EC120 week 05, topic 4, slide 1

Commercial expansion: mercantilism and finance

Topics:• Trade, plunder and settlement (c1600−c1800)• Economic rivalry among European states• Dutch trading empire• Mercantilism: doctrines and their assessment• Institutional transformation: Britain• Mercantilism as Rent Seeking• Finance and Capital: Historical Overview• Financial Revolution• Joint Stock companies

EC120 week 05, topic 4, slide 2

Trade, plunder and settlement (c1600−c1800)

• From c1600, focus of world trade shifts west, towards the Atlantic

• International commercial relations dominated by geopolitical conflict

• Traded goods: mainly high value/weight products

• Price gaps, between source & destination, remained wide

EC120 week 05, topic 4, slide 3

Emergence of nation-states in Europe

• Gradual decline in arbitrary exercise of power

• Evolution of nation states: (a) common culture in well-defined boundaries, (b) sovereign tax authority, (c) monopoly of coercive power

• Fragile balance of power among Europe rival states

EC120 week 05, topic 4, slide 4

Economic rivalry among European states

• Spain: declining in economic power in 17C and 18C

• France: became a powerful, absolutist nation-state

• Holy Roman Empire: small states, conflicting loyalties

• Eastern Europe dominated by Prussia, emerging Russia & declining Ottoman Empire

• Scandinavia: dominated by Sweden, sparsely populated

EC120 week 05, topic 4, slide 5

Dutch trading empire• Early prosperity based on textiles and North Sea

trade

• Economically efficient relative to rest of Europe

• Merchant marine in 17th century became dominant

• International power waned in 18C: rivalry with France & Britain

EC120 week 05, topic 4, slide 6

Mercantilism: the doctrines• Diverse, practical, interventionist state policies

• Aim: promote the national interest

• Objective: accumulate gold & silver

• How? Favourable balance of trade

• International trade (and relations): a zero sum game

Institutional transformation: Britain

• The Glorious Revolution, 1688/9 – Confirmed Parliamentary supremacy,

against absolute monarchy

• Economic significance commonly dismissed

• Revisionist view: the revolution did matter. Why?• Changed the balance of power

– Party politics, not the King’s agenda– Whig domination

EC120 week 05, topic 4, slide 7

EC120 week 05, topic 4, slide 8

British mercantile policies

• Evolves from regulation to taxation

• Grants of monopoly and privileges to restrict competition– Favour employers (masters) over workers

(servants)– Local enforcement, mainly urban; – Rural areas less regulated

• Monarchy v. Parliament resolved in favour of Parliament– Civil war, 1642-49;

Glorious Revolution 1688–89

EC120 week 05, topic 4, slide 9

Mercantilism: assessmentFavouring mercantilist policies:• Necessary to enable transition to capitalism• Aided emergence of nation-states• Temporary policies support “infant industries”.

Against:• Mercantilist policies restrict growth of trade

– Hence restrict prosperity (income)

EC120 week 05, topic 4, slide 10

Mercantilism as Rent Seeking

• Distinguish between: (a) economic efficiency and (b) distribution of wealth

• Mercantilist policies -> “surplus” = “rent” = “profit”

• “Rent seeking” is the quest to capture the surplus

• Result: redistribution of wealth and economic inefficiency

• Even worse: rent seeking rivalry can dissipate the surplus

EC120 week 05, topic 4, slide 11

Finance and Capital: Historical Overview

• Of ancient origin: loan contracts, money (typically coins)

• From medieval times (to 17C):

– Expansion of banking for trade credit

– Usury laws restricted/prohibited interest on loans

– Expanding land market

EC120 week 05, topic 4, slide 12

Financial Revolution from late 1600s

• Driven by British and Dutch for Govt funding

• Parliamentary ascendency restrains arbitrary action

• Improved administration of tax gathering

• `Secondary’ markets expanded for:Gilt-edged stock and Joint-stock companies’ shares

EC120 week 05, topic 4, slide 13

Joint Stock Companies

• Emerged from medieval associations and guilds

• Main stimulus: growth in overseas trade

• Joint stock form enables – large amounts of capital to be

amassed, – risk-sharing among investors, – transferable stock

• Vulnerable to manias and panics