1 mercantilists and pre-mercantilists econ 205w summer 2006 prof. cunningham

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Mercantilistsand Pre-Mercantilists

ECON 205WSummer 2006Prof. Cunningham

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1500s Rise of the nation-state John Calvin (1509-1564): Prosperity

is Piety Nicolo Machiavelli (1469-1527) and

“The Prince” Separates the church and the state Denies mankind’s desire for freedom Charity has no role for the individual

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1500s and 1600s Elizabethan Poor Law of 1601 Invention of printing with movable type gave rise

to economic literature written by lay people Thomas Wilson (1525-81) wrote Discourse on

Usury (1572) Charles Dumoulin (Latinized as Molinaeus) wrote

Treatise on Contracts and Usury (1546) Denied that interest was forbidden by divine law Suggested public regulation of lending and interest

Influx of gold and silver from the New World

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Jean Bodin (1530?-96) Reply to the Paradoxes of M. Malestroit (1568)

Here Bodin developed the quantity theory in response to a contemporary writer

Sees the abundance of gold and silver as the reason for price increases

May have been influenced by Navarrus (1453-1586). Both were students at Univ. of Toulouse, Navarrus may

have been a teacher of Bodin How do theories like the quantity theory

emerge?

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Rise of Mercantilism Few systematic treatises prior to Wealth

of Nations Phenomenological Term “Political Economy” arises in 1615 Policy orientation Ideals of Renaissance Adam Smith in Book IV of Wealth of

Nations, devotes 200 pages to “the commercial or mercantile system”

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Major Tenets of Mercantilism Gold and silver are most desirable forms of wealth Accumulating these requires a trade surplus Implies a nationalistic view Import raw materials, protect with tariffs against

the importation of an goods that can be produced domestically. Restrict imports of raw materials.

Colonization. Keep colonies dependent. Oppose internal taxes of any kind. Strong central government Large, hard-working labor force is critical

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Whom did the Mercantilists seek to benefit?

Merchant capitalists Kings Government officials (amounts to rent-seeking behavior)

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Validity in its time? The growth of commerce was/is

constrained by liquidity Needed money for wars Increased supply of money makes

tax collection easier Reduces interest rates, making

borrowing and expansion of capital stock easier and cheaper

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Lasting contributions? Influenced attitudes toward

merchants Promoted nationalism Increased the role of chartered

trading companies (Several East Asian countries today

employ mercantilist policies)

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Gerard de Malynes (Belgium, 1586-1641)

Background Views

The economic world was out of control and destabilizing

Suspicious of bankers, lending, usury Thought foreign exchange was some kind of

“cloaked usury” Purely monetary transactions had lost sight of

“just price” Profits should be regulated by the government

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Malynes (2) 1601, wrote 80 page pamphlet called Saint

George for England Allegorically Described 1601, 120 pages, writes a second treatise

Advocates “a certain equality of exports and imports” Never addressed what determines the volume of

imports and exports 1622, Lex Mercatoria

Defends merchants Advocates government quality controls Increased money supply leads to increased prices and

increased business activities

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Edward Misselden (1608-54) Worked at times at East India Company 1622, 130 pps., Free Trade or the Means

to Make Trade Flourish Tries to explain the recession/depression of

the early 1620s Obsessed with the idea that England needs

more specie• Force exports, restrain imports• Advocates “Free Trade”, but that shouldn’t include a

lack of restrictions on imports• Prefers oligopoly?

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Thomas Mun (1571-1641) Director of East India Company Needed to defend East India’s practice of

exporting gold 1621, Discourse of Trade from England

unto the East Indies 1630, England’s Treasure by Foreign Trade

Published posthumously by his son in 1664 Mercantilist view of the wealth of nations Understands quantity theory Taxes are a necessary evil

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Charles Davenant (1656-1714)

Served in government posts Views mercantilist policies as a bid

for political power Saw the benefit of some kinds of

free trade Essay on the East-India Trade, 1696

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Jean Baptiste Colbert (1619-1683)

French Prime Minister under Louis XIV

Bullionist, colonialist, nationalist Disdain for everyone outside the

palace?

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Sir William Petty (1623-87) Self-made man, Latin scholar at age 12 Diverse life and career, genius with a

hard, multifaceted life Made a fortune by buying land from

soldiers leaving Ireland Pioneering statistician Most important economic writer of the

period Some mercantilist sympathies

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Petty (2) Developed concept of national income Disutility theory of interest Backward bending labor supply curve Prefers consumption tax to income tax In Verbum Sapienti (1664) discusses the velocity

of money and its impact on the quantity theory Specialization and division of labor Understand economic rents Relationship of capital to production Labor theory of value

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Physiocrats (1756-1776) Économistes 1756, François Quesnay published

his first article on economics in Grande Encyclopedie

1776, Turgot lost his position in the French government and Adam Smith publishes Wealth of Nations

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Major Tenets “Physiocracy” means “rule of

nature” Laissez faire, laissez passer Emphasis on Agriculture Only tax landowners Viewed the macroeconomy as a

circular flow of goods and money

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Who Benefits? Peasants avoid taxes Businesses helped by reduced

regulation Landowners get hurt by taxes

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Lasting Contributions Established economics as a social

science Tableau Economique Diminishing returns (Turgot) Marginalism Recognition of the issue of shifting

of tax burdens Laissez faire

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Key Ideas Each individual is the best judge of his/her

interest Self-interest leads to common good Private property Role of government Unequal distribution of wealth Advanced capital theory Interest is OK Use of the concept of equilibrium Focus on distribution

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Francois Quesnay (1794-1774) Made a fortune as a court physician, came to economics

in his 60s His model of nature was biological Developed the tableau as analogous to a blood

circulation model Harvey’s theory of the circulation of the blood was

understood at that time Wealth is created and used, circulating through the

economy with perpetuating flows Quesnay wanted to show scientifically the nature of the

economy Believed that nonagricultural production was sterile

(“produit net” can occur only in agriculture)

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Anne Robert Jacques Turgot(1727-1781) Born to nobility 1774 became Finance Minister Implemented numerous reforms Advocated:

Taxing the nobility, stop taxing subsistence-level peasants

People should be free to choose their occupations Allow religious liberty Universal education Create a central bank Increase saving to increase investment

Got a lot of people angry with him!