Mercantilism was an economic theory and practice dominant in Europe from the 16th to 18th centuries that promoted governmental regulation of a nation's economy to augment state power over rival nations. Key mercantilist policies included restricting imports, subsidizing exports, limiting domestic consumption, and accumulating monetary reserves through a positive trade balance. Prominent early economists who contributed to mercantilist ideas included Thomas Mun, Jean Bodin, and Colbert, while later critics included Pierre Le Pesant and Adam Smith who helped usher in new economic theories.

1. MERCANTILISM
History of Economic Thought
Lecture 2

2. Mercantilism
• An economic theory and practice;
• Dominant in Europe from the 16th to the 18th century;
• Promoted governmental regulation of a nation's economy for the purpose
of augmenting state power at the expense of rival national powers;
• Economic counterpart of political absolutism or absolute monarchies;
• Includes a national economic policy aimed at accumulating monetary
reserves through a positive balance of trade, especially of finished goods.

3. Mercantilist Policies
• Forbidding colonies to trade with other nations;
• Monopolizing markets with staple ports;
• Banning the export of gold and silver, even for payments;
• Forbidding trade to be carried in foreign ships;
• Subsidies on exports;
• Promoting manufacturing through research or direct subsidies;
• Limiting wages;
• Maximizing the use of domestic resources; and
• Restricting domestic consumption through non-tariff barriers to trade.

6. Economists of the Mercantilism Era
1) SIR THOMAS MORE (Utopia, 1516)
2) NICOLAUS COPERNICUS (Quantity Theory of Money, 1517)
3) JEAN BODIN (Reply to Malestroit, 1568)
4) BARTHÉLEMY DE LAFFEMAS (Les Trésors et richesses pour mettre l'Estat en
splendeur, 1598)
5) LEONARDUS LESSIUS (On Justice and Law, 1605)
6) GERARD MALYNES (Bullionism, 1623)

7. Economists of the Mercantilism Era
7) EDWARD MISSELDEN (CRITIQUE ON BULLIONISM, 1623)
8) THOMAS MUN (Discourse of Trade from England unto the East Indies1621;
England's Treasure by Foreign Trade, 1664)
9) SIR WILLIAM PETTY (Political Arithmetic, 1662)
10)PHILIPP VON HÖRNIGK (Austria Over All, If She Only Will, 1684)
11)JEAN-BAPTISTE COLBERT (Set up national guilds to regulate major
industries)

8. Economists of the Mercantilism Era
12.PIERRE LE PESANT (Le détail de la France; la cause de la diminution de ses
biens et la facilité du remède, 1695)
13.CHARLES DAVENANT (An Essay on the probable Methods of making a
People Gainers in the Balance of Trade, 1699)
14.SIR JAMES STEUART (An Inquiry into the Principles of Political
Economy, 1767)
15.VICTOR DE RIQUETI (Testament Politique, 1747)

9. In Germany…
Johann Johachim Becher’s
Politischen Discurs (1668)

10. In England
Edward Misselden’s critique of bullionism (ca. 1623)

11. Problems of the 17th & 16th Centuries
• Strong gold imports to Europe;
• The quantitative increase and geographical enlargement
of trade with the colonies;
• The war of 30 years and the ensuing contractive
consequences on population and production;

12. Problems of the 17th & 16th Centuries
• The demands by merchants and traders for more support
and/or liberty by the sovereign;
• The scientific revolution;
• The birth of national economy; and
• The ascendancy of individual self-interest and an
autonomous goal-oriented means-ends-rationality as an
impact of the Renaissance and the Reformation.

13. Economy is with unemployed resources…
• An increase in demand leads to the use of idle productive capital,
land, or workers and increases GDP with no necessary effect on
the price level.
• An increase in money supply or its velocity – at that time in the
form of precious metals – can induce growth with no inflationary
side effects.

14. Growth was not seen as conducive for higher consumption levels and general
welfare per head, but higher levels of employment and output were often seen
as functional to make the country independent of the import of manufactured
goods and strengthen the power of the sovereign…

16. Sir Thomas More (1478 –1535)
• English lawyer, social philosopher, author, statesman and
noted Renaissance humanist.
• Published Utopia, which describes an ideal society where
land is owned in common and there is universal
education and religious tolerance, inspiring the English
Poor Laws (1587) and the communism-socialism
movement.

17. More…
• Opposed the Protestant Reformation, in particular the theology of Martin
Luther and William Tyndale.
• Opposed the King's separation from the Catholic Church.
• Refused to acknowledge Henry as Supreme Head of the Church of England
and the annulment of his marriage to Catherine of Aragon.
• Convicted of treason and beheaded after refusing to take the Oath of
Supremacy.

18. More
• Canonized in 1935 as a martyr by Pope Pius XI
• Remembered liturgically since 1980 as a Reformation martry
• Declared in 2000 as the "heavenly Patron of Statesmen and Politicians“ by
Pope John Paul II
• Honored by the Soviet Union for the communistic attitude toward property
rights expressed in Utopia

19. Utopia
• 1516, published in Latin.
• De optimo rei publicae deque nova insula Utopia
(literally, "Of a republic's best state and of
the new island Utopia“)
• A frame narrative primarily depicting a
fictional island society and its religious,
social and political customs.
• Reminiscent of life in monasteries

20. Nicolaus Copernicus (1473-1543)
• Polish astronomer
• Published the first known argument for the quantity
theory of money.
• Published in 1519 the first known form of Gresham's
Law: "Bad money drives out good".

21. Quantity Theory of Money (QTM)
• As gold and silver inflows from the Americas into Europe were being minted
into coins, there was a resulting rise in inflation.
• This led economist Henry Thornton in 1802 to assume that more money
equals more inflation and that an increase in money supply does not
necessarily mean an increase in economic output.
• There is a direct relationship between the quantity of money in an economy
and the level of prices of goods and services sold.

22. The Theory's Calculations
MV = PT (the Fisher Equation)
Where:
M = Money Supply
V = Velocity of Circulation (the number of times money changes hands)
P = Average Price Level
T = Volume of Transactions of Goods and Services

23. Jean Bodin (1530–1596)
• French jurist and political philosopher; member of the Parliament of Paris
and professor of law in Toulouse.
• Best known for his theory of sovereignty.
• Published Reply to Malestroit, containing the first known analysis of
inflation, which he claimed was caused by importation of gold and silver
from South America, backing the quantity theory of money.

24. Reply to Malestroit (1568)
• Réponse de J. Bodin aux paradoxes de M. de Malestroit (1568)
• A tract that offered one of the earliest scholarly analyses of the phenomenon of inflation which
was unknown prior to the 16th century.
• The background to discussion in the 1560s was that by 1550 an increase in the money supply in
Western Europe had brought general benefits. But there had also been appreciable inflation.
Silver arriving via Spain from the South American mine of Potosí, together with other sources of
silver and gold, from other new sources, was causing monetary change.
• Emphasis on the relationship between the amount of goods and the amount of money in
circulation.
• Other factors: population increase, trade, the possibility of economic migration, and
consumption that he saw as profligate.

25. Barthélemy de Laffemas (1545-1612)
• Born in Beausemblant, France in 1545
• Official record of death in Paris in 1612;
rumoured to have actually died on September 23,
1611, after falling from his horse
• The first person to write about
underconsumption.

26. Underconsumption Theory
• Published Les Trésors et richesses pour mettre l'Estat en splendeur (1598), which blasted
those who frowned on French silks because the industry created employment for
the poor.
• First known mention of Underconsumption Theory, later refined by John Maynard
Keynes.
• Recessions and stagnation arise due to inadequate consumer demand relative to the
amount produced. The theory formed the basis for the development of Keynesian
economics and the theory of aggregate demand after the 1930s.

27. Leonardus Lessius (1554–1623)
• A Flemish moral theologian from the Jesuit order.
• Best known for his treatise De iustitia et iure (On Justice and
Law), of 1605
• Studied how banking and commerce were functioning in
Antwerp (then a world business center in rapid expansion),
and his experience gave weight to his ethical solutions to moral
cases dealing with business and finance.
• Praised by modern historians of economics for the subtlety of
his understanding of business matters involving interest.

28. On Justice and Law
• Went through more than 20 editions in the 17th century alone.
• Probably the first in-depth moral theological approach to economic and
financial questions.
• Cited the dependence of the price of an insurance contract on the risk of
the event insured against.
• Gave guidelines for a new "just price" approach, accepting the fact that what
was proposed by Thomas Aquinas was no longer workable in the 16th
century.

29. Edward Misselden (1608–1654)
• English merchant, and leading member of the writers in the Mercantilist
group of economic thought..
• Argued that international movements of money and fluctuations in the
exchange rate depended upon the international trade flows and not the
manipulations of the bankers, which was the popular view at the time.
• Proposed that trading returns should be established for purposes of
statistical analysis, so that the state could regulate trade with a view to
obtaining export surpluses.

30. Free Trade, or the Means to make Trade
flourish (London, 1622)
• Discussed the causes of the alleged decay of trade, which Misselden
attributed to excessive consumption of foreign commodities, exportation of
bullion by the East India Company, and defective searching in the cloth
trade.
• Apparently aimed to disarm the opposition to the regulated companies.

31. Gerard Malynes (1585–1641)
• An independent merchant in foreign trade,
• An English commissioner in the Spanish Netherlands,
• A government advisor on trade matters, assay master
of the mint, and commissioner of mint affairs.
• Showed how an outflow of precious metals could lead
to a fall in prices at home and a rise in prices abroad.
• Suggested that higher import tariffs should be levied
and exports of bullion prohibited, because [he
believed] that a country's growth was related to the
accumulation of precious metals.

32. Misselden and Malynes
In 1622 English merchants Edward Misselden and Gerard Malynes began a
dispute over free trade and the desirability of government regulation of
companies, with Malynes arguing against foreign exchange as under the control
of bankers, and Misselden arguing that international money exchange and
fluctuations in the exchange rate depend upon international trade and not
bankers, and that the state should regulate trade to insure export surpluses.

33. Sir Thomas Mun (17 June 1571 – 21 July 1641)
• An English writer on economics; often referred to as the last of
the early mercantilists.
• Known for serving as the director of the East India Company.
• Took on a prominent role during the economic depression
which began in 1620.
• Published A Discourse of Trade from England unto the East-Indies in
1621, and England's Treasure by Forraign Trade or the Balance of
Forraign Trade is the Rule of Our Treasure (written ca. 1620–1630,
published 1664))

34. Mun’s Proposed Economic Policies
• Imported goods that can be produced domestically should be banned.
• Reduce luxurious imported goods by making Englishmen have a taste for English
goods.
• Reduce export duties on goods produced domestically from foreign markets.
• If no alternatives are available to its neighbours, England should charge more
money for its exports.
• Cultivate wasteland for higher production and to reduce the amount of imports
needed from abroad.
• Shipping should be completed solely on English vessels.

35. Sir William Petty
(26 May 1623 – 16 December 1687)
• English economist, entrepreneur, scientist, inventor and
philosopher.
• Known for his theories on economics and his methods of
political arithmetic.
• Developed the philosophy of 'laissez-faire' in relation to
government activity.
• Influenced by Thomas Hobbes and Francis Bacon

36. Petty and Hobbes
According to Hobbes, theory should set out
the rational requirements for 'civil peace and
material plenty'. As Hobbes had centred on peace,
Petty chose prosperity.

37. Petty, Hobbes and Bacon
Bacon, and indeed Hobbes, held the conviction that
mathematics and the senses must be the basis of all rational
sciences. This passion for accuracy led Petty to famously
declare that his form of science would only use measurable
phenomena and would seek quantitative precision, rather
than rely on comparatives or superlatives, yielding a new
subject that he named political arithmetic. Petty thus carved
a niche for himself as the first dedicated economic scientist,
amidst the merchant-pamphleteers

38. 3 Major Economic Contributions
• Treatise of Taxes and Contributions (1662)
• Verbum Sapienti (1665)
• Quantulumcunque (about money, 1682),

39. Petty’s Economic Thoughts
• On Money: Recognized the 3 functions (standard of value, medium of
exchange, store of value), but gave pride of place to the second function.
• On Value: “That Labour is the Father and active principle of Wealth, as
Lands are the Mother.”

40. Philipp von Hörnigk
(23 January 1640 – 23 October 1714)
• Sometimes spelt Hornick or Horneck
• Von Hörnigk was born in Frankfurt am Main and
died in Passau.
• He wrote in a time when his country was constantly
threatened by Turkish invasion.
• Oesterreich über alles, wann es nur will (1684, Austria
Over All, If She Only Will): laid out one of the
clearest statements of mercantile policy.

41. Nine Principles of National Economy
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...

42. Nine Principles of National Economy
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]
10. Nationalism, self-sufficiency and national power were the basic policies proposed.

43. Jean-Baptiste Colbert
(29 August 1619 – 6 September 1683)
• Served as the Minister of Finances of France
from 1665 to 1683 under the rule of King
Louis XIV.
• Achieved a reputation for his work of
improving the state of French manufacturing
and bringing the economy back from the brink
of bankruptcy.

44. Colbertism
• Enrichment of the country by commerce.
• The State, through Colbert's dirigiste policies, fostered manufacturing enterprises in a
wide variety of fields.
• Authorities established new industries, protected inventors, invited in workmen
from foreign countries, and prohibited French workmen from emigrating.
• To maintain the character of French goods in foreign markets, as well as to afford a
guarantee to the home consumer, Colbert had the quality and measure of each
article fixed by law, punishing breaches of the regulations by public exposure of the
delinquent and by destruction of the goods concerned, and, on the third offense, by
the pillory.

45. Pierre Le Pesant, sieur de Boisguilbert
(17 February 1646 – 10 October 1714)
• French law-maker and a Jansenist
• Held that the wealth of a country consists,
not in the abundance of money which it
possesses but in what it produces and
exchanges.

46. Le détail de la France; la cause de la diminution de ses
biens et la facilité du remède (1695)
• Drew a picture of the general ruin of all classes of Frenchmen, caused by
the bad economic regime.
• The remedy for the evils of the time was not so much the reduction as the
equalization of the imposts, which would allow the poor to consume more,
raise the production and add to the general wealth. He demanded the reform
of the taille, the suppression of internal customs duties and greater freedom
of trade.

47. Charles Davenant (1656–1714)
• A strong supporter of the mercantile theory,
and in his economic pamphlets (as distinct from
his political writings) he takes up an eclectic
position, recommending governmental
restrictions on colonial commerce, but freedom
of exchange at home.

48. Davenant’s Works
• An Essay on the East India Trade (1697)
• Two Discourses on the Public Revenues and Trade of England (1698)
• An Essay on the probable means of making the people gainers in the
balance of Trade (1699)
• A Discourse on Grants and Resumptions and Essays on the Balance of
Power (1701)

49. James Steuart
(21 October 1713 – 26 November 1780)
• Published An Inquiry into the
Principles of Political Economy
(1767) the first book by a Scottish
economist with 'political economy' in
the title.

50. SIR JAMES STEUART
“[just as] economy in general [is] the art of providing for all the wants of a
family, [so the science of political economy] seeks to secure a certain fund of
subsistence for all the inhabitants, to obviate every circumstance which may
render it precarious; to provide every thing necessary for supplying the wants
of the society, and to employ the inhabitants ... in such manner as naturally to
create reciprocal relations and dependencies between them, so as to supply one
another with reciprocal wants.”

51. Victor de Riqueti (1715-1789)
• French economist of the Physiocratic school.

52. Mercantilism
• Made popular by Adam Smith who devoted more than
one fourth of his Wealth of Nations to the history of
economic thought in Book IV on the systems of political
economy.
• For Smith, political economy has two objects: (1) to
provide a plentiful revenue or subsistence for the
people… and (2) to supply the state with a revenue
sufficient for the public purposes.