History of economic thought

1. History of economic thought Presentation 4 Petr Wawrosz

2. Mercantilism

3. Basic characteristic • The concept of “mercantilism”designates either a system of economic policy or an epoch in the development ofeconomic doctrine during the seventeenth and eighteenth centuries, or both ofthem, before the publication of Adam Smith’s path-breaking Wealth of Nations(1776). • Mercantilism' is the name given by late nineteenth century historiansto the politico-economic system of the absolute state from approximately thesixteenth to the eighteenth centuries. • The firstmercantilist writers, who are explicitly named as such, we find two Englishmen,Thomas Mun and Edward Misselden in the 1620s, while James Steuart’sPrinciplesof Political Oeconomy(1767) is conventionally perceived as perhaps thelast major “mercantilist” work. • Most of the mercantilist writers during the seventeenthand eighteenth centuries were businessmen, merchants and governmentofficials. They wrote mainly about practical matters concerning trade, shipping,the economic effects of tariffs and protection of industries, monetary issues (thedevaluation of coins), interest rates, and so on.

4. Basic characteristic • The concept was utilized in order to describe an economic policy regime characterized by direct state intervention, intended to protect domestic merchants and manufacturers. • The main creator of “the mercantile system” was Adam Smith. According to Smith, the core of the mercantile system – “the commercial system” as he called it – consisted of the popular folly of confusing wealth with money. • Even though mercantilist writers mainly were practically oriented, they nevertheless proposed an analytic principle; namely, that a country must export more than it imported, which would lead to net inflow of bullion. This goal would be achieved through an active policy and thus make the state – or commonwealth – richer.

5. Basic characteristic • The primary objective of Mercantilism was to increase the power of the nationstate. One of the important aspects of national power or strength was wealth. • The states that followed a policy ofmercantilism tended to see trade, colonialism and conquest as the primaryways of increasing wealth.

6. Basic characteristic • How to obtain new money at that time?- by mining or by foreign trade. • The shortage of money would curtail economic development. This was a major problem for England in particular, as it had no silver or gold mines of its own. The only solution to this dilemma was to import money from abroad. • Money as a capital to finance a greater volume of trade? • Could the circulation of goods expand so fast that it would lead to a shortage of money?

7. Historical background • Generally, Mercantilism is associated with the rise of the “Nation state.” • Feudal institutions were weakened by the increasing use of money and a greaterreliance on exchange within the economy. • The Protestant Reformation weakened the role of the church and consequently thecivil role of the state was expanded. • There was a rise of Humanism (the concern for well-being of humans in the short term). • The decline of feudalism was influenced by changes in technology.

8. Historical background • In the area of state absolutism, grants of special privilege included thecreation by grant or sale of privileged 'monopolies', i.e. the exclusive rightgranted by the Crown to produce or sell a given product or trade in a certainarea. These 'patents of monopoly' were either sold or granted to allies of theCrown, or to those groups of merchants who would assist the king in thecollection of taxes. • The grants were either for trade in a certain region, suchas the various East India companies, which acquired the monopoly right ineach country to trade with the Far East, or were internal - such as the grant ofa monopoly to one person to manufacture playing cards in England.

9. Practical examples of mercantilistic policy • In Englandagriculture was sheltered from foreign competition through the sliding scale tariff provided bythe Corn Laws (which in years of good harvests virtually excluded grain imports, thoughwhen home supplies were low and prices high, imported grain could then bear the cost of thelowered protective duties). • In the France of Colbert, manufacturingestablishments were launched and subsidized by government.

10. Thomas Mun • 1571–1641 (he lives in the period of 30 years war, 1618-1648) • The main architect of the mercantile system of economicthinking. • His main published writings appear in two short treatises, A Discourse of Tradefrom England unto the East Indies (1621) and perhaps the more important England’sTreasure by Forraign Trade (1664). • The idea ofa positive balance of trade in order to propagate a protective trade policy ingeneral, including duties on imports, tariffs, bounties, and so on. • Support export, restrict import.

11. William Petty (1623-1687) • Petty had many characteristics of a mercantilist, however his work is moresystematic than most. His attempts to quantify economic and demographiccharacteristics and to apply empirical methods helped lay the foundation forClassical Economics. • statistician” measurement, estimation and averages: Engaged in the analysis of masses of quantitative data. Derived estimates from fragmentary and dubious data - On basis of a 30% increase in exports from Ireland, Petty estimates thepopulation of Ireland increased 30%. • Considered induced effects of additional spending, early forerunner of “multipliereffect”. • Theory of value is “Land and Labour”: “labour is the father and active principle of wealth as lands are the mother.” • “Doctrine of the Par,” common yardstick of value is average man’s daily requirementof food. Value of land can be converted into the value of labour, anticipates“opportunity cost”.

12. Mercantilism in France • High and crippling regulation: total crippling of economic and industrial growth in France. • Enforcing of 'quality' standards on production and trade: That effectively hobbled or even prevented the innovation . • Jean-Baptiste Colbert (1619-83): engaged in a virtual orgy of grants of monopoly, subsidies of luxury, and cartelizing privilege, and built up a mighty system of central bureaucracy, of officials known as intendants, to enforce the network of controls and regulations. He also created a formidable system of inspections, marks and measurements to be able to identify all those straying from the detailed list of state regulations. The intendants employed a network of spies and informers to ferret out all violations of the cartel restrictions and regulations. In the classic mode of spies everywhere, they also spied on each other, including the intendants themselves. Penalties for violations ranged from confiscation and destruction of the 'inferior' production, to heavy fines, public mockery, and deprivation of one's licence to stay in business.

13. Todays view • Mercantilism as “a rent-seeking society. • They looked at international trade as at zero-sum game: what one gained in trade someone else lost. • Mercantilism expressed the economic interest of the state and regarded economic wealth as a rational means to achieve political power. • The active role of the state in economic modernization and growth. • Fear of goods and love of money: an expression of the transition from a barter economy to a money (gold and silver) economy, which took place during this period.

14. Economic theory and economic policy • The British Navigation Act of 1651, the establishment of national standards of weights and measurements, a national monetary system. • Support of manufactories that increaseddivision of labor. • Net inflow of money was a barometer that signaled whether a nation won or lostin its trade with other countries.Thus, a net inflow of money could be a means of procuring wealth;but wealth itself was always the result of production and consumption.

15. A problem of active trade balance (balance of payment) • Inflow of money results in domestic prices rising, relative prices in foreign economy fall, since prices are relatively lower (to domestic buyers) in foreign countries, domestic buyers purchase more (increase imports). • Foreign buyers are faced with higher relative prices in our economy so buy less (decrease exports) balance of trade automatically reverses.