History of Economic Thought

ByQulb e Abbas

• An introduction to the history of economic thought.

• The Mercantilist School: Overview, tenets, key contributors.

• Mun, Petty, Malynes, Davenant, Colbert

Mercantilism (Roughly between 1500 to

1776)

The Historical Back-ground of Mercantilist School

• Self-sufficient feudal community slowly replaced by a new system of merchant capitalism.

• Trade flourished both within each country and

between countries, and the use of money expanded.

Concept of nation state;

strongest nations had colonies

The mercantilist school emerged:

• suspended feudal concepts • promoted nationalism • gave new dignity and importance to

merchants• justified a policy of economic and military

expansion.

Major Tenets of Mercantilist School

1.Gold and silver is the most desirable form of wealth: • Wealth of nation equivalent to the amount of gold and

silver bullion it possesses. • Surplus exports were therefore necessary to generate

payments in hard money.

• Therefore, a nation would even export to enemy during war as long as the products were paid for in gold.

2.Nationalism: There is a fixed amount of economic resources in the world: One country could increase its resources only the expense of others – all countries cannot simultaneously export more than they import. Therefore, one’s own country should promote exports and accumulate wealth at the expense of others. Led to stronger nations forming colonies, dominating trade routes, waging wars against rivals and competing aggressively international trade. This extreme nationalism led to militarism.

3.Duty-free importation of raw materials that could not be

produced at home, protection for manufactured goods and raw

materials that could be produced domestically, and export

restriction on raw materials:

This emphasis on exports and reluctance to import has been called “the fear of

goods”.

 

It was suppose to enhance country wealth and power due to accumulation of

gold and silver.

 

Prohibition against the outward movement of raw materials helped keep the

prices of finished exports low.

 For Example:

Queen Elizabeth banned the export of live sheep (1565) – penalty confiscation

of property, one year imprisonment and cutting off the left hand. Second

offense – death.

4.Colonization and monopolization of colonial trade: Merchant capitalists wanted favored colonization and wanted to keep colonies eternally dependent upon and subservient to the mother country. Any benefits to the colonies were an accidental by-product of the policy of exploitation.

Boston Tea Party 1773

5.Opposition to internal tolls, taxes, and other restrictions on the movements of goods: Mercantilists recognized that tolls and taxes could throttle business enterprise and drive up the price of country’s exports. However, mercantilists did not favor free internal trade in the sense of allowing people to engage in any trade that they wished. Rather, preferred monopoly grants and exclusive trading privileges whenever they could acquire them

6.Strong Central Government: Strong central government required to promote mercantilist goals. Government encouraged exports, limited domestic competition by granting monopoly privileges. Agriculture, mining and industry promoted through subsidies and protected from imports via tariffs. Regulated quality of goods – for preserving international reputation. Therefore strong national government required to ensure uniform national regulations.

7.Importance of Large Hard-working population: Not only would a sizeable, industrious population provide an abundance of soldiers and sailors ready to fight for the glory and wealth of the nation, but it would also keep the labor supply high and wages therefore low.

Low wages mean: Lower prices on exports and hence an increased inflow of goldReduce idleness and promote greater participation in the labor force.

Idleness and begging by able-bodied people dealt with mercilessly, and thievery was severely punished.

Henry VIII in Great Britain hanged 7,200 thieves during his reign (1509-1547).

Whom Did the Mercantilist School Benefit or Seek to Benefit?

It benefited the:• merchant capitalists • kings• government officials.

It served those who were the most powerful and entrenched and had the most favored monopolies and privileges.

Laws took the form of grants of:

• monopoly status • prohibitions against imports• regulations that made it difficult for new

producers and merchants to compete successfully against the established ones.

Extreme form of rent seeking behaviour.

• Government officials to make these laws and regulation - as a way to secure benefits for themselves and for the royalty they served.

• Huge tensions could exist between those who benefitted and those who were at a disadvantage

For Example

• In France from 1686 to 1759, import and use of printed calicoes was prohibited. Result – 16,000 people were killed in conflicts and executions arising from the enforcement of these measures.

How Was the Mercantilist School Valid, Useful, or Correct in Its Time?

• Arguments for bullionism, although exaggerated, made sense in the context of that period.

• The rapid growth of commerce required more money in circulation, and banking was insufficiently developed to produce it.

• Bullion provided a reserve that could be used to hire and maintain soldiers, build ships, buy allies and bribe enemies.

• Before the development of international finance and multilateral trade, bullion was of major significance in making international payments.

• Influx of precious metals also made tax collection easier.

Which Tenets of the Mercantilist School Became Lasting Contributions?

1. Emphasized on the importance of international trade

2. Developed the concept of balance of payments between a nation and the rest of the world.

Little other direct contribution to economics as we know it today:Ignored increases in efficiency, comparative advantage specialization etc.

Indirect contributions to economics and economic development:

1) Permanently influenced the attitude towards the merchant: helped them gain respectability and importance.

2) Had a major impact on economics by promoting nationalism.

3) The privileged, charted trading companies helped transform the economic organization of Europe by bringing in new products, providing outlets for manufacturing goods, and furnishing incentives for the growth of capital investment.

4) Contributed to economic development through expansion of internal markets, promoting free movement of goods unhampered by tolls, establishing uniform laws and taxes, and protecting people and goods in transit within and between countries.

THOMAS MUN (1571- 1641)

• Director of East India Company.

Argued that as long as total exports exceeded total imports, the drain of species from a country in any one trade area did not matter.

England’s Treasure by Foreign Trade:

• How was kingdom to be enriched?

• The answer lay neither in production nor in the accumulation of capital goods, but in surplus of exports.

• Although England was rich, it could be still richer if it used wasteland to grow hemp, flax, lumber, tobacco, and other things being imported.

• Exports should be carried in English ships to gain insurance and freight charges.

• Believed that increasing imports would increase England’s stock of precious metal if the wares were exported to some other country at a profit.

GERARD MAYLNES (1586-1641)

• A merchant in foreign trade, prisoner, an English commissioner in Belgium, a government advisor on trade matters, assay master of the mint, and commissioner of mint affairs.

Maylnes expressed several Mercantilist ideas

• Where trade was considered to be too low for aristocracy, Maylnes defended the merchants.

• Advanced the idea that regulation of goods by government was necessary to assure high quality exports.

• Developed the Mercantilist notion that more money in a country would raise the prices and thereby stimulate business.

CHARLES DEVANANT (1656-1714)

• An Oxford dropout, MP, Civil servant • An Essay on the East-India Trade (1696): • Argued against burying the dead in woolen cloth. • An Essay on the Probable Means of Making the People Gainers in the

Balance of Trade:

• Argued that the kingdom can reap the benefit of the entire value of an exported product if it is made from domestic raw materials.

• Discourse on the Publick Revenues, and on the Trade of England:

Devanant expressed a preference for wars fought within a country rather than abroad, citing economics as the underlying reason. Called for government regulation of business because merchants were not to be trusted.

“..their answers are dark and partial: and when they deliberate themselves in assemblies, ‘tis generally with a bypass, and a secret eye to their own advantage…” He was enlightened to say that the wealth of a country is what it produces, not its gold or silver. He favored a trade surplus because he believed that when the quantity of money increases, interest rates fall, land value rise, and taxes increase.

JEAN BAPTISE COLBERT (1619- 1683)

• French Minister of Finance • Colbert was a bullionist who believed that the

strength of a state depends on its finances, its finances rest on its collection of taxes, and tax revenues in turn are greatest if money is abundant.

Was an arch-nationalist and militarist.

He favored exports, reduced imports and laws preventing the outflow of

bullion from the country.Four professions are useful for great purposes: Agriculture, trade, war on

land, and from the sea.

Commerce was economic war. Government regulation of business was an important part of Colbert’s policies – mistrust of merchants – to protect the consumer, Frances reputation and attain uniformity Monopoly privileges and subsidies were offered for new industries – especially where large investment was required.

Encouragement of wine making almost led to food insufficiency.

Many businesses declared “Royal

Manufacturers.”

Colbert favored large, hard working, and poorly paid population. Also in favor of child labor:

“.. experience has always certainly shown that idleness in the first years of a child’s life is the real source of disorders in later life..”

He regarded monks, nuns, lawyers and officials as unproductive idlers and tried to reduce their number. Every father of ten living children was exempted from taxes. Sons died in armed forces were counted as living; but priests, nuns and monks were not counted. Not interested in internal commerce which, in his view, did nothing for state wealth Incredibly regressive tax system was reinforced: privileged landowning gentry exempt from taxation, subsidies to the big import-export capitalists, the burden of taxes fell upon French farmers and small town craftsmen. Generated a "progressive" external economy while allowing the internal economy to stagnate.

SIR WILLIAM PETTY (1623- 1687)

• A sailor, physician, professor of anatomy, inventor, surveyor, MP, shipbuilder, author, statistician, landowner.

Petty’s Mercantilist views:

He favored freer foreign trade than many of the mercantilists, for he believed it would circumvent the widespread smuggling. He wanted imported goods to be taxed if the same goods are made or grown at home. He wanted lower tariffs on the imports of raw materials. Like other mercantilists, favor large population: based upon his concept of increasing returns to government and lower unit costs. Favoured a poll tax as an incentive to work. Thieves should become slaves The unemployed should be hired by the state to work on roads, dredging rivers, planting trees, building bridges, mining minerals and manufacturing various goods.

How to finance these public works? Petty believed it should be done through taxes: proportional taxation.

Petty as a Forerunner of Classical Economics

• He was a pioneer statistician.• Several of his ideas were later developed in greater

detail by the classical economists.

1. Velocity of circulation2. Division of Labor3. Rent Theory4. Importance of Capital and production efficiency5. Labor Theory of Value

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