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Lecture 3-History of Economic Thought
Lecture 3-History of Economic Thought
■ Mercantilism emerged in Europe during the late Renaissance, with its roots stretching
into the 16th century
■ Evolved gradually as nations sought to navigate the economic and geopolitical realities
of the time
■ There was a rise of Humanism (the concern for well-being of humans in the short term)
INTRODUCTION
Rise of Nation-States:
The emergence of powerful nation-states in Europe required:
■ resources to maintain armies, navies, and bureaucracies.
■ governments had to increase their wealth as a means of funding these endeavors
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Technological Advancements:
■ Advancements in shipbuilding, and military technology made long-distance trade
■ technological advances allowed European powers to dominate global trade routes and to
enforce mercantilist policies.
Monetary Developments:
■ The flow of gold and silver into Europe played a significant role in shaping mercantilist
thought.
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Government Intervention:
■ encouraging exports and discouraging imports, especially
through the use of tariffs.
■ imposing tariffs on imported goods to make them more expensive and less attractive to
domestic consumers,
■ providing subsidies to domestic industries to make them more competitive abroad
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Zero-Sum Game:
■ Underlying mercantilist thought was the belief that international trade was a zero-sum
game, where one nation's gain was necessarily another nation's loss.
■ This view encouraged competitive trade practices and often led to trade wars and
colonial competition among European powers.
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German Mercantilism
■ The Austrian lawyer and scholar
Philipp Wilhelm von Hornick, in his
Austria Over AIl, If She Only Will of
1684, detailed a nine-point program of
what he deemed effective national
economy, which sums up the tenets of
mercantilism comprehensively:
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Spanish Mercantilism
■ Spanish mercantilism was heavily influenced by the wealth flowing from its colonies in
the Americas. The Spanish Crown imposed strict control over colonial trade,
■ allowing only Spanish ships to carry goods between the colonies and Spain,
■ The focus was on extracting precious metals, such as gold and silver, which were
believed to be the essence of national wealth and power.
■ However, Spain's heavy reliance on this wealth led to inflation and economic
dependency on other European nations for manufactured goods
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Why?
Spanish mercantilism is a classic example of what can happen when a country relies too
heavily on a single source of wealth.
"Price Revolution" occurred during the 16th and 17th centuries, where the influx of
precious metals from the New World led to widespread inflation in Spain.
As the supply of money (gold and silver) increased, its value decreased, causing prices to
rise. This was a classic case of too much money chasing too few goods, which reduced the
purchasing power of money.
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Example of Mercantilism:
■ Mercantilist doctrine is by no means dead; Neo-Mercantilists
equate political power with economic power with a balance of
trade surplus.
■ Critics argue that many nations have adopted a neo-mercantilist
approach to boost exports and minimize or limit imports.
■ For example, China has recently been criticized for using the
mercantilist system, deliberately keeping its currency value low
against the U.S. dollar in order to sell more goods to the U.S.
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Criticism:
■ Adam Smith and David Hume were the founding fathers of anti-
mercantilist thought; This practice was strongly attacked by
Adam Smith in his 1776 work "The Wealth of Nations". The
criticisms of mercantilism are given elaborately:
■ Mercantilists viewed the economic system as a "zero-sum
game", in which a gain by one country results in a loss by other.
■ Adam Smith & David Ricardo argued that, trade should be a
positive-sum game, or a situation in which all countries can
benefit.
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Conclusion:
■ Mercantilist regulations were steadily removed over the course
of the Eighteenth Century in Britain, and during the 19th century
the British government fully embraced free trade and Smith's
laissez-faire economics.
■ In France, economic control remained in the hands of the royal
family and mercantilism continued until the French Revolution.
The continued pressure resulted in the implementation of
laissez faire economics in the nineteenth century.
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Wealth
■ Thus the Mercantilists had a high regard for money. If we
consider the circumstances of the day, Mercantilists were
justified in attaching greater importance to gold.
■ According to Keynes, "the Mercantilists understood the
important role of money in the economic system.They studied
the effects of an increase in the quantity of money on the price
level and employment.
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Foreign Trade
■ They believed that all those nations which did not possess their
own gold and silver mines could become rich after getting gold
and silver from foreign countries through trade.
■ However, the mercantilists theory of foreign trade has no validity
in modern times. If every nation exports more, there would be an
end to international trade.
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Population
■ Mercantilists encouraged a large population to make the nation
militarily strong and to increase its productive capacity.
■ They believed that a cheap and abundant supply of labor would
keep the cost of production low.
■ This would enable a country to sell its commodity at a lower
price in the international market
■ The mercantilists even encouraged immigration because they
would bring wealth and enrich the country.
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Natural resources
■ The mercantilists wanted to utilize all the natural resources to the
maximum extent to produce more, export more, and import less.
Wages and rent
■ The mercantilists discussed the problems of production only. So they did
not give much importance to the problems of distribution, especially to
wages and rent.
Interest
■ A famous mercantilist writer favoured interest taking for the loans on
the ground that lending helped the poor and young merchants. It also led
to the employment of the savings of the widows.
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Taxation
■ The views of the mercantilists on taxation were interesting
because they were more scientific and ahead of their time.
■ The mercantilists favoured a multiple tax system based on the
principle of "each should pay according to the benefits received
from the state“.
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Theory of value
■ According to the mercantilists the normal value of a commodity
depended on the cost of production.
■ Value was thus considered to be different from price.
■ By the end of the mercantilist period, market value was
recognised. Scarcity also determined the value of a commodity.
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