ECN 3111

1. ECN 3111 History of Economic Thought THE MERCANTILIST SCHOOL

2. Introduction • Prior to 1500s the economic writings were rather loose and scattered • The mercantilist school started around 1500 • The school marks the end of the feudal period and the beginning of the capitalists era. • Between the period 1500 and 1776 is known as the emergence of the market society (industrial revolution started in England in 1750, Watt’s steam engine was invented in 1796)

3. The Mercantilist School • Mercantilist signifies merchant or trade. • It appeared between the middle ages and the period of the triumph of the laissez-faire.

4. The Mercantilist School- Brief History • Self-sufficiency of the feudal community slowly gave way to the new system of merchant capitalism • How? • cities begin to grow and become more important. • Trade flourished between cities and countries. • The use of money expanded. • Discovery of gold

5. The Mercantilist School- Brief History – (continue) • Great geographical discoveries – based in part on the development of navigation which extend the sphere of commerce. • Production was on small scale – but increasingly the merchant interceded between producer and consumer • National states were raising, most powerful of them acquire colonies and sphere of influence.

6. The Mercantilist School- Brief History – (continue) • It is not surprising that a body of doctrine evolved, and superseded the feudal concepts, promoted nationalism, gave new dignity and importance to the merchant, which justified the policy of economics and military expansion. • Hence, this body of doctrine became the mercantilist school.

7. Major Tenets/principles of the Mercantilist School • Gold and silver are the most desirable form of wealth. • Equate the wealth of the nation with the amount of gold and silver bullion it possess. • Gold and silver bullions are valued to achieve power and riches • Surplus of exports are necessary to generate payments in hard money.

8. Major Tenets/principles of the Mercantilist School – (continue) • Nationalism. • All countries could not simultaneously export more than they imported. • One’s own country promote export to accumulate wealth at the expense o their neighbors. • Hence, this can only be done by powerful nations – that can capture and hold colonies, dominate trade routes, win wars, and compete successfully in international trade. • This is a static concept of economic life –there is a fixed quantity of economic resources in the world – to increase one’s resources at the expense of another.

9. Major Tenets/principles of the Mercantilist School – (continue) • Duty free importation of raw materials that could not be produced domestically. • Protection for manufactured goods produced domestically and restrict export of raw materials. • “the fear for goods” – emphasis for exports and reluctance in imports. • Reluctance in imports reduce availability of goods for consumption at home. • Merchants received more gold in exchange for their exports. • Prohibition of export of raw materials keeps prices of finished exports low.

10. Major Tenets/principles of the Mercantilist School – (continue) • Colonization and monopolization of colonial trade. • Merchant capitalists like colonization and keep the colonies eternally dependant upon subservient to the mother country. • E.g. Colonial manufacturing was curbed or outlawed , so that the territories remain as the suppliers of raw cost of raw materials and importers of the manufactured goods. • Foreign imports into the colonies are restricted or prohibited.

11. Major Tenets/principles of the Mercantilist School – (continue) 5. Opposition to internal tolls, taxes and other restrictions on the movement of goods. • Mercantilists writers and practitioners agree that tolls and taxes obstruct (throttle) the flow business enterprise and drive the up the price of the country’s export. Case of Elbe River in 1685. (shipments of sixty planks from Saxony to Hamburg required the payment of fifty-four planks at the toll stations along the way. Finally only six plank arrived at the destination.) • Mercantilist prefer monopoly grants and exclusive trading privileges.

12. Major Tenets/principles of the Mercantilist School – (continue) • Strong central government to promote the goal of the mercantilist. • Govt. grant monopoly privileges to engage in foreign trade • Restrict entry into business at home to limit competition. • Agric., mining and are promoted with subsidies and protected from imports via tariffs. • Maze of regulations governing the production of goods to protect the reputation of the country.

13. Major Tenets/principles of the Mercantilist School – (continue) • Stressed on the importance of large, hard-working population. • Labour supply high and wages very low. the advantage: • Enable lower prices on export, which increase the inflow gold • Reduce idleness and promote greater participation in the labor force.

14. Whom Did the Mercantilist School Benefit or Seek to Benefit? • The doctrine benefited the merchant capitalist benefited the those who were most powerful, • It benefited the kings, government officials and merchant mercantilist . • Mercantilism can be best understood as the extreme “rent seeking behavior” – attempts by private parties to increase their profits by securing favorable laws and regulations from government.

15. Mercantilist’s Tenets of Lasting Contribution • Lasting contribution to the economy: • Importance of international trade – developed the economy and accounting notion what is now known as the balance of payments between nation and the remainder of the world. • Indirectly they contribute towards economic development. • Indirectly promoting nationalism – Central govt. regulations are necessary when uniform weights, measures coinage and laws are concerned.

16. Mercantilist’s Tenets of Lasting Contribution - continue • The privileged chartered trading companies, ancestors of modern corporation, help transform the economic organization of Europe by bringing new products and providing new outlets for manufactured goods and furnishing incentives for growth of capital investment. • Expanding internal markets, promoting free movement goods, establishing uniform laws and taxes, and protecting people and goods in transit within and between countries.

17. The Famous Mercantilist • Thomas Mun (1571-1641) • Gerard Malynes ( -1641) • Charles Davenant (1656-1714) • Jean Baptiste Colbert (1619-1683) • Sir William Petty (1623-1687)

18. Thomas Mun (1571 – 1641) • Son of a British dealer in textiles • Acquired his wealth and reputation while he was a merchant in the Italian and Near Eastern trade. • Director of the East India Company. • He was involved in the controversy over company policy of exporting gold. In 1621 he published Discourse of Trade from England unto the East Indies – argued as long as total export >total import the drain of species from a country in any one trade areas did not matter.

19. Thomas Mun (1571 – 1641)-continue • In 1630 he wrote his famous exposition of the mercantilist doctrine, England’s treasure by Foreign Trade. • In it he wrote that the means to enriched the kingdom – it lay neither in production nor accumulation of capital goods, but rather in export surplus. • In order to export one must produce but in subservient to the accumulation of gold.