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Summary History of Economic Thought
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Summary of the chapters needed to read for the course. Book: History of Economic Thought Radboud University
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Chapter 3 – Mercantilism, Physiocracy, and OtherPrecursors of Classical Economic Thought
Mercantilism
Mercantilismlimthemnasemglvenmtomthemeconoslcmilteratrremandmpractcemofmthemperlodmbetweenm1500-1750.
Themilteratrremprodrcedmfocrieimonmqreitonimofmeconoslcmpoilcymandmwaimriraiiymreiatedmtomampartcriarmlntereit
themserchant-wrltermwaimtrylngmtomprosote.mFormthlimreaion,mtheremwaimofenmconilderabiemikeptclismregardlngm
themanaiytcaimserltimofmpartcriarmargrsentimandmthemvaildltymofmthelrmconciriloni.
Themagemofmsercantilismhaimbeenmcharacterlzedmaimonemlnmwhlchmeverymperionmaimhlimownmeconoslit.
Mercantilismcanmbeitmbemrnderitoodmaimanmlnteiiectraimreactonmtomthemprobiesimofmthemtsei.m Inmthlimperlodmofm
themdecilnemofmthemsanormandmthemrliemofmthemnaton-itate,mthemsercantilitimtrledmtomdeterslnemthembeitmpoilcleim
formprosotngmthempowermandmweaithmofmthemnaton.
Themsercantilitimproceededmonmthemaiirsptonmthatmthemtotaimweaithmofmthemworidmwaimfied.mUilngmthemiasem
aiirspton,mthemichoiaitcimhadmreaionedmthatmwhenmtrademtookmpiacembetweenmlndlvldraii,mthemgalnmofmonemwaim
neceiiarliymthemioiimofmanother.mThemsercantilitimappiledmthlimreaionlngmtomtradembetweenmnatoni,mconcirdlngm
thatmanymlncreaiemlnmweaithmandmeconoslcmpowermofmonemnatonmoccrrredmatmthemeipeniemofmothermnatoni.
m Internatonaimtrademaimamseanimofmlncreailngmweaithmandmpowermofmamnatonmand,mlnmpartcriar,mfocriedm
onmthembaiancemofmtradembetweenmnatoni.
Mercantilitimadvocatedmlncreailngmthemnaton’imweaithmbymilsritaneoriiymencorraglngmprodrcton,mlncreailngm
eiporti,mandmhoidlngmdownmdoseitcmconirspton.mThemweaithmofmthemnatonmreitedmonmthempovertymofmthemsany.
Accordlngmtomsercantilitmthlnklng,mamcorntrymihoridmencorragemeiportimandmdlicorragemlsportimbymseanimofm
tarlffi,mqrotai,mirbildlei,mtaiei,mandmthemilke,mlnmordermtomachlevemamio-caiiedmfavorabiembaiancemofmtrade.
Themfritmsercantilitimargredmthatmamfavorabiembaiancemofmtrademihoridmbemitrrckmwlthmeachmnaton.
Amcentraimfeatrremofmsercantilitmilteratrremlimltimconvlctonmthatmsonetarymfactori,mrathermthanmreaimfactori,marem
themchlefmdeterslnantimofmeconoslcmactvltymandmgrowth.mMercantilitimsalntalnedmthatmanmadeqratemirppiymofm
soneymlimpartcriariymeiientaimtomthemgrowthmofmtrade,mbothmdoseitcmandmlnternatonai.mChangeimlnmthemqrantty
ofmsoney,mtheymbeileved,mgeneratemchangeimlnmthemieveimofmreaimortprt.
Adam Smith:mthemieveimofmeconoslcmactvltymandmltimratemofmgrowthmdependimrponmamnrsbermofmreaimfactori:mthem
qranttymofmiabor,mnatrraimreiorrcei,mcapltaimgoodi,mandmthemlnittrtonaimitrrctrre.mAnymchangemlnmthemqranttymof
soneymworidmlnfrencemoniymthemgeneraimieveimofmprlcei.
BecariemSmithmandmothermciaiilcaimeconoslitimitreiiedmthemreaimforceimthatmdeterslnemthemieveimofmortprt,mthelrm
theorleimfocriedmaisoitmeicirilveiymonmirppiy.mHowever,mbecariemKeynesmesphailzedmthemroiemofmaggregatem
desand,mhemforndmiosemcossonmbondimbetweenmhlimtheorymandmthatmofmthemsercantiliti:mamfavorabiembaiancem
ofmtrademworidmlncreaiemdoseitcmipendlngmandmtherebymraliemthemieveimofmlncosemandmespioysent.
Themvlewmthatmthemiawimofmthemeconosymcoridmbemdlicoveredmbymthemiasemsethodimthatmreveaiedmthemiawimofm
phyilcimwaimanmlsportantmitepmtowardimirbieqrentmdeveiopsentimlnmeconoslcmtheory.
Onemlsportantmdlfferencembetweenmciaiilcaimandmsercantilitcmtheory:m
Themsercantilitimbeilevedmtheremwaimambailcmconflctmbetweenmprlvatemlntereitimandmthemprbilcmweifare.m
Thereforemtheymconilderedmltmneceiiarymformgovernsentimtomchanneimprlvatemieif-lntereitmlntomprbilcm
benefti.
Ciaiilcaimeconoslitimforndmambailcmharsonymlnmthemiyitesmandmiawmprbilcmgoodimaimfowlngmnatrraiiym
frosmlndlvldraimieif-lntereit.
,Influential Precursors of Classical Thought
THOMAS MUN (1571-1641)
Hlimthlnklngmwaimtyplcaiiymsercantilitcmlnmthatmhemconfriedmthemweaithmofmamnatonmwlthmltimitockmofmpreclorim
setaiimandmthereforemargredmformamfavorabiembaiancemofmtrademandmanmlnfowmofmgoidmandmilivermtomietiemthemtrade
baiance.
Hembeilevedmthatmgovernsentmihoridmregriatemforelgnmtrademtomachlevemamfavorabiembaiance,mencorragem
lsportatonmofmcheapmrawmsaterlaii,mencorragemeiportatonmofmsanrfactrredmgoodi,metc.
WILLIAM PETTY (1623-1687)
Hlimeconoslcmwrltngimweremnotmgeneraimtreatieismtheymweremthemreiritmofmhlimpractcaimlntereitimlnmsaterimirchm
aimtaiaton,mpoiltci,msoney,mandmseairresent.
BERNARD MANDEVILLE (1670-1733)
Mandevliie’imiatrlcaimpoesmwaimanmatackmonmthemio-caiiedmientsentaimsorailiti,mwhoiemappeiiatonmrefectim
thelrmbeilefmthatmsorailtymlimnotmsademofmprreiymratonaimprlnclpiei.
Themratonai,mieifihmdrlveimofmhrsanmbelngimworkedmtowardmthemioclaimgoodmbecariemsoraimientsentmtespered
egolismandmpersltedmanmrnderitandlngmofmthemdlfferencembetweenmrlghtmandmwrongmanmofmhowmtomchooiemthem
rlghtmway.
m Seifihneiimwaimamsoraimvlcembrtmthatmioclaimgoodmcoridmreiritmfrosmieifihmactimlfmtheiemactonimwerem
properiymchanneiedmbymthemgovernsent.
TomMandevliie,mthemendmreiritmofmprlvatemvlrtremlimeconoslcmdepreiilon.
Mandevliiemwaimamprremsercantilitmlnmhlimlnilitencemthatmgovernsentmregriatemforelgnmtrademtomenirremthatm
eiportimaiwayimeiceedmlsporti.
Mandevliie’impoiltonmonmiabormlimpartcriariymciearmandmaiarslng:mhemadvocatedmamiargempopriatonmandmchlidm
iabor,mandmhemcondesnedmldieneii.mAmiargempopriatonmwlthmhlghmiabor-force-partclpatonmrateimreiritimlnmiowm
wagei,mwhlchmglveimthemnatonmamcospettvemadvantagemlnmeiportimandmlnternatonaimtrade
Amdownward-iioplngmiabormirppiymcrrve:mhlghermwageimredrcemiabormirppiy.
DAVID HUME (1711-1776)
Hrsemcoridmbemcaiiedmamilberaimsercantilit:mhemhadmonemfootmlnmsercantilis,mbrtmwlthmthemothermiteppedm
forwardmlntomciaiilcaimpoiltcaimeconosy.
InmlnternatonaimtrademtheorymHrse’imcontrlbrtonmhaimbecosemknownmaimthemprlcemipecle-fowmsechanlis.m
Hrsempolntedmortmthatmltmworidmbemlspoiilbiemformanmeconosymtomsalntalnmamfavorabiembaiancemofmtradem
contnroriiy,maimsanymsercantilitimadvocated.
Ifmonemcorntrymhaimamfavorabiembaiancemofmtrade,miosemothermcorntrymormcorntrleimsritmbemhavlngmanm
rnfavorabiembaiance.
Seif-correctonmofmthemtradembaiancei:meiportimwliimdecreaiemandmlsportimwliimlncreaiemformthemeconosymwlthmthem
lnltaimfavorabiemtradembaiancembecariemltimprlceimaremreiatveiymhlghermthanmthoiemofmothermeconoslei.
Hrsemiearchedmformamconnectonmbetweenmeconoslcmfreedosmandmpoiltcaimfreedos.mHrsemsalntalnedmthatmthem
growthmofmeconoslcmfreedosmwentmhandmlnmhandmwlthmthemgrowthmofmpoiltcaimfreedos.
Hrse’imDlctrs:mthatmwatmorghtmtombem(norsatvemitatesenti)mcannotmbemderlvedmfrosmwhatmlim(poiltvem
itatesent).
RICHARD CANTILLON (1680-1734)
Cantiionmwaimpartmsercantilit,mpartmphyilocrat,mandmpartmphyilocrat-ciaiilcai.mHemwaimsodernmlnmthat:
1. Hemitartedmwlthmthemgoaimofmeitabilihlngmbailcmprlnclpieimofmeconoslcimthrorghmthemproceiimofm
reaionlng.
, 2. Hemwantedmtomcoiiectmdatamtomriemlnmthemproceiimofmverlfylngmhlimprlnclpiei.
Cantiion’imieslnaimvlilonmwaimofmamsarketmiyitesmthatmcoordlnatedmthemactvlteimofmprodrcerimandmconirseri
throrghmthemsedlrsmofmlndlvldraimieif-lntereit.mThemkeymactorimlnmthlimieif-regriatngmiyitesmwerementreprenerri
whomprodrcedmioclaimreiritimirperlormtomoneimthatmcoridmbemprodrcedmbymgovernsentmlnterference.
Hlimeipianatonmofmthemforceimthatmdeterslnemprlceimwaimirrprlilngiymsodernmlnmthatmhemdlitngrlihedmbetweenm
sarketmprlcei,mdeterslnedmbymihort-rrnmfactori,mandmwhatmhemcaiiedmlntrlnilcmvaire,miong-rrnmeqrlilbrlrsmprlcei.
Physiocracy
Phyilocratimpercelvedmthemlnterreiatedneiimofmthemiectorimofmthemeconosymandmanaiyzedmthemworklngmofm
nonregriatedmsarketi.
m Beganmarorndm1750.
Themwrltngimofmthemphyilocratcmichooimeipreiimresarkabiymconilitentmvlewimonmaiimsajormpolnti.mTheremaremthree
reaionimformthli:
1. PhyilocracymdeveiopedmeicirilveiymlnmFrance
2. Themldeaimofmthemphyilocratimwerempreientedmovermamreiatveiymihortmperlodmofmtse:m1750mtom1780
3. Phyilocracymhadmanmacknowiedgedmlnteiiectraimieader,mFrangois Quesnay (1649-1774),mwhoiemldeaim
weremacceptedmvlrtraiiymwlthortmqreitonmbymhlimfeiiowmphyilocrati.
Themcorrectmforsriatonmofmeconoslcmpoilcymreqrlredmamcorrectmrnderitandlngmofmthemeconosy.mThemphyilocrati’m
rnlqremldeamconcernedmthemroiemofmnatrraimiawmlnmthemforsriatonmofmpoilcy.mTheymsalntalnedmthatmnatrraimiawim
governedmthemoperatonmofmthemeconosymandmthatmhrsanimcoridmobjectveiymdlicovermthes.
Themphyilocratimfocriedmnotmonmsoneymbrtmonmthemreaimforceimieadlngmtomeconoslcmdeveiopsent.m Inmreactonmtom
themsercantilitcmnotonmthatmweaithmwaimcreatedmbymthemproceiimofmeichange,mtheymitrdledmthemcreatonmofm
phyilcaimvairemandmconcirdemthatmthemorlglnmofmweaithmwaimlnmnatrre.
Prodrctonmforsmiandmcreatedmthemirrpirimthatmthemphyilocratimcaiiedmthemnetmprodrct.
Themphyilocrati’mcontrlbrtonmtomslcroeconoslcmtheorymweremnotmaimilgnlfcantmaimthelrmcontrlbrtonimtom
sacroeconoslcmtheory.mTheymbeilevedmthatmthembailcmsotvatonmformthemeconoslcmactvlteimofmhrsanmbelngim
waimthemdeilremtomsailslzemgaln.mTheymconcirdedmthatmfreemcospettonmiedmtomthembeitmprlcemandmthatmiocletym
woridmbeneftmlfmlndlvldraiimfoiiowedmthelrmieif-lntereit.
Becariemthemphyilocratimbeilevedmthatmamnatrraimordermeilitedmthatmwaimirperlormtomanympoiilbiemhrsanmdeilgn,m
theymconcelvedmofmthemeconosymaimiargeiymieif-regriatngmandmthrimrejectedmthemcontroiimlspoiedmbymthem
sercantilitmiyites.
Thempropermgoaimofmthemgovernsentmwaimtomfoiiowmampoilcymofmialiiezmfalre:mtomieavemthlngimaione.
Spanish Economic Thought
Azpilcueta:mthemqranttymtheorymofmsoneymeipialnimthatmthemkeymfactormcarilngmchangeimlnmthemgeneraimieveimofm
prlceimlimthemqranttymofmsoneymlnmclrcriaton.
, Chapter 4 – Adam Smith
The breadth of Adam Smith
Sslthmwaimlnfrencedmbymhlimteacher,mFrancis Hutcheson (1694-1746),mandmbymDavid Hume (1711-1776).mSslthm
iharedmHrtcheion’imitrongmdliapprovaimofmthemldeaimofmBernardmMandevliie,mwhoiemiatrlcaimityiemhadmglvenmhlim
preientatonmofmthemsercantilitmpoiltonmwldemcrrrency.
Sslth’imconceptonmofmthemicopemofmeconoslcimfoiiowedmthatmofmthemEngilihmsercantiliti.mHemwaimlntereitedmlnm
eipialnlngmthemnatrremandmcarieimthemweaithmofmnatoni.
Smith’s analysis of markets and policy conclusions
TheremaremtwompoiilbiemapproacheimtomthemwrltngimofmAdasmSslth:
1. Eiaslnemthemoveraiimtheoretcaimitrrctrremandmthempoilcymlspilcatonimthatmaremelthermlnherentmlnmthem
theoretcaimiyitesmormitatedmeipilcltiymbymSslth.
2. Eiaslnemthemtheoretcaimitrrctrremlnmdetalimtomevairatemltimlnternaimconilitencymofmiackmthereof.
WemwliimriemthemfritmapproachmbecariemSslth’imlsportancemlnmthemhlitorymofmeconoslcmthorghtmlimamreiritmof:
1. Hlimbroadmrnderitandlngmofmthemlnterconnectedneiimofmthemeconosy
2. Hlimlnfrencemonmeconoslcmpoilcy
Sslth’imgreatmitrengthmaimanmeconoslitmiaymlnmhlimvlilon:
1. Ofmthemlnterdependencemofmthemiegsentimofmthemeconosy
2. Ofmthempoilcleimtombemfoiiowedmtomprosotemthemweaithmofmamnaton
Sslthmadvocatedmialiiezmfalremnotmbecariemhembeilevedmsarketimtombemperfectmbrtmbecariemsarketimriraiiym
prodrcedmbetermreiritimthanmdldmgovernsentmlnterventon.
Poiltvemeconoslci:msater-of-factmreiatonihlpimbetweenmvarlabiei.
Norsatvemeconoslci:mqreitonimofmwhatmihoridmbe.
Conteitraimeconoslcmpoilcymlimjritmanothermwaymofmeipreiilngmthemldeamofmthemartmofmeconoslci.
ThemeconoslcimofmAdasmSslthmandmthemsercantilitimiharemcertalnmbailcmeiesenti:
Itmwaimpoiilbiemtomdlicovermthemiawimofmthemeconosymbymseanimofmhardmanaiyili.mMater-of-fact,mcarie-
and-effectmreiatonihlpimcoridmbemreveaiedmthrorghmiclentfcmlnveitgaton.
Hrsanmbelngimaremratonaimandmcaicriatngmandmiargeiymdrlvenmbymeconoslcmieif-lntereit.
Dlfferencei:
Cospettvemsarketimeilit,mandmwlthlnmtheiemsarketimthemfactorimofmprodrctonmsovemfreeiymtomadvancem
thelrmeconoslcmadvantage.
Amnatrraimproceiimatmworkmlnmthemeconosymcanmreioivemconflctimsoremeffectveiymthanmanym
arrangesentimdevliedmbymhrsanmbelngi.
Themkeymtomrnderitandlngmhowmiosemdegreemofmharsonymandmgoodmproceedmfrosmconflctmandmieif-lntereitmileimln
themactvlteimofmthemcapltailit.mSslthmihowedmthatmcapltailitimaremdrlvenmnotmbymaitrrlitcmsotveimbrtmbymamdeilrem
tomsakemprofti.
Sslthmconcirdedmthatmltmlimwonderfrimhowmthemsarket,mwlthortmpiannlngmormgovernsentaimdlrecton,mieadimtomthem
iatifactonmofmconirsermdeilreimatmthemioweitmpoiilbiemioclaimcoit.
Sslth’imsoitmilgnlfcantmcontrlbrtonmtomeconoslcmtheorymwaimhlimanaiyilimofmthemworklngimofmcospettvem
sarketi.mHemwaimabiemtomipeclfymwlthmgreatermaccrracymthanmprevlorimwrlterimthemsechanlismwherebymthemprlcem
reiritngmfrosmcospettonmworid,mlnmthemiongmrrn,meqraiimthemcoitmofmprodrcton.
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