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Summary The Evolution of Economic Thought
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Full summary The Evolution of Economic Thought NB: contains all the pages for schoolyear , course: History of Economics Radboud Nijmegen
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Mercantilsm (1500 – 1776)Names:
- Mun
- Malynes
- Davenant
- Colbert
- Sir William Petty (foreshadowed classical economists)
Mercantilists did not favour free internal trade, on the contrary they preferred monopoly grands and exclusive
trading privileges whenever they could acquire them. Government should set a lot of rules about production,
too protect a good reputation for the exported products.
Mercantilists were against internal tolls, taxes and other restrictions because it could drive up the export price
of the good. Labour supply high, wages low: means lower export prices, increasing the inflow of gold and
reduce idleness and promote greater participation in the labour force (NB: mercantilist only looked at the
income effect of wage increase, but overlooked the substitution effect).
Nationalistic, colonialization, trade as zero sum game. Fear of goods, duty free importation of materials that
could not be produced domestically and export restrictions on raw materials.
Beggars and the poor were executed.
Mercantilism:
- Extreme rent seeking behaviour
- Benefited the merchant capitalists, king and government officials (fines, concessions, monopoly privileges
sold + inflow of gold and silver enhanced general tax collections and improved country’s ability to fight
wars)
Wrong:
- Extreme regulation prevented the experimentation and development of new techniques
- Trade not a zero sum game (specialization)
- Higher wages need not lead to idleness and reduced labour force participation
- Countries cannot only become richer by impoverishing their neighbours but also by discovering natural
resources, producing more capital goods, using labour more efficiently
Good:
- Bullion provided an reserve that could be used to fight wars (pay soldiers) and trade with (paper money
not widely accepted)
- Easier tax collection
- Inflow of gold and silver, more gold and silver in circulation reduced interest rates and promoted business
- Importance of international trade
- Balance of payments
- Influenced attitude towards merchants
- Promoting nationalism
- Central government regulation is necessary to keep check when production and trade have not yet
developed sufficiently to permit reliance on competition to provide consumers a wide choice of goods
- Monopoly grants may be necessary to induce more risk taking than otherwise could have happened
- Charted trading companies helped transform EU economy
- Expanding internal market, promoting free movement of goods, establishing uniform laws and taxes and
protecting people and goods in transit
,The physiocratic school (1756-1776 = Smith’s Wealth of Nations)
France
Names:
- Quesnay
- Turgot
Reaction to mercantilism:
- Strict rules – no improvement, experiments
- Corrupt government couldn’t enforce the rules
o Very high taxes on peasants (not on nobility and clergy) – no incentive to expand and invest
o No free movement of goods in France (tolls, taxes, tariffs internally)
o Corvee (Colbert), work without benefit on public goods
o No grain trade, export prohibited and internal tolls and restrictions. In some areas people starved,
while there was abundance in others (!) – faulty regulation
o Disputes between guides, and clothmakers/sellers – high legal costs
Major tenets:
- Natural order
o Physiocrat = natural order
o Natural right to enjoy the fruits of their own labour, provided that such enjoyment was consistent
with the rights of others
- Laissez-faire, laissez-passer (Vincent de Gournay)
o Minimum government intervention
Protect life, property and maintain freedom of contract
o Let people do as they please without government intervention
- Emphasis on agriculture
o Only agriculture and maybe mining created an surplus (net product above the value of resources
used in production)
- Taxation of the landowner
o Only the landowner received a surplus (rent)
o All taxes on others were passed on to the landowner
o Direct tax is preferable over an indirect tax, because an indirect tax increases as it is passed along
to others (offsets the market more)
- Interrelatedness of the economy
o Circular flow of goods and money
Who benefited
- Peasant at first, but in the end: physiocrats wanted to make them wage laborers on large farms with
advanced techniques (capitalistic)
- Promoting industry – freer internal grain trade and stimulating export of farm products, and import of
manufactured goods
- Against: the landowners (nobility and clergy) who had to pay tax
o But physiocrats supported the idea of right to own land + receive land
o Tax of 1/3th of the surplus (instead of all surplus, Henry George USA 1880’s)
o Based on the wrong analysis that all taxable surplus comes from the land, the idea was that an
direct tax would lower the overall burden on landowners – but that’s not true
How was it right:
,- Before the industrial revolution, compared to farming – industrial work could easily be seen as sterile and
agriculture gave big surpluses
- Opposing obstacles to capitalist economic development (promoted the French Revolution which swept
away numerous obstacles)
- Emphasized production rather than exchange as a source of wealth
- Argued for capital accumulation through reduced consumption by the wealthy
- Support for direct taxes instead of corrupt indirect taxed at that time
What was wrong:
- Trade and industry aren’t sterile
- Led to the next error: belief that only landowners should be taxed because only land could yield a surplus
- Two errors in thinking about the future:
o Industrialists and laborers became the most important figures
o Not big capitalistic farms, but small peasant farmers became the typical in France
Now, a tax on land wouldn’t curb luxury consumption by the nobility but would hurt
small farmers (wrong)
Lasting contributions:
- Examining society as a whole and analysing the laws that governed the circulation of wealth and goods –
founded economics as an social science
o Quesnay’s economic table is the precursor of:
The economic flow diagram
National income accounting
- The law of diminishing returns was stated by Turgot (before Malthus and Ricardo)
- Originated the idea of analysis tax shifting and incidence (see current micro)
- Turned attention to the proper role of government by advocating laissez-faire
Classical school (1776 – 1871)
1776 Wealth of Nations – 1871 when Walras, Jevons and Menger came with demand based theories
(neoclassical economics)
Two relations:
1. The scientific revolution
o Experimental evidence
o Universe is governed by universal laws
o Static view of the universe. Space, time and matter are independent of each other, nothing
changes over time
o Idea: natural law of self-interest. Rent, interest and profits are just rewards for ownership and
productive use of wealth.
2. The industrial revolution
o Competition could be relied on the ensure moderate prices and product quality, mercantilist
practises were breaking down
o Large, free and low paid labour supply. Falling death rate, and a high birth-rate + bankrupt
Irish peasant (emigrants)
Classical doctrine = economic liberalism
- Classical ideas were liberal in contrast to feudal and mercantilist restrictions
- Today, a classical adherent could also be called a conservative (in America)
Major tenets:
, - Best government is the government that governs least
o Government should only provide: property right enforcement, national defence, public education
- Self-interested behaviour is human nature
- Natural harmony of interest in a market economy
o Exception: Ricardo
- All economic resources and activities are important for classical economists
- Focus on economic laws (explicit economic theories) = universal and immutable
o Law of comparative advantage
o Law of diminishing returns
o Malthusian theory of population
o Law of market (Says law)
o Ricardian theory of rent
o Quantity theory of money
o Labour theory of value
Who benefited?
- Whole society: capital accumulation and economic growth
- Social status for entrepreneurs, merchants and industrialists
- Wage earners profited only in the very long run, when there position got better/less bad
Rapid expansion of output: capitalists reinvested there profits
Government was wasteful and corrupt at that time – therefore: small government
Promotion of the urban labour force, dependent of food product by farmers and sold by merchants
Lasting contribution:
1. The law of diminishing returns
2. The law of comparative advantage
3. The notion of consumer sovereignty
4. The importance of capital accumulation to economic growth
5. The market as a mechanism for reconciling the interests of individuals with those of society
However, problems with laissez-faire:
- Inadequate as public policy to deal with:
o Depressions
o Monopolies (whether natural or not)
o Monopsony power
o External effects of private actions
o Provision of public goods
- Prediction: rental income would rise and profits will fall as the economy advanced
o Failed to consider technological change and the relation between rising productivity and wages
- Labour theory of value
o Failed to fully incorporate the role of utility and demand in the products value
David Hume (1711-1776)
- Forerunner of classical economists (came close to Smith)
- Price specie-flow mechanism
o Hume accepted Locke’s quantity theory of money (price level is determined by the quantity of
money available, given the velocity and quantity of output) (like Cantillon)
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