Transcript 1. Mercantilism

II. Toward the classical economy
1. Mercantilism or the “Nation” as an
economic doctrine.
2. Ideas in transition: Petty, Boisguilbert
Mandeville, Cantillon and Hume.
3. Physiocracy or the agriculture as the
source of wealth.
1. Mercantilism
1.1. Historical context
1. The rise of national states Militar and economic
power to position in the international system.
2. Enlightment and trust in reason to unveil the natural
laws  mechanical visión of the world
3. .
Colonies and
bullion
Global
commerce
1. Mercantilism
1.2. General ideas
Not really a school but a way of approaching and
devising solutions for the economic problems and
for the empowering of the nation.
The more important authors were themselves
merchants ant its writings and pamphlets aimed to
favour their trading companies.
Impetus to sever economics from the purely ethical
and normative approach of medieval times. Justice
and personal salvation gives its way to powerful and
wealthy states
Two periods: from bullion to foreign trade
1. Mercantilism
1.3. Bullionism
Gold and silver were the substance and the definition
of both private and national wealth.
Relevance of the “good money” and rejection of the
debasements because
“bad money expels good” (Gresham’s law)
Credibility of national currency
Balance of payment  the government must
favour the sale of raw materials (inflow of bullion)
Discourage the imports
Authors  Thomas Gresham and John Hales
1. Mercantilism
1.4. The balance of trade
«England’s Treasure by forraign
Trade» (1664)
Wealth, considering both a stock of foreign
1571-1641
currency and a quantity of products.
The main source of the increase in national wealth is a
surplus trade balance  favour the exports of
manufactured commodities* (instead of raw materials)
Favour the importation of raw materials at low costs:
the lower price of imports, the higher the trade surplus.
Cheap inputs lower the cost structure and make
national commodities more competitive.
Money wages must be kept low in order to favour the
competitiveness via moderate prices and prevention
of workers laziness.
1. Mercantilism
1.5. The mercantilist manifest, Philipp von Hörnigk (1684)
1. To inspect the country's soil with the greatest care,
and not to leave the agricultural possibilities of a
single corner or clod of earth unconsidered...
2. All commodities found in a country, which cannot be
used in their natural state, should be worked up
within the country...
3. Attention should be given to the population, that it
may be as large as the country can support...
4. gold and silver once in the country are under no
circumstances to be taken out for any purpose...
5. The inhabitants should make every effort to get along
with their domestic products...
1. Mercantilism
1.5. The mercantilist manifest, Philipp von Hörnigk (1684)
6. [Foreign commodities] should be obtained not for
gold or silver, but in exchange for other domestic
wares...
7. ...and should be imported in unfinished form, and
worked up within the country...
8. Opportunities should be sought night and day for
selling the country's superfluous goods to these
foreigners in manufactured form...
9. No importation should be allowed under any
circumstances of which there is a sufficient supply of
suitable quality at home."
1. Mercantilism
1.6. Summary
Money constitues the essence of wealth
(individual/country) (*) and it is given/constant.
Inner wars, for instance, not disminish the wealth
Commerce as zero-sum game. (*)
Main purpose Empowering the nation and Increase
wealth Positive balance of trade (*); (relevance of
statistics to elaborate balance of trade)
Militarism and Colonialism.
Mutual interest among governants and merchants to
favour protectionism of own industries and commerce.
High population and low salaries. (*)
1. Mercantilism
1.7. Early Critics
Dudley North: “Discourses Upon Trade”;
Free trade benefits to all exchanging parties
and government can’t succeed in limit the
strong market rules.
1641-1691
Gerard de Malynes and Misselden
should we prevent any export of
bullion or allow imports of raw
materials?.
Not directly opposed to free trade
and discourage regulatory rules
1586-1641
1608-1654
1. Mercantilism
1.7. Early Critics
John Locke
“Some considerations on the Consequences of the
Lowering of Interest, and Raising the Value of the
Money” (1691)
1632-1704
Differentiation between value in use and value in exchange
(*); The exchange ratio between two commodities depends
on abundance and scarcity of a good relatively to the
demand for it;
Labour as the foundations of property rights
Cuantitavism (similar to Hume): Inflow of gold increase of
prices national goods more expensive lose of competitiviness
decrease of exports increase of imports
interest cannot be fixed by law, because it depends on the
quantity of money in circulation, as well as on the overall
amount of trade in the kingdom, that is, the level of economic
activity.(**)
1. Mercantilism
1.8. Legacy
(+) Mechanical and causal “vision” o the universe/world  It
is possible to analyze the economy and unveil its general
laws (similar to natural laws).
(+) Relevance of statistics to grasp the economic reality
(+) Evolution toward less radical positions regarding the
balance of trade: mutually beneficial trade, advantages of
the division of labor… which anticipates some ideas of
classical liberalism.
(-) Populist economic and political thinking which consider
that the economy is a zero-sum game; that the trade
barriers will improve the economy; and, that the constant
inflow of bullion will not affect the price level and
competitiveness.
2. Ideas in transition
2.1. Sir William Petty
«Political Arithmetic» (1690)
Policy proposals more than systematic
analysis.
1623-1687
Knowledge based on cuantitativism and empirism is
preferred to subjectivism and Aristotelian logic
Moral (aims) is distinctively different from science
(means)
Metaphor of society resembling a human body 
division of labor
Producers: of necessaries, food and clothing; of
exports; and of luxury goods
Non producers: the governors, the learned
professions and the traders.
2. Ideas in transition
2.1. Sir William Petty
Agriculture yields a surplus  There is activities
different for agriculture and a rent superior to zero
Technical division of labor allows increase productivity (*)
Exchange value of commodities depends on permanent
or long run forces (conditions of production) and
temporary causes (oscillations from the actions of sellers
and buyers)
Land an labour as the ultimate determinant of value  a
production process vertically integrated (**)
Capital not only as a financial magnitude but also as an
input in the production. National wealth more linked to the
organization of production rather than trade…
… Nevertheless, sometimes bullionists views
2. Ideas in transition
2.2. Pierre le Pesant Sieur de Boisguilbert
«Dissertation of the Nature of Wealth, Money
and Taxation» (1704)
1646-1714
Crucial role of agriculture in a society
organised on the principle of division of labour (*)
Foreign trade benefits all trading countries.
An orderly circulation is essential for prosperity
Exchange must take place at appropriate prices (the gain
should be shared in a fair way between buyer/seller)
Prices need to be in proportion to the expenses incurred.
Risk economic crisis:
Excessive taxation in agriculture
Excessive gains at the expense of his trading partners
Excessive expenditure on luxuries could undermine the rest of
the economic activities
2. Ideas en transición
2.3. Bernard Mandeville
«The fable of bees»
Private Vices (self-interest) leads to Public Benefits
(common good) (*)
«Vast Numbers thronged the fruitful Hive;
Yet those vast Numbers made 'em thrive
Millions endeavouring to supply
Each other's Lust and Vanity…
…Thus every Part was full of Vice,
Yet the whole Mass a Paradice
1670-1733
2. Ideas en transición
2.4. Richard Cantillon
«Essai sur la nature du commerce» (1755)
Synthesis on economic discipline.
1680?-1734
Envision economic like Newton el Cosmos 
Mechanism in continuous movement of adjustment
depending on the Law of the self-interest
(Gravitational Law).
Economist in transition:
Partly mercantilist.- Ideas about international trade
Partly physiocrat.- Relevance of agriculture
Partly Classic.- Interdependence among economic
sectors
2. Ideas en transición
2.4. Richard Cantillon
Increase of population as a part of the economics
process.
Explanation about the geographical location of
populations and industries.
Differentiation between the market price and the
intrinsic value (balanced price)
Changes in the speed and quantity of money are
similar.
Influx mechanism of the currency over prices.
Mechanism of price adjustment in international
market.
Analyse of flows on income between economics
sectors.
2. Ideas en transición
2.4. Richard Cantillon
1. Market system
System of interconnected and interdependent agents
(consumers and producers) which automatically adjust
itself (without State’s intervention) following the law of the
self-interest of the entrepreneurs.
Intrinsic value  quantity and quality of land and
incorporate work in a product. That of the market can be
superior due to demand reasons and lack of coordination
between producers-consumers.
Prices  signalling mechanism, which coordinates the
desires of the buyers and the sellers on the market of the
goods and products.
2. Ideas en transición
2.4. Richard Cantillon
2. The role of the entrepreneur
Competition as rivalry between entrepreneurs.
Agents who takes risks (they buy to a certain price and
sell to an uncertain one) and they make the circulation
and the exchange of goods..
3. Money, prices and production
He links the production level either with the quantity of
money required or with velocity.
Distinction between relatives’ prices and the general price
level Depends on the class who is receiving the
income: consumers or savers.
He links interests with offer/demand of money
Metallic money can be lent (low interest) or spent (rise of
the demand and production).
2. Ideas en transición
2.5 David Hume
Proto-utilitarismo.- Moral principles could be
found attending the utility promoted by then.
Not from the perspective of merely adding
utilities…
1711-1776
… but considering if they favor our personal
interests those of our close people.
Empathy.- The capacity to put onself in another’s persons
position.
About dinero
Mechanism of flow of money impossibility of the
mercantilist goal of a permanent surplus balance. Gold
standard, inflation and lost competitiveness.
Benefits of short-term inflation  The time lag between
money and prices increase, increases real money supply to
CP and stimulates the economy..
3. Physiocracy
3.1. Introducción
Physiocracy .- Government of nature
First school of thought? Vision of a systematic
economic reality
Medieval concept of natural law and protection of
individual rights.
Support of absolute power (absolutism), self-interest
and free trade.
IT could be considered the economic aspect of
enlightenment.
3. Physiocracy
3.2. Authors
heterogeneous current limited to France and the period
1756-1778 around the economic salon talks of Mirabeau
The main autor is François Quesnay and
its work«Le Tablau Economique» (1758)
1694-1774
Marques de Mirabeau.Merciere de la Riviére.- «L'ordre naturel et essentiel des
sociétés politiques» (1767)
Dupont de Nemours
Nicolas Baudeau
Guillaume-François Le Trosne
3. Physiocracy
3.3. The natural ordre
There is a natural economic order that determines
the development of a society  public intervention
may accelerate that development (England) or block
(France)
Support the economic freedom (free trade, private
property and self-interest) but ...
«Laissez faire, laissez passer, le monde va de
lui même» (Vincent de Gournay)
... They praise absolutism, while criticizing the
arbitrary power against which it should be opposed
a greater power: the laws of nature.
3. Physiocracy
3.4. The concept of wealth
Product o net surplus.- Difference between inputs
(Advances of capital, land and wages) and outputs..
The increase in net product, increases welfare
Agriculture  only productive sector.
Other sectors "transform" but do not generate
more output of the input they consume.
Capital accumulation increases productivity.
3. Physiocracy
3.5. The economic circuit
Economy  Interdependent relationships of income
and expenses among all the sectors. Depicted in the
Tableau Economique (Quesnay)
Organicism.- If a sector is altered affects the rest.
3. Physiocracy
3.6. The concept of society
The economic system tends to reproduce subsistence
goods and the class structure in a circular process.
Landowners (aristocracy and church) or "parasitic
class". They appropriating net income and spend on
luxury items.
"Industrial" (craft) or "sterile class" workers: includes
merchants.
Farmers or "productive class".
3. Physiocracy
3.7. Policy recommendations
Taxes should tax income and not capital  reduces
the landowner consumption  increases capital and
agricultural productivity  increases income (and
also taxes)
Free trade (with restrictions) .- It allows France
export agricultural products  capital flows to the
agricultural sector  It increases the circular flow of
income according to the "laws of nature"
3. Physiocracy
3.8. Legacy
Critics
Agriculture as the only productive sector and source
of wealth?
contributions
Adam Smith.- direct influence on systematic and
comprehensive approach to economics
Net surplus concept.- Ii is a cornerstone in Classical
Economics and Marx
Circular economy.- Influence on the reproduction
scheme of Marx, Walras general equilibrium, and the
prices Multiplier in Keynes and Sraffa system.