the most efficient and
beneficial economic system. George Frederich List would argue that once a
nation is fully developed, it would be able to receive the benefits of free trade, but
nations that are still trying to develop home markets for their manufactured goods
should consider using protective measures against foreign imports. Karl Marx
would likely argue that the expansion of capitalism has led to greater worker
exploitation and commodity fetishism. He would argue the world’s current
system is unstable and bound to collapse. A dependency theorist would argue
that the development of the world economy reinforces the position of power of
some nations and parts of the world over others. Specifically, global capitalism
would keep underdeveloped parts of the world weak because their resources are
being used more profitably elsewhere.
As you continue through the course and learn about the processes and events in
the global history of industrialization that made the modern economic world
possible, please refer back to this study guide to consider how these different
theorists would interpret and explain what is happening.
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