Commerce; Economics; Market Competition - AP European History

Adam Smith is one of the most influential economists in European history. His magnum opus The Wealth of Nations was published in 1776 and is one of the earliest-known works advocating for free-market laissez-faire capitalism. It also touches on issues like division of labor, class structure, and government intervention in the economy.

In the early nineteenth century, Britain found itself in the unique position, at the time, of importing more from China than it was exporting. An unfavorable balance of trade, from the British perspective, was emerging and worsening over time. In an attempt to remedy this, the British decided to begin prioritizing the sale of opium to China in the knowledge that it was highly addictive and would result in extensive and consistent profits for the British, which would help balance the trading relationships between the two countries in Britain’s favor.

The Zollverein is the name given to a movement to unify the economies of several German states in the nineteenth century several decades prior to German political unification. It was an organization set up to manage tariffs and control economic policy between the various German states. The Austrian Empire was notably not included. It is the earliest-known European example of an economic union that was not accompanied or preceded by a political union.

Thomas Robert Malthus was an English cleric and economist who wrote An Essay on the Principle of Population in 1798, initially under a pseudonym. Malthus argued in his essay that the increasing population of Great Britain would be unable to feed itself with its current agricultural output and would face famine and disease, a condition known as "the Malthusian catastrophe." Malthus' predictions did not come to pass largely because of the technological advances of the Industrial Revolution and the Agricultural Revolution.

The Iron Law of Wages is an important principle of capitalist economics usually credited to David Ricardo, although sometimes it is credited to Thomas Malthus. It states that in the long term, the amount of money that a worker receives for labor will always tend towards the bare minimum needed to keep the worker alive and working.

Britain, like most other countries at the time, embraced mercantalism in the initial period of European colonialism and expansion; however, the British switched their economic policy to the promotion of free market capitalism once their naval power and commercial might made doing so advantageous. This has been widely criticized by politicians and thinkers in other countries who decry Britain’s emphasis on “fairness” and “economic equality” when, from their perspective, the British only embraced it themselves after they had become wealthy from the exploitation of other countries' raw resources and peoples.

Banking, as we generally understand it, can be loosely traced to the Italian city-states at the height of the Italian Renaissance; however, it did not really emerge as an institution that could extend credit and support corporations until the banking revolution that began in the Dutch Republic in the seventeenth and eighteenth centuries and quickly spread to Britain and then around Western Europe.

Thomas Malthus wrote his famous work An Essay on the Principle of Population in 1798, and it quickly came to have a profound effect on the government policies of Western European countries and the development of several ideas, such as the theory of natural selection. It states that population will naturally increase at a greater rate than the ability of that population to sustain itself—essentially, that unchecked population growth will lead to poverty and a lower standard of living. Malthus based his theory, in part, on his belief that human reproduction operates on an exponential model whereas production operates on an arithmetic model. The British government in particular during the Industrial Revolution took Malthusian theories to heart and attempted to limit the growth of the working class.

Mercantalism was the primary economic policy of most European nations during the age of European colonialism and exploration and lasted until the innovations of the Industrial Revolution. Mercantalism is a system of government designed to promote a favorable balance of trade in the home country by exploiting colonies. The government regulates the economic interests of the country by engaging in protectionism.

In perhaps the most famous passage from Adam Smith's magnum opus, The Wealth of Nations, Smith lays out his belief that the incentives faced by those engaging in free and competitive business result in often pure self-interest being made to work for wider public interests. Smith wrote at a time when it was common for absolutist monarchs to manage large empires with millions of inhabitants for their own interests all the while cloaking their actions in the language of serving the greater good of the nation. Smith was influential in launching the free trade movement, which argued that society would prosper much more if businesspeople were allowed to trade freely rather than having monarchs directing economic affairs for their own personal gain.

In 1394, Giovanni de Medici founded the Medici Bank in Florence, which over the next century became the most powerful and influential bank in all of Europe. Through this influence, the Medici family slowly gained political power over the city of Florence, which was asserting itself as the most powerful Italian city-state. The Medici family would become hereditary Dukes of Florence, produce four popes, and have two women become queen regents of France.

Around 1450, European commerce was primarily concentrated in the Italian city-states. Cities like Florence, Milan, Naples, Venice, and Rome all profited from their position on the Mediterranean that allowed them to facilitate trade between the Near East and the rest of Europe. Eventually the center of commerce would migrate to the Iberian Peninsula before quickly shifting north to the Netherlands and England.

The Triangular Trade Route is the name used to describe the transfer of products, resources, and humans from one continent to another during the colonial era. Generally, it involved the forced transfer of slaves from Africa to the Americas; the transportation of raw resources from the Americas to Europe; and the opening up of Africa and the Americas as a market for manufactured goods from Europe. It also introduced alcohol to millions of indigenous people for the first time, which would have profound sociological effects for centuries to come.

Inflation generally occurs when there is too much money flooded into a society without a proportional increase in the level of production. In sixteenth-century Europe, almost all currency was backed by gold, silver, or some other precious metal, so when gold and silver flooded into Europe from the New World, it led to rampant inflation until the money could be reinvested into increasing the level of production.

Adam Smith’s Wealth of Nations introduced many of the thinkers and rulers of Europe to the idea that the economy is governed by a set of natural laws that would naturally inspire efficiency and competition. Furthermore, Smith contends that government intervention only impedes this process. The idea that the economy is subject to natural laws underpins much of the theory behind free market capitalism.

The middle class were certainly the primary beneficiaries of the inflationary economy of this time period. The situation for the rural peasants and the clergy remained largely unchanged, while a small number of the urban working class might have been elevated to the middle class. However, for the nobility, the inflationary economy was a huge hindrance, particularly if the wealth of the noble family was based exclusively on land ownership.

A "bourse" was the name commonly given to a stock exchange in the French speaking world, particularly in the Early Modern period.

The invention of the steam engine by Thomas Newcomen, and its later improvement by James Watt, led to and accelerated the industrial revolution. It also led to the construction of railroads in the first half of the nineteenth century, particularly in Britain. This lowered the cost and time required for shipping and allowed new types of goods to be effectively transported and sold.

By the sixteenth century, the center of European commerce was rapidly migrating north, and for a time the Fugger family in Germany controlled more wealth than all of the Italian merchant families combined. This was a time of great economic innovation in Germany and the Netherlands, and the Fuggers may be understood as an early incarnation of venture capitalists.