Economic Thought Through the Ages, Lecture 4 with David Gordon - Mises Academy


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Economic Thought Through the Ages, Lecture 4 with David Gordon - Mises Academy

  1. 1. Economic Thought, Lecture 4Mercantilism: How the State Controlsthe Economic System
  2. 2. Mises and Rothbard onPopulation• Last time, we were discussing Rothbard’scriticism of Botero on the law of population.Botero anticipated Malthus• Rothbard rejected the theory that populationgrows faster than food supply. He said thisassumes that two interdependent variables areindependent.• Danny Sanchez pointed out that Mises acceptedpart of Malthus’ doctrine. The existence on aoptimum population follows from the Law ofReturns.
  3. 3. Population Continued• Are Mises and Rothbard in conflict? It doesn’tfollow from the existence of an optimumpopulation that population grows faster than foodsupply. You could believe that there is anoptimum population without accepting the claimRothbard questions.• One difference between Mises and Rothbard isthat Mises believed that, in fact, many societieshave a greater than optimum population; andRothbard didn’t.
  4. 4. Mercantilism• Why is Rothbard talking aboutmercantilism? Although he rejects the“standard” narrative that economics beganwith Adam Smith, he agrees that economictheory needs to oppose mercantilism.• Economic theory developed in part inopposition to mercantilism.
  5. 5. Mercantilism Continued• Mercantilism wasn’t itself a theory. It was anassortments of justifications for the absolute stateand for privileges for particular groups.• “As the economic aspect of state absolutism,mercantilism was of necessity a system of state-building, of Big Government, of heavy royalexpenditure, of high taxes, of (especially after thelate seventeenth century) inflation and deficitfinance, of war, imperialism, and the aggrandizingof the nation-state.”
  6. 6. Significance of AccumulatingBullion• Rothbard makes an extremely importantpoint about the mercantilist policy ofaccumulating gold and silver bullion.• From the point of view of economic theory,this doesn’t make much sense.• But it does make sense from the standpointof the rulers of the state. An accumulationof gold and silver helps them stay in power.
  7. 7. Monopoly Privileges• Besides accumulating gold and silver,mercantilism was characterized by grants ofmonopoly privileges.• It was in essence a way particular groupscould advance their own interests.• Rothbard’s interpretation of mercantilismfollows the classic work of Eli Heckscher,Mercantilism.
  8. 8. Rothbard on Mercantilism• “They were, as Schumpeter called them,consultant administrators and pamphleteers,to which should be added lobbyists. Theirtheories were any propaganda arguments,however faulty or contradictory, that couldwin them a slice of boodle from the stateapparatus.”
  9. 9. Mercantilism in Spain• We are going to be concentrating onmercantilism in France, but first we’ll givea general survey of mercantilism in Europe.• Spain was the most powerful country in theworld in the 16thcentury, but mercantilismhelped to destroy the economy.
  10. 10. Spain Continued• Extensive regulations ruined the Spanishtextile and silk industry.• As if this weren’t enough, more regulationshurt grain farmers to help the Mesta, apowerful association of sheep holders.• Spanish prosperity dried up after the influxof gold and silver lessened.
  11. 11. Mercantilism in France• Rothbard’s discussion of mercantilism in Franceleads him to another vital point.• One way mercantilist monopolies are defended isthat “quality standards”, e.g, in clothmanufacturing have to be preserved. This drivesprices up and keeps goods out of the hands of thepoor.• The aristocracy doesn’t care about this becausethey benefit from the luxury goods.
  12. 12. France Continued• Mercantilist regulations aren’t self-enforcing. They require an extensive stateapparatus. In France, the leading officialswere called intendants.• They used spies to discover violations ofthe regulations. People could be executedfor wearing forbidden clothing.
  13. 13. Effect of Mercantilism in France• “As a result of all these factors, even thoughthe population of France was six times thatof England during the sixteenth century,and its early industrial development hadseemed promising, French absolutism andstrictly enforced mercantilism managed toput that country out of the running as aleading nation in industrial or economicgrowth.”
  14. 14. Mercantilism in England• England under the Tudors and Stuarts also had alot of mercantilist regulations. E.g., the Statute ofArtificers (1563) greatly strengthened the powerof the guilds.• Rothbard stresses that mercantilism was based onforced labor. Idleness by the lower classes wasn’ttolerated.• The regulations weren’t as effective as in France.This helped English economic development later.
  15. 15. Mercantilism In Eastern Europe• The forced labor feature of mercantilismwas even more evident in Prussia,Lithuania, and Poland.• In these countries, the peasants were madeserfs again. They were no longer free toleave the land and had to engage in forcedlabor.
  16. 16. Mercantilism and Inflation• Kings needed money in order to finance theirwars. E.g., “The key to English history in theseventeenth and eighteenth centuries is theperpetual wars in which the English state wascontinually engaged”• In 1694, William Paterson introduced a newmethod of enabling the government to obtainmoney. In return for the government’s granting theBank of England the power to issue bank notes,the bank bought vast amounts of government debt.
  17. 17. The Bank of England• The government in 1696 gave the Bank ofEngland the power to suspendconvertibility. In other words, the bankdidn’t have to meet its contractualobligations. In the wars with France afterthe French Revolution, it did so for twodecades.
  18. 18. The Bank Concluded• “Thus, by the end of the seventeenthcentury, the states of westernEurope,particularly England and France,had discovered a grand new route towardsthe aggrandizement of state power: revenuethrough inflationary creation of papermoney, either by government or, moresubtly, by a privileged, monopolistic,central bank.”
  19. 19. Laffemas• The French mercantilist writers were of very poorquality. E.g., Barthélemy de Laffemas (1545-1612) favored a policy of self-sufficiency.• France should try to produce as much as possibleinternally. This violates a basic principle ofeconomics, benefits from trade and the division oflabor. Laffemas’ argument depended on theMontaigne fallacy. His ideas led to a harebrainedscheme to grow mulberry trees and silk worms.
  20. 20. Laffemas Continued• Laffemas realized that the best way for thestate to accumulate bullion was not toprohibit the export of gold and silver.• Instead, the state should allow free trade inbullion, and the regulate trade so thatbullion in the country would keepincreasing.
  21. 21. French Absolutism• Rothbard has a very negative view of theFrench state in the 17thcentury.• He says, e.g., that Cardinal Richelieu, theChief Minister of Louis XIII, regarded theFrench people as animals. Taxes shouldn’tbe so high that people are discouraged fromworking.• But they shouldn’t be too low, either.
  22. 22. Richelieu on Taxes• “For if the people were too comfortable andcomplacent, it would be impossible tocontain them in the rules of their duty.Richelieu added the revealing comment thatIt is necessary to compare them [thepeople] to mules, who, being accustomed toburdens, are spoiled by a long rest morethan by work .”
  23. 23. Colbert• Colbert, who was in in charge of theeconomic program of Louis XIV, had acontemptuous attitude toward the people.• He thought that merchants were smallpeople who didn’t understand the nationalinterest.• Trade was based on war and conquest.Once again, the Montaigne fallacydominated
  24. 24. Colbert Continued• Colbert tried to coordinate the artists andintellectuals to glorify the king.• Colbert strengthened the French Academyand established other academies forpainting and sculpture and architecture.(The Academy was established byRichelieu.)• Enormous sums were spent on palaces forthe king.
  25. 25. Louis XIV• Louis XIV (1638-1714) is one of Rothbard’s mainaversions.• Louis thought that he owned all the land in thecountry. Everyone else was merely a tenant.• He viewed himself as a god-like figure.• Bishop Bossuet was the chief ideologist of Frenchabsolutism. He compared the king to god.• Rothbard concludes, “Catholic political thoughthad come a long way from the Spanishscholastics.”