Mercantilists and Pre-Mercantilists

1. Mercantilistsand Pre-Mercantilists ECON 205W Summer 2006 Prof. Cunningham

2. 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

3. 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

4. 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?

5. 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”

6. 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

7. Whom did the Mercantilists seek to benefit? • Merchant capitalists • Kings • Government officials • (amounts to rent-seeking behavior)

8. 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

9. Lasting contributions? • Influenced attitudes toward merchants • Promoted nationalism • Increased the role of chartered trading companies • (Several East Asian countries today employ mercantilist policies)

10. 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

11. 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

12. 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?

13. 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

14. 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

15. Jean Baptiste Colbert (1619-1683) • French Prime Minister under Louis XIV • Bullionist, colonialist, nationalist • Disdain for everyone outside the palace?

16. 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

17. 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

18. 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

19. 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

20. Who Benefits? • Peasants avoid taxes • Businesses helped by reduced regulation • Landowners get hurt by taxes

21. 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

22. 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

23. 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)

24. 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!