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History of Economics summary Nathalie VinkChapter 3. Mercantilism, Physiocracy, and other precursors of classical economic thought
The 150-year period from 1600 to 1750 was characterized by an increase in economic activity.
Feudalism, with its economically, socially, and politically self-sufficient manors, was giving way to
increase trade, the growth of cities outside the manor, and the growth of the nation-state.
Production of goods for the market became more important, and land, labor and capital began to be
bought and sold in markets. Is groundwork for the Industrial Revolution.
During this period, economic thinking developed from ideas about individuals, households, and
producers to a more complicated view of the economy as a system with laws and interrelationships
of its own. There are three main heading: mercantilism, precursors of classical economic thought and
physiocracy.
Mercantilism
Mercantilism is in the period between 1500 and 1750. The most significant contributions were made
by the English and the French.
Economic theory of mercantilism was the work of merchant businessmen. The literature focused on
questions of economic policy and usually related to a particular interest the merchant-writer was
trying to promote. For this reason, there were questions about the validity of their conclusions.
However, throughout the mercantilistic period, both the quantity and quality of economic literature
grew.
Every person his own economist
Every person was his own economist. Each writer tended to concentrate on one topic, and no single
writer was able to synthesize these contributions impressively enough to influence the subsequent
development of economic theory. Economics had not yet found a home in university, it was largely
studied by men of affairs who wrote pamphlets about the particular economic problems that
concerned them.
Power and wealth
Mercantilism can best be understood as an intellectual reaction to the problems of the times.
The mercantilists tried to determine the best policies for promoting the power and wealth of the
nation.
The mercantilist proceeded on the assumption that the total wealth of the world was fixed. Using the
same assumption, the scholastics had reasoned that when trade took place between individuals, the
gain of one was necessarily the loss of another. The mercantilists applied this reasoning to trade
between nations, concluding that any increase in the wealth and economic power of one nation
occurred at the expense of other nations. They focused on the balance of trade between nations.
The goal of economic activity was production. For the mercantilists, the wealth of the nation was not
defined in terms of the sum of individual wealth. Increasing wealth was by encouraging production,
increasing exports, and holding down domestic consumption. A plentiful supply of goods within a
country was considered undesirable. The mercantilists advocated low wages in order to give the
domestic economy competitive advantages in international trade. They believed that higher wages
would cause laborers to work fewer hours per year, and national output would fall.
Thus, when the goal of economic activity is defined in terms of national output and not in terms of
national consumption, poverty for the individual benefits the nation.
Balance of trade
Countries should encourage exports and discourage imports by means of tariffs, quotas, subsidies,
taxes etc. to achieve a favourable balance of trade.
Historians of economic thought disagree over the nature and significance of the balance of trade
doctrine in mercantilist literature. However, many early mercantilists argued for a favourable balance
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,of trade because it would lead to a flow of precious metals into the domestic economy to settle the
trade balance.
The first mercantilists argued that a favourable balance of trade should be struck with each nation.
However, a number of writers argued that only the overall balance of trade with all nations was
significant.
Money and mercantilism
Early mercantilists were very impressed with the significance of the tremendous flow of precious
metals into Europe. However, later mercantilists did not subscribe to this view and were able to
develop useful analytical insights into the role of money in an economy. Jean Bodin (1569)
recognized the relationship between the quantity of money and the general level of prices. He
offered five reason for the rise in the general level of prices in Western Europe, the most important
begin the increase in the quantity of gold and silver there resulting from discovery of the New World.
Nonetheless, in the early 1500s there was no understanding of the consequences of trade balances
between nations and of increases in the money supply. By the middle of the 18 th century, progress
had been made in understanding these issues.
A central feature of mercantilist literature is its conviction that monetary factors are the chief
determinants of economic activity and growth. Mercantilists maintained that an supply of money is
essential to the growth of trade. They believed changes in the quantity of money generate changes I
the level of real output.
All this would change with the advent of Adam Smith and classical economics, which would contend
that the level of economic activity and its rate of growth depend upon a number of real factors. Any
changes in quantity of money would influence only the general level of prices and not output and
growth.
Modern analysis of mercantilism
Smith and other classical economists stressed the real forces that determine level of output, theories
of the mercantilists focused almost exclusively on supply.
Keynes discussed the mercantilists. He was sympathetic to their underconsump-tionist views and
declared sound their belief that increases in the quantity of money would increase output. The
mercantilists held that a favourable balance of trade would increase domestic spending and thereby
raise the level of income and employment.
Mercantilists were driven by profit motives to use government to gain economic privilege for
themselves. They can charge higher prices because of this.
Theoretical contributions of mercantilists
The study of mercantilism by historians of economic theory demonstrates that from about 1660 to
1776 the quantity and quality of economic analysis increased.
The most significant accomplishment of the later mercantilists was the explicit recognition of the
possibility of analysing the economy.
The view that the laws of the economy could be discovered by the same methods that revealed the
laws of physics was an important step toward subsequent developments in economic theory.
Many mercantilists saw a highly mechanical causality in the economy and believed that if one
understood the rules of this causality, one could control the economy. Legislation could positively
influence the course of economic events and that economic analysis would indicate what forms of
government intervention would affect a given end. Mercantilists realized that government
interference must not be haphazard the law of supply and demand.
Many of the later mercantilists became aware of the serious analytical errors of their predecessors.
They recognized that specie is not a measure of the wealth of a nation, that is was not possible for all
nation to have a favourable balance of trade, that no one country could maintain a favourable
balance of trade over the long run, that trade can be mutually beneficial to nations, and that
advantages will accrue to nations that practice specialization and division of labor.
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,The mercantilists believed there was a basic conflict between private interests and the public
welfare. Classical economists, on the other hand, found a basic harmony in the system and saw
public good as flowing naturally from individual self-interest.
Influential precursors (voorlopers) of classical thought
During the mercantilist period, the ideas that would become the focus of the classical school were
germinated. Period is from 1500 till 1750.
Thomas Mun
Mun was according to Adam Smith a leading mercantilist. Mun was a director of the East India
Company, which had been criticized for two things that some writers found undesirable: (1) England
imported more from India than it exported, and (2) England sent precious metals to India to pay for
imports. It is often said that Mun’s 1664 book is the classic of English mercantilistic literature.
Mun asserted in the title of his book that England’s treasure was gained by foreign trade. His thinking
was typically mercantilistic in that he confused the wealth of a nation with its stock of precious
metals and therefore argued for a favorable balance of trade and an inflow of gold ad silver to settle
the trade balance. He thought the same as the mercantilists.
But he pointed out that even though a favorable balance of trade with all nations was desirable and
an outflow of precious metals to all nations was undesirable, the unfavourable balance of trade with
an export of precious metals to India was beneficial to England in that such practices enlarged its
trade balances with all nations and, thereby, its inflow of gold and silver.
William Petty (1623 – 1687)
He was the first economic writer to advocate the measurement of economic variables. He discussed
the methodology of political arithmetic.
Petty was the first to explicitly advocate the use of what we would call statistical techniques to
measure social phenomena.
Petty’s seminal insight that ideas should be expressed in terms of numbers, weight, and measure and
that only arguments that have visible foundations in nature should be accepted is the cornerstone of
modern thinking in economics.
Bernard Mandeville (1670-1733)
Mandeville wrote the Fable of the Bees, with his satirical poem he attacked on the so-called
sentimental moralists, whose appellation reflects their belief that morality is not made of purely
rational principles. In their view, morality consists of emotions or sentiments as well as human
reason.
Mandeville argued that selfishness was a moral vice but that social good could result from selfish acts
if these actions were properly channelled by the government.
Mercantilistic beliefs incorporated a fear of goods, a concern with overproduction and
underconsumption. Individual saving was undesirable because it led to lower consumption, lower
output, and lower employment.
Mandeville was a pure mercantilist in his insistence that government regulate foreign trade to ensure
that exports always exceed imports.
Mandeville advocated a large population with high labor-force-participation rates because that
results in low wages, which gives the nation a competitive advantage in exports and international
trade. Low wages also ensure an adequate supply of labor.
One of Mandeville’s major points is that one should accept men and women as they are and not try
to moralize about what they should be.
The message of the mercantilists was the focus on power for the state and production of goods with
little concern for increasing consumption on the masses.
David Hume (1711 – 1776)
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, Hume was a liberal mercantilist. In international trade theory Hume’s contribution has become
known as the price specie-flow mechanism. Hume pointed out that it would be impossible for an
economy to maintain a favorable balance of trade continuously. A favorable balance of trade would
lead to an increase in the quantity of money. An increase in the quantity of money would lead to a
rise in the level of prices in the economy with the favorable balance of trade. Exports will decrease
and imports will increase because its prices are relatively higher than those from other economies.
The opposite tendencies will prevail in an economy with an unfavourable balance. This process will
ultimately lead to a self-correction of the trade balances.
According to mercantilists, an increase in the money supply could increase real output. The classicals
say that real output depend on real forces. Changes in the money supply would change only the
general level of prices. Hume believed that although the absolute level of money in a nation would
not influence real output, a gradual increase in the money supply would lead to an increase in
output.
Hume had still got two other ideas: He searched for a connection between economic freedom and
political liberty. Hume maintained that the growth of economic freedom went hand in hand with the
growth of political freedom. And he was a precursor of the distinction made later by Nassau Senior,
John Neville Keynes, and Lionel Robbins concerning the difference between positive and
normative statements.
Richard Cantillon (1680 – 1734)
His book was described as ‘the first systematic treatment in political economy’ and ‘the cradle of
political economy.’
Cantillon himself acknowledged the influence of John Locke, for his theory of money, and William
Petty, for his emphasis on the importance of measuring economic phenomena.
Cantillon was modern in that (1) he started the goal of establishing basic principles of economics
through the process of reasoning, and (2) he wanted to collect date to use in the process of verifying
his principles.
Cantillon’s seminal vision was of a market system that coordinated the activities of producers and
consumers through the medium of individual self-interest. Cantillon was able to point to the
adjustment processes as demands, costs, technology, and other factors change.
Physiocracy
Physiocrats are a group of French writers. They perceived the interrelatedness of the sectors of the
economy and analysed the working of nonregulated markets.
Physiocracy began around 1750. The writings of the physiocratic school express remarkably
consistent views of all major points. There are three reasons for this. (1) Physiocracy developed
exclusively in France. (2) The ideas of the physiocrats were presented over a relatively short period of
time, from 1750 – 1780. (3) Physiocracy had an acknowledged intellectual leader, Frangois Quesnay,
whose ideas were accepted virtually without question by his fellow physiocrats.
Natural law
The physiocrats developed their economic theories in order to formulate correct economic policies.
The physiocrats’ unique idea concerned the role of natural law in the formulation of policy. They
maintained that natural laws governed the operation of the economy and that humans could
objectively discover them.
The interrelatedness of an economy
The physiocrats achieved significant insights into the interdependence of the various sectors of the
economy on the levels of both macro- and microeconomic analysis.
The major concern of them was with the macroeconomic process of development. The physiocrats
wished to discover the nature and causes of the wealth of nations and the policies that would best
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