The Nature of the Wealth of Nations and how to promote it:  Colonization and Mercantilism

Reading:  Schweikart Chapter 2 (pp.31-42)

                 LaHaye, Laura,  "Mercantilism"  Concise Encyclopedia of Economics.  http://www.econlib.org/library/Enc/Mercantilism.html

 

Goal:  Understanding the economic philosophy that promoted colonization during the 18th century and the economic, political and social implications thereof.  The importance of definitions and the power of economic ideas to guide policy. 

“Practical men, who believe themselves to be quite exempt from any intellectual  influences,  are usually the slaves of some defunct economist."

John Maynard Keynes

Outline:

What is mercantilism? What policies did mercantilism promote?  What were effects of mercantilism?

Why did later economists (i.e., Adam Smith) oppose mercantilism?

Is mercantilism dead?

What is Mercantilism? (read Schweikart)

What is wealth?

Why do nations trade?

Is trade a zero sum game?

What are the key ideas of mercantilism?

What are the policies that follow mercantilism?

 

Mercantilism:  Not a school as much as a common theme during 15th to 18th centuries of a group of writers and politicians dominating England, France, Spain, Germany, Holland.  English associated with people such as William Petty, Thomas Mun

Thomas Mun:  1571-1641  Pamphleteer, director of East India Company, “England’s Treasure by Forraign Trade, Chapter II”  “The ordinary means therefore to increase our wealth is by Forraign trade, wherein wee must ever observe this rule:  to sell more to strangers yearly than we consume of theirs in value”

 

Opponents of Mercantilism:  Hume and Smith

Early 18th century opposition to mercantilism arose.  Why do people oppose trade and mercantilism?

1) The effect of gold on the economy; 2) the creation of winners and losers; 3) the role of government.

 

What was the effect of gold on the economy? 

(Source:  History of Economic Thought Websites (see below)

“Between the years of 1480 and 1650, price levels rose steadily in Europe. This phenomenon, sometimes referred to as the "Great Elizabethan Inflation", was puzzling to contemporaries. As the purchasing power of people was being eroded, many peasant revolts ensued - mostly directed against grain merchants. Many, including governments, thought it was due to the monopolies and collusive practices of merchants. It was only in 1568 that the French mercantilist, Jean Bodin, drew attention to the most important economic development in this period: namely, great influx of gold and silver from the Americas into Spain and consequently the rest of Europe. There was, he speculated, thus a direct relationship between the quantity of gold and silver and the price level. Thus was born the first theory of money - the "Quantity" - which has, surprisingly, survived in some form or another until today.”

"Money is not, properly speaking, one of the subjects of commerce, but only the instrument which men have agreed upon to facilitate exchange of one commodity for another. It is none of the wheels of trade: It is the oil which renders the motion of the wheels more smooth and easy. If we consider any one kingdom by itself, it is evident that the greater or less plenty of money is of no consequence." (David Hume, "Of Money", 1752, reprinted in Essays: Moral, political and literary, 1754,p.281)  Source:  http://cepa.newschool.edu/het/essays/money/problem.htm 

Adam Smith seemed to agree with Hume in part. For instance, he writes:

"The gold and silver money which circulates in any country may very properly be compared to a highway, which, while it circulates and carries to market all the grass and corn of the country, produces itself not a single pile of either"  (A. Smith, Wealth of Nations, 1776: p.321)

Thus, both Hume and Smith thus believed money was of no direct consequence on the "real" economy other than improving upon its efficiency. Source:  http://cepa.newschool.edu/het/essays/money/scotmoney.htm

 

Why mercantilism doesn’t increase wealth:

Adam Smith’s critique of mercantilism for monopolies and restriction of trade:

“ The statesman who should attempt to direct private people in what manner they ought to employ their capitals would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person,  but to no council or senate whatever”….”if the produce of domestic can be brought there as cheap as that of foreign, the regulation is useless.  If it cannot, it must generally be hurtful.  It is the maxim of every prudent master of a family never to attempt to make at home what it will cost him more to make than to buy.” (Smith 1776, 400)

 

Adam Smith’s policies

Promoted laissez-faire approach by government meaning:

don’t create monopolies

– don’t mandate low wages for workers

– don’t force people into professions based on ancestry

– don’t allow sub-groups to control the economy

 

Was mercantilism useful?  (Schweikart, Dobb)

Is mercantilism still around?  (Brown)

 

Supplemental Sources:

Dobb, M. (1963). Studies in the Development of Capitalism. new York, International Publishers Co.

Heckscher, E. F. (1935). Mercantilism. London, George Allen & Unwin.

Heilbroner, R. (1972). The Worldly Philosophers:  The Lives, Times, and Ideas of the Great Economic Thinkers. New York, Simon and Schuster.

Smith, A. (1776(1933)). An Inquiry into the Nature and Causes of the Wealth of Nations. New York, E.P. Dutton.  Available fulltext online at: http://www.econlib.org/library/Smith/smWN.html

Internet: 

http://www.boisestate.edu/econ/lreynol/web/PDF_HET/MERCANTILIST.pdf  

Physiocracy:     http://cepa.newschool.edu/het/schools/physioc.htm

Quantity theory of money: http://cepa.newschool.edu/het/essays/money/scotmoney.htm http://www.umanitoba.ca/faculties/arts/economics/Laura_Brown/trade/trade00/merctoaadvantage.pdf  (explains relation of modern and ancient mercantilism and policies).