Economics and Policy in the Age of Mercantilism

History of Economic ThoughtBoise State University

Fall 2015Prof. D. Allen Dalton

Background Influences

• Renaissance and Reformation– Artistic and literary renewal

• Scientific Discovery– Constancy of natural world– Empiricism, measurement,

mechanics

• Politics as Science– From ethics to self-interest

The Renaissance• Artistic, literary and cultural flowering

centered in Italy, from mid-15th century– Rediscovery of Latin and Greek classics

of literature and the flowering of art• da Vinci (1452-1519)• Michelangelo (1475-1564)• Raphael (1483-1520)

– Scientific impact – naturalism and humanism

Art of The Renaissance

The Reformation• Conservative reaffirmation of Christian

morality and theology against humanism of Renaissance and against the abuses of the Roman church– Martin Luther (1483-1546)– Jean Calvin (1509-1564)– Ulrich Zwingli (1484-1531)

• Resulting problems– no single ecclesiastical authority– the question of political obligation (when

ruler and subjects are of different faiths)

Scientific Discovery• Grows out of the “measuring mania” at

Universities during the 14th Century– Merton Calculators (Oxford)– Parisian Scholastics

• Jean Buridan• Nicholas Oresme

– Relationship to the monetized society– No direct application to real world

(contingency of real world due to world being the result of God’s will)

Scientific Discovery• Copernicus (1473-1543)

• Commentariolus (1514); first modern statement of heliocentric theory

• De Revolutionibus Orbium Coelestium (1543)

• Tycho Brahe (1546-1601) • Tycho - first observation of supernovae (1572)

• Johannes Kepler (1571-1630)• Kepler - Astronomia Nova (1609); Kepler's first

two laws of planetary motion

• Galileo (1564-1642)• A Dialogue Concerning the Two Chief World

Systems (1632) promotes Copernican theory

Scientific Discovery

• Francis Bacon (1561-1626)– Novum Organum (1620) argues for

experimental, empirical science; natural laws induced from collected facts

– Founder of Royal Society

• René Descartes (1596-1650)– Discourse on the Method of Rightly

Conducting the Reason and Seeking the Truth in the Sciences (1637) argues that science is built upon axioms, self-evident truths; emphasis on deduction; the world as a mechanism

Scientific Discovery• Isaac Newton (1642-1727)

– De Analysi per Aequationes Numero Terminorum Infinitas (1669)

• first systematic account of the calculus (“fluxions); circulates as manuscript but not published until 1711; dispute with Leibniz over discovery (1684)

– Philosophiae Naturalis Principia Mathematica (1687)

• universal law of gravity; laws of motion; predicts nonspherical earth

Politics as Science• Machiavelli (1469-1527)

– The Prince (1513) • separation of state and religion• ruler has as objective of

increased state power• “Politics have no relation to

morals.”• “War should be the only study of

a prince. He should consider peace only as a breathing-time, which gives him leisure to contrive, and furnishes as ability to execute, military plans.”

Politics as Science• Thomas Hobbes (1588-1679)

– Served as Francis Bacon’s last secretary

– English Civil War (1640-1651) spent in Paris

– Leviathan (1651)• Men in a state of nature are in a war

of all against all

• Social contract establishes the state (not divine right), with absolute authority, to keep peace and order

• without absolute authority, property is insecure, contracts are unenforceable and economic life is impossible

Economic ThoughtQuantity Theory of Money

• The Response of Jean Bodin to the Paradoxes of Monsieur de Malestroict…(1568) - Jean Bodin– several reasons for rise in prices but “principal reason”

is the abundance of gold and silver (follows Navarrus’s argument that the increase in quantity of monetary metals causes price inflation)

• A Discourse of the Common Weal of This Realm of England (1549, 1581) - “W.S.”– usually attributed to Sir Thomas Smith and nephew

William Smith, but has also been attributed to Jonathan Hales

– first English statement of the quantity theory of money (preceded by Navarrus in 1556 and Bodin in 1568) in note appended to 1581 edition

Mercantilism• The economic thought of 15th to early

18th centuries• Descriptive term originates with Marquis de

Mirabeau (1763) and Adam Smith (1776)• system of trade regulation and money

(balance-of-trade doctrine)

• “Mercantilist” Thought and Policy• pamphlets oriented to specific issues• state and secular concerns

– source of funds for the state/king– encouragement of specific industries

Mercantilism• Common Aspects of Mercantilist Policy

– “bullionism;” an attempt to accumulate gold and silver and prohibit export

– encouragement of domestic manufacture through monopoly, subsidy, and high tariffs

– encouragement of cheap raw material imports– government support of agriculture and prohibition

of foodstuff exports– large merchant navies and navigation laws– encouragement of fisheries– colonies as economic subordinates in imports

and exports

Balance-of-Trade Doctrine

“The ordinary means... to encrease our wealth and treasure is by Forraign Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value.”

- Thomas Mun, England’s Treasure

by Forraign Trade (1664)

Thomas Mun (1571-1641)• Director, East India Company

– East India Company’s purchase of goods resulted in export of bullion

• A Discourse of Trade (1621) • England’s Treasure by Forraign Trade (likely

written in 1620s, pub. 1664)• Wealth as produced commodities; monetary

movements depend upon condition of trade balance• Domestic trade zero-sum; international trade is the

source of national wealth and power• Money wages must be kept low in order to stimulate

labor to be productive• Low interest rates to encourage industry• Profits arise from buying cheap, selling dear

Josiah Child (1630-1699)• Governor, East India Company• Member of Parliament• Brief Observations Concerning Trade and

Interest of Money (1668), reprinted anon. with minor additions as Discourse about Trade (1690); reprinted as A New Discourse of Trade (1693)– Reduction of the legal interest rate in England

from 6 percent to 4 percent• began by citing reasons for the wealth of Dutch

Republic• argued that low interest rate in the Dutch

Republic was primary cause of Dutch wealth• argued that past reductions in legal limit in

England had been followed by increased English wealth

Sir William Petty (1623-1687)

• Doctor of Medicine, Oxford, 1648• Professor of Anatomy, Oxford, 1650• Chair of Music, Gresham College, 1651• Served in Cromwell’s Army in Ireland, 1651-3

– Medical officer; topographical surveyor; ended with large Irish estate

• Founding member of Royal Society• Primary works:

– A Treatise of Taxes and Contributions (1662)

– The Political Arithmetick (1690)– The Political Anatomy of Ireland

(1691)

Sir William Petty (1623-1687)

• human body as metaphor for human society

• Influenced by English empiricism, focused on quantifying economic relationships

• general laws describe the operation of the economy and are deduced by reason

• economic policy succeeds if in accordance with general laws

Sir William Petty (1623-1687)• A Treatise of Taxes and Contributions

(1662)• “public finance” text• proper objects of expenditures and the qualities

of tax avoidance and tax payment

– Social Division of Labor and the Social Surplus• Hierarchy of productivity (but no distinction

between productive and unproductive)• Surplus of agriculture at base of further division

of labor• Existence of rent also an indication of

agricultural surplus

Sir William Petty (1623-1687)– Sophisticated discussion of land and rents

• natural rent is the surplus of corn

• identifies this quantity with the natural surplus of silver mining (rate of returns are equalized)

• argues that all things ought to be naturally valued in land or labor

• uses rental value as basis for capital value of land

• finally, notes that the interest is to the amount of money lent as the amount of rent is to the land that can be bought with money lent

Sir William Petty (1623-1687)• Political Arithmetick (1670s, pub. 1690)

– attempt to quantify wealth of England– established national income accounts that

equated personal spending with sum of wages, profits and rents

– argued that value of assets are linked by common discount rate

– mercantilist argument that nation benefits from accumulating treasure and adding to money supply to drive trade

– increases in quantity of money lower rate of interest

John Law (1671-1729)• Money and Trade Considered;

with a Proposal for Supplying the Nation with Money (1705)– Economic depression due to

shortage of metallic money; requires paper currency as substitute

– Money was Credit, Credit based in confidence

– Money supply should be related to needs of trade

– Expansion of money supply will permanently increase output and employment without raising prices

– The interest rate is the price of money’s use; changes in the money supply affect interest rates and therefore investment

John Law (1671-1729)• Money and Trade Considered;

with a Proposal for Supplying the Nation with Money (1705)– elaborates upon Charles

Davazanti’s distinction between “value in use” and “value in exchange”

– presents “diamond-water” paradox and argues that relative scarcity is the creator of exchange value, solving the paradox

John Law (1671-1729)• Exiled to Europe• French bankruptcy and debt as

consequence of Louis XIV’s wars and policies– Regent Duke d’Orleans in Paris

• 1716, establishes Banque Générale • 1717, establishes Compaigne

d’Occident • 1718, Bank Générale becomes Banque

Royale, and Mississippi Company absorbs other trading companies

• 1719, Massive note inflation and Stock market bubble in Company shares

• Early 1720, Company and Banque united

• Mid-1720, Price of shares collapse, bank-run and collapse of Banque Royale