Chapters 2, 3, and 4
Study Guide by James R. Martin, Ph.D., CMA
Professor Emeritus, University of South Florida
Oser Summary Main Page
Chapter 2: The Mercantilist School (1500-1776)
Overview of Mercantilism
A new system of merchant capitalism evolved as the feudal community with its emphasis on self-sufficiency slowly declined. After 1500, cities, trade, and the use of money expanded, gold was discovered facilitating commerce, navigation was developed, and geographical discoveries were made. As small scale production increased, merchant capitalist provided the connection between producers and consumers. A new body of doctrine was needed to supersede the feudal concepts.
The Essence of the Mercantilist School
1. Mercantilist believed gold and silver were the most desirable forms of wealth. Acquiring bullion was the means to power and riches (Bullionism). A surplus of exports was necessary to obtain hard money.
2. Mercantilist promoted nationalism since only powerful nations could capture and hold colonies, dominate trade routes, and successfully engage in economic warfare.
3. Mercantilist emphasized exporting manufactured goods, importing raw materials without tariffs if they could not be produced at home, protection for manufactured goods, and the restriction of exports of raw materials. The interest of merchants was considered more important than the interest of consumers.
4. Merchant capitalist policies were designed to dominate and exploit the colonies, monopolizing trade for their own benefit. Colonies were to be dependent on, and subservient to their nations. For example, goods imported into Great Britain and the colonies had to move on English ships, and foreign imports to the colonies were restricted or prohibited.
5. Mercantilist believed in free trade within a country (no internal tolls or taxes), although monopoly grants and exclusive trading privileges were acquired when they were available.
6. Strong central governments were favored by mercantilist to enforce the regulation of business. Governments granted monopoly privileges to companies engaged in foreign trade, protected agriculture, mining, and industry with subsidies and tariffs, and insured that internal trade was unhampered by tolls and excessive taxes.
7. The Mercantilist encouraged a large population of people who would work hard for low wages, including laborers, soldiers, and sailors who would fight for the glory of their nations and the enrichment of their masters. Idleness, begging, and thievery were not permissible. During the reign of Henry VIII (1509 to 1547) 7,200 thieves were hanged in Great Britain. The mercantilist doctrine produced wealth for the nation, but most people were excluded.
What Groups of People did the Mercantilist School Serve or Seek to Serve?
The mercantilist doctrine mainly served the merchant capitalists and the kings and their immediate followers. Government officials, judges, enforcement officers also gained from the government regulations.
How was the Mercantilist School Valid, Useful, or Correct in its Time?
Bullionism was useful in the transition between the self-sufficient system of the middle ages to the money and credit economy of modern times. During this early period the rapid growth in commerce required more money in circulation when banking was not sufficiently developed. The mercantilist recognized that more money lowered the rate of interest and promoted business. Their views related to interest helped overcome the medieval ethical and religious scruples about usury. The mercantilist also gave the business man respectability and importance. Business men had previously been considered second-class citizens who were immersed in the muck of business and money. Mercantilist made a permanent contribution by expanding the internal market.
How Did Mercantilism Outlive its Usefulness?
Banking developed as the market economy expanded making real estate, factories, inventories of goods, machinery, and money in checking accounts more important than wealth in gold and silver. The merchant capitalist was replaced by the industrial entrepreneur as the key figure in the business environment. Progress in science, technology, and invention helped people realize that wealth could be obtained not only by dominating and exploiting their neighbors, but by mastering the forces of nature more efficiently, investing more capital, and making labor more productive.
Mun
In 1621 Thomas Mun (1571-1641) published A Discourse of Trade from England unto the East Indies. Mun argued that a surplus of exports could enrich the kingdom. England should use its land to grow hemp, flax, cordage, tobacco, and other things for export in English ships. Although production was subservient to the accumulation of gold, the export of gold should be allowed to pay for the import of goods that would increase the volume of exports. Mun also argued for multilateral rather than bilateral trade.
Malynes
Gerald Malynes (No birthdate -1641) published Lex Mercatoria: or, the Ancient Law-Merchant in 1622. Malynes observed that trade was considered too low for the aristocracy, but too important for the incompetent. He wrote that merchants were the means and instruments to benefit the monarchies and states. Regulation was needed to insure quality goods. He also developed the idea that more money in a country would raise prices and stimulate business. He had a fear of overpopulation which was different from the viewpoint of most mercantilist who encouraged a large population of low-wage workers as noted above.
Davenant
Charles Davenant (1656-1714) published An Essay on the East-India Trade in 1698 in which he developed the bullionist argument. Davenant wrote that home consumption should be small while foreign consumption produced clear and certain profit. A surplus of exports increased the quantity of money causing interest rates to fall, land values to rise and taxes to increase. He favored government regulation of business because merchants could not be trusted. He recognized that investments in ships, buildings, manufactures, furniture, and apparel were riches as much as coins and bullion. An emphasis on too much gold and silver could cause neglect of the arts, labor, and manufactures. Bilateral trade should be enforced between the country and its colonies, but multilateral trade was desirable between equals. Other publications by Davenant include An Essay on the Probable Means of Making the People Gainers in the Balance of Trade in 1699, and Discouses on the Publick Revenues, and On the Trade of England in 1698.
Colbert
Jean Baptiste Colbert (1619-1683) was the French Minister of Finance from 1661 to 1683 under King Louis XIV. Corbert was a bullionist, arch-nationalist, and militarist. He felt that the strength of a country depended on the collection of taxes and the abundance of money. He favored exports, reduced imports and the retention of bullion within the country. Agriculture, trade, and war on land and sea were useful for great purposes. Colonies were useful as markets for French goods and as sources of raw materials. A nation could become richer only at the expense of another country since the production of manufactured goods, and the volume of trade were thought to be relatively fixed. He enforced the feudal system of compulsory labor of peasants (including child labor) and agreed with the feudal contempt for businessmen who were viewed as shortsighted, selfish and greedy. Corbert also viewed monks, nuns, lawyers, and officials as unproductive and canceled seventeen holy days. People were exempted from taxes if they were married early, or fathered ten living children (those who died in war were counted as living). He also attempted to develop a uniform system of weights and measures, but a uniform system based on the metric system was not established until 1789.
Petty
Sir William Petty (1623-1687) was a mercantilist and a man of great wealth and fame. In A Treatise of Taxes and Contributions (1662) he was concerned that the unemployed would starve, beg, or steal, but was opposed to the usual remedies (hanging or exile). Instead he thought they should be employed on roads, making rivers navigable, planting trees, building bridges, mining or manufacturing as an antidote to unemployment (A view advocated by Keynes much later). Petty favored a large population, but he did not recognize the concept of decreasing returns to farming. He supported freer foreign trade, but felt imported goods should be taxed if the same goods could be made at home.
Petty as a Forerunner of Classical Economics
Petty was a founder of the science of statistics. In Political Arithmetick (1690) he pointed out the advantages of the division of labor noting that there was more to be gained from manufacturing than farming. In Verbum Sapienti (circa 1667) he emphasized the importance of the quantity of money and the importance of the velocity of its circulation. He also suggested that there could be too much money in circulation as well as too little. In A Teatise of Taxes and Contributions Perry considered rent as the surplus from land, but he did not separate the return to capital from the return to land. His idea for a labor theory of value was that the value of a bushel of corn would be the same as an ounce of silver if the labor necessary to produce each was the same. In The Political Anatomy of Ireland (1691) he emphasized production rather than labor which was a very unmercantilist viewpoint.
Chapter 3: The Physiocratic School
The Physiocratic school is dated at 1756 when Quesnay published an article in the Grande Encyclopedie. It ended with Smith's Wealth of Nations and Turgot's downfall from his high office in 1776. The name physiocracy was derived from the Greek term meaning the rule of nature.
Overview of the Physiocrats
The Social Background of the School
Physiocracy was a reaction to the corruption and decayed society in France associated with mercantilism. French industry was constrained by local tolls, taxes, and tariffs on the movement of goods. Peasants were forced to work without pay on the public roads and forced to pay dues to the lord when they inherited property or transferred it through sale. Tolls and regulations impeded the grain trade causing surpluses in some areas while people starved a few miles away. The guilds impeded free entry of labor into certain occupations, restricted output, fixed prices, and fought against competition between towns and from other countries.
The Essence of the Physiocratic School
1. The physiocrats developed the idea of natural order and that humans were subject to the laws of nature. Enjoying the fruits of his own labor was viewed as a natural right of man. The term physiocracy means the rule of nature.
2. The physiocrats were opposed to almost all feudal, mercantilist, and government restrictions and promoted laissez faire, laissez passer, a term used by Vincent de Gournay meaning freedom of business enterprise at home and free trade abroad.
3. Only agriculture and possibly mining produced a surplus above the cost of production. Industry, trade and the professions were viewed as useful, but sterile in that they simply reproduced the value consumed.
4. Since only agriculture produced a surplus that went to the landowner, only the landowner should be taxed.
5. They were opposed to the consumption of luxury goods.
6. They analyzed the circular flow of wealth viewing the economy as a whole.
What Groups of People did the Physiocratic School Serve or Seek to Serve?
The physiocrats promoted industry by advocating laissez faire, but their emphasis was on agriculture, capitalistic farmers, and encouraging freer internal grain trade.
How was the Physiocratic School Valid, Useful, or Correct in its Time?
The physiocrats emphasized production rather than exchange as a source of wealth, favored direct rather than indirect taxes, promoted laissez faire and looked at society as a whole. By analyzing the laws that governed the circulation of wealth and goods they were the founders of economics as a science.
How did the Physiocratic Doctrine Outlive its Usefulness?
They were wrong in viewing industry and trade as sterile, that only land could produce a surplus, and that only landowners should be taxed. They promoted the capitalistic farmer, but the industrialist became much more important in the economic growth of the country.
Quesnay
Francois Quesnay (1694-1774) was the founder of the physiocratic school and the court physician of Louis XV. He viewed society as a physical organ where the circulation of wealth and goods was like the circulation of blood in the body. In Tableau Economique (1758) he depicted the circular flow of goods and money in a freely competitive economy, later referred to as a macroeconomic basis. His economic table foreshadowed national income analysis and statistics to describe the economy. He assumed that only farmers produced a surplus, but the surplus came from nature, not the workers. Therefore the landowner had a right to the surplus. Quesnay favored a just price determined by the free market rather than regulation, and argued that an excess of luxury could ruin a nation.
Turgot
Anne Robert Jacques Turgot (1727-1781) received a theological degree but decided to pursue administrative service and became the finance minister of France in 1774 (Colbert's office a hundred years earlier). He introduced antifeudal and antimercantilist measures including freedom of internal grain trade, and a tax that only landowners had to pay. He and other physiocratis were reformers rather than revolutionaries. In Reflections on the Formation and the Distribution or Riches published in 1766 Turgot developed a theory of wages. Competition among workers would lower the wage to the minimum of subsistence (the iron law of wages). He believed that only farmers produced a surplus and the capitalist tenant farmer entrepreneur was capable of efficient farming and reinvesting their profits. Turgot wrote about the law of diminishing returns, and also recognized the possibility of increasing returns in early stages of production when additional units of variable factors were added to a fixed factor such as land.
Du Pont de Nemours
Pierre Samuel Du Pont de Nemours (1739-1817) was a disciple of Quesnay, Turgot and other physiocrats. He advocated the doctrine of free trade in Exportation et importation des grains published in 1764. The name for the school was taken from his book, La physiocratle published in 1767. He emigrated to the United States in 1797.
Chapter 4: The Classical School: Forerunners
The classical school began in 1776 when Adam Smith's book was published and ended in 1871 when W. Stanley Jevons and Carl Menger published papers that were later referred to as neoclassical theory.
Overview of the Classical School
The industrial revolution developed in England with substantial growth in manufacturing, trade, inventions, and the division of labor. By 1776 England was the most powerful country in the world and could allow free trade without fear of competition from other countries. Entrepreneurs no longer had to rely on subsidies, monopoly privileges and tariff protection. Business and industry required a free, mobile, low wage, hard working labor force. Although wages had been regulated in England for centuries, this practice died out in 1762 as wages were kept low by the workings of the free market. The Speenhamland Law of 1795 established a minimum income for the poor, but the system ended in 1834 when a competitive labor market was fully established.
The Essence of the Classical School
The classical school was based on the laissez faire doctrine of personal liberty, private property, individual initiative, and control of enterprise. These ideas were considered economic liberalism at the time, in contrast to the feudal and mercantilist restrictions on choice of occupation, land transfers, trade, and other activities. The main features of the classical school were as follows:
1. Laissez faire. The government is best that governs least. A self-adjusting market guides production, exchange, distribution, and full employment without government intervention.
2. Each individual seeking his own self-interest serves the best interest of society. Ricardo provides an exception to this concept referred to as the "harmony of interests."
3. The classical school added industry as a source of wealth in addition to commerce (from the mercantilists) and agriculture (from the physiocrats).
4. The classical school provided a method of analyzing the economy and the economic laws that determine its behavior.
5. The classical school attempted to promote maximum economic growth and development.
6. The classical school viewed the economy using the macroeconomic approach.
What Groups of People did the Classical School Serve or Seek to Serve?
The classical school gave respectability to businessmen and helped create an economic climate that promoted industry, trade and profit. Society as a whole benefited from its theories that promoted capital accumulation and economic growth. Even wage earners were better off, although their slice of the larger pie was relatively small.
How was the Classical School Valid, or Correct in its Time?
The new classical doctrine justified ending the mercantilist restrictions imposed by governments that were notoriously wasteful and corrupt. Their emphasis on the private sector rather than the public sector helped expand production which was society's greatest need at that time. They enlarged the market by promoting freer international trade and by promoting an urban labor force. They also provided the best economic analysis up to that time, and developed the foundation for modern economics as a science.
North
Sir Dudley North (1641-1691) was perhaps the worlds first prominent free-trader. In Discourses upon Trade published anonymously in 1691 he emphasized that trade was not a one-sided benefit to the country that realizes a surplus of exports, but instead a mutual advantage. International trade would promote wealth even if no gold or silver existed. Wealth should not be measured by precious metals, but by an estate that is growing, either in land, money at interest, or goods in trade. Commerce between nations distributes money according to the needs of trade. North disagreed with the mercantilist practice of granting monopoly privileges to companies engaged in foreign trade, and with the concept that war and conquest enriched a country.
Cantillon
Richard Cantillon (1680?-1734) developed a theory of value and price, emphasized the role of land and labor, supply and demand, and the fluctuation of price around intrinsic value. He recognized the importance of the velocity of circulation of money, and that a faster circulation required a smaller amount. Cantillon preferred a surplus of exports from the production of goods and their sale abroad. Gold and silver mined at home would not serve the same purpose. Instead this would promote imports, raise prices, rents and wages. He was mercantilistic in his emphasis on the use of money in warfare, but regretted that nobles and monks lived in luxury and idleness, and anticipated Malthus on population saying that "Men multiply like Mice in a barn if they have unlimited Means of Subsistence."
Hume
David Hume (1711-1776) was an eminent philosopher, historian, and established as an economist with his essays in Political Discourses published in 1752. He presented the price specie-flow mechanism analyzing the mechanism of international equilibrium that would occur without government intervention. In his Of the Balance of Trade published in 1752 he wrote that an imbalance of trade tends to correct itself. In Of the Jealousy of Trade published in 1758 he disputed the mercantilist concept of trading states as rivals. He also recognized the diminishing marginal utility of added units of wealth, repudiated the idea of defending luxury for making work, and anticipated Malthus in Of the Populousness of Ancient Nations. He was also opposed to the idea that all taxes should fall on the landowner.
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Go to the next Chapter. Chapter 5: The Classical School: Adam Smith (Summary).
Go to Chapter 1 and the links to all Chapters. (Summary).
Related summaries:
Martin, J. R. Not dated. A note on comparative economic systems and where our system should be headed. (Note).
Milanovic, B. 2019. Capitalism, Alone: The Future of the System That Rules the World. Harvard University Press. (Summary).
Piketty, T. 2014. Capital in the Twenty-First Century. Belknap Press. (Note and Some Reviews).
Porter, M. E. and M. R. Kramer. 2011. Creating shared value: How to reinvent capitalism and unleash a wave of innovation and growth. Harvard Business Review (January/February): 62-77. (Summary).
Thurow, L. C. 1996. The Future of Capitalism: How Today's Economic Forces Shape Tomorrow's World. William Morrow and Company. (Summary).