Capitalism, or mercantilism?

I've been having an interesting discussion with David about whether the industrial expansion (and personal liberty contraction) of the late 19th and early 20th centuries are the result of capitalism or mercantilism. He's quite right that the "anything for a buck" ethic that permeated certain parts of the "gilded age" did huge damage to the prior culture of small businesses and farms. Real quality has trouble competing with authentic-looking forgeries, as anyone who competes with Wal-Mart knows all too well.

However, he's also absorbed the same lesson we were all told in school; that the excesses of the gilded age were representative of capitalism, and that the 20th century shift to mild socialism occurred due to the excesses of capitalism. Unfortunately, this explanation of history is one of the most egregious examples of bait & switch that I can think of.

Let's start with definitions. "Capitalism" is an economic system based on free markets and minimal government intervention. "Mercantilism" is an economic system where governments make intensive use of tariffs, subsidies, and colonization to create markets for industrial goods and achieve a positive trade balance.

The bait is obvious; the late 19th century featured, at least in comparison to today, very few of the governmental regulations which today amount to a 14% or so tax on all business conducted here. So at least at a superficial level, the late 19th century does appear to be a great example of laissez faire capitalism.

Now the switch; the late 19th century also featured a 45% tariff, massive subsidies of railroads and other enterprises, and aggressive colonization of the Great Plains, Mexico (U.S. Southwest), and the South. Emphasis was placed (and remains to this day) on the balance of trade.

In other words, government policy of the time (which continued to the mid-20th century) was strongly mercantilist, not capitalist.

Now let us consider the case of a factory owner in New England. Does it matter how greedy or wicked he is if the means to get his product to consumers in Iowa, Alabama, and so on is more expensive than manufacturing that item locally, or importing it from England?

One sees rather quickly that the key element in the formation of huge factories in the U.S. is not capitalism, but rather the mercantilist ethic which subsidized internal transportation (railroads) and levied huge tariffs on foreign competition. What a tragedy that this horrendous bait & switch by Marxist historians promotes the problem (government involvement) and slanders the solution (free markets).

And how to fight "anything for a buck" and monstrous factories? Learn to recognize junk, and stop buying it. Corporate product managers can't resist the urge to cut another penny from the bill of materials, and hence the products made by the millions tend to be junk.