Economic Ideas Before Adam Smith

History of Economic Thought

Outline
• Early Mercantilist writing on value and profits
• The Christian Paternalistic Ethic & Mercantilism
• The Individualist Protestant Ethic & Early Capitalism
• The Physiocrats
• Quesnay’s Contributions
 Merchant Capitalism v. Industrial Capitalism
Mercantilism
*Exchange, Not Production,
Generated Profits:
~ Ownership is denoted by Buying,
Transporting, and Selling.
~Buying and Selling is Recognized as
the Source of Profits.
~Therefore, Mercantilists look to the
Market and Market Prices
(Exchange Values), at the point of
sale, to understand Profit.
Industrial Capitalism
*Production, Not Exchange,
Generates Profits:
~Ownership is denoted by the ownership
of the means of production.
~Production of Commodities is Recognized
as the Source of Profits.
~Therefore, the later Classical Economists
look to the Production Process, seeking
to understand the origins value-added
by Production.
Chapter 2 - 1
Early Mercantilist Writing on Value &
Profits
• Understanding the determinants of commodity prices was central to
understanding the Merchant’s profits.
• Early Medieval thinkers asserted that prices were determined by the
cost of production, including compensation for the labor of
craftsmen.
• The early mercantilists abandoned the cost-of-production approach
and focused on analyzing exchange values.
Three Notions of Mercantilist Value Theory

1. “Value” or “Natural Value” Is the Market Price.

• “The price of wares is the present value” and “the market is the best judge
of value”… “things are just worth…as much as they can be sold for.”
2. The Forces of Supply and Demand Determined Market Value.
• “if the plenty of the goods has brought down the price, the merchant layeth
them up, til the quantity is consumed and the price riseth.”
3. “Intrinsic Value” or Use Value Is the Most Important Casual
Determinant of Market Value.
• “The value of all wares arriveth from their Use; and the dearness and cheapness
of them, from their plenty and scarcity.”
• “The use of things are to supply the wants and necessities of man.”
Chapter 2 -3
Two Sources of Merchant’s profits
1. The inflation of the 16th and 17th centuries

2. Variations in the conditions under which production took place

• Regional/ country differences
• Little mobility of resources, technology, and labor between regions.
• Merchants could buy a commodity in a region/country where it was inexpensive and sell it in a region/country
where it was expensive.
• Changes in market prices are due to changes in the general willingness to purchase particular
commodities. (Demand side)
• Supply-side analysis is scant.
• At a given level of demand for a commodity, scarcity would affect prices.

For early mercantilists, it is clear that control over the conditions affecting
the supply of commodities was the main way to attain and perpetuate
high profits.
 Merchant Capitalists v. Capitalists

Mercantilists Capitalists
*Favored Monopoly and *Accept Competition and Seek
Strongly Aligned with the to Break from the State:
Interests of the State: ~Break from the Christian
~Acceptance of market Paternalistic Ethic toward an
restrictions. Individualistic Ethic (Protestant
Ethic)
~Functioning within the context
of the Christian Paternalistic ~Prices and Profits arise from
Ethic. Production.

Chapter 2 - 2
 The Christian Paternalistic Ethic in the Age of Mercantilism
POOR LAWS 1531 Attempt to Deal with Unemployment, Poverty, and
Misery.
1536Each individual parish responsible for poor.
1572Establishment of “poor rate” tax to accrue funds.
1576“Houses of Correction” for “Incorrigible Vagrants”
as well as parishes being provided with raw
materials for potential manufacture by paupers and vagrants.
1601Tudor effort to unify earlier poor laws.

RULES AND 1563 The Statute of Artificers: Specifying

REGULATIONS conditions of employment, length of
apprenticeships, and maximum wage rates.

These laws “were predicated upon the idea that poverty, instead of being a
personal sin, was a function of the economic system.” Chapter 1 - 5
 Later Mercantilist Writing & the
Philosophy of Individualism
Two economic developments that rendered mercantilism unsatisfactory:
1. The spread of commerce and growing competition reduced price differences
between regions and nations.
• Reduced profit potential for great trading companies
2. As potential profits from price differences alone were reduced, there occurred
an integration of capitalist over both production AND commerce.
• the putting-out system and craft guilds
Early 17th Century: Producer-capitalists began moving into the arena of commerce.
• The interests of the budding capitalist class were frequently opposed to the
interests of the older-merchant capitalists.
Two Important Changes in Economic
Ideas
1. The rejection of paternalistic views of the state and state
regulation
• Toward a new philosophy of individualism
• Hobbes’s Leviathan (1651): all human motives- even compassion- are
just self interest in disguise.
2. Shift from the idea that prices and profits were determined
primarily by the forces of supply and demand and utility
• Toward a view that prices were determined by the conditions of
production.
• Profits originated in the production process.
The Protestantism & the Individualist Ethic

• Conservative on most social issues

• Men are justified by “Faith” Not “Works”
o While Works required the Church, Faith was “nothing else but the truth of the
heart.” A Reliance upon Private Conscience!
o While Christian Paternalism distrusted riches, promoting the needless
dissipation of wealth, the Protestant Ethic stressed “asceticism and
abstemious frugality.”
o Securing salvation and glorifying god achieved through economic expansion

Chapter 2 - 4
Economic Policies of Individualism
• Individualist Mercantilist writers detested state-granted monopolies &
felt that a competitive market would benefit society most if prices
fluctuated freely and found their own proper level (market-equilibrium).
• Restrictions on production and trade within a nation are harmful to
everyone
• Mandeville (1714): selfishness, greed, and acquisitive behavior all
contribute to industriousness and a thriving economy.
• Profit Seeking could be effective only in a society based on the protection
of private property rights and the enforcement of contractual
commitments between individuals.
 Beginnings of the Classical Theory of
Prices & Profits
• Late 17th century Britain: revival of older producer’s cost approaches to value
• Emphasis on production costs.
• The creation of a “free” labor force
• The division of labor (specialization) productivity increases
The view that increased productivity came from:
1. Natural resources are commodities with exchange value only after labor had transformed
them into products that have use value.
2. Exchange of commodities= the exchange of different specialized labor embodied in those
commodities.
• If labor is the most important determinant of prices, labor must be the source of profits
• Profit is the surplus of production over the consumption needs of workers
 The Physiocrats Reforms

• A French school of economists/social reformers, disciples of Francois

Quesnay (1694-1774)
• Expressed ideas from Quesnay’s Tableau Economique
• Belief: Societies were governed by natural law and France’s problems were
a result of failure of the French rulers to understand this natural law.
• Political Reforms:
• Abolition of Guilds.
• Removal of Tariffs, Taxes, Subsidies, Restrictions, and Regulations.
• Replacement of large-scale farming with small-scale farming.
• Single, Nationwide tax on Agriculture.
Chapter 2 - 5
Francois Quesnay’s Contributions
The Tableau Economique is a model of an economy that shows the processes of
production, circulation of money and commodities, and the distribution of income.
• surplus was a gift of nature and only extractive and agricultural production would
allow human labor to produce a surplus
• Three classes: the productive class, the sterile class, and the idle class.

Three main contributions:

1. Productive, Unproductive Labor and Economic Surplus.
2. Mutual Interdependencies of Production Processes
3. Circular flows of money and commodities as well as the economic crises associated
with the hoarding of money.
Chapter 2 - 6
Concluding remarks
• Not many writers before Smith wrote elaborate analyses of the
economic processes of capitalism, but this is attributed to the fact
that they were writing during a time of socioeconomic transition.
• By the late 18th century, capitalism becomes more apparent and
thinkers beyond this point built on and refined the ideas of their
predecessors.
• Despite enormous changes since the 16th century, capitalism
continues to rest on many of the same social, political, legal, and
economic foundations on which it was established.