__UG_B.A._Economics (English)_136 54 History of Economic Thought_BA (Economics)_6176.pptx

B.A. (Economics)
V - Semester
136 54
HISTORY OF ECONOMIC THOUGHT
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SYLLABI-BOOK MAPPING TABLE
History of Economic Thought
Syllabi Mapping in Book
Unit-1: Introduction: Nature - Approaches - Significance of History of
Economic Thought.
Unit-2: Mercantilism: Main Characteristics - Thomas Mun.
Unit-3: Physiocracy: Natural Order - Primary of Agriculture - Social
Classes - Tableau Economique - Taxation.
Classical School -I: Adam Smith - T.R. Malthus - David Ricardo -
J.S. Mill - J.B. Say.
Classical School -II: Alfred Marshall - J.A. Schumpeter - Pigou.
Unit-4:
Unit-5:
Unit-6: Socialism: Introduction - Role - Karl Marx.
Unit-7: Schools of Socialism: Different Schools of Socialism: Utopian -
Christian.
Fabian - Syndicalism - Guild Socialism.
Unit-8:
Unit-9: Institutional Economics: Gunnar Myrdal - Thorstein Veblen.
Unit-10: Romesh Dutt - Wesley Clair Mitchell.
Unit-11: John Maurice Clark - John Kenneth Galbraith.
Unit-12: Indian Economic Thought I: Thiruvalluvar - Gokale - Naoroji -
Ranade.
Unit-13: Indian Economic Thought II: Nehru - Gandhi - E.V. Ramasamy -
Amartya Sen.
Unit-14: Welfare Economics: Meaning - Education - Health - Poverty.
Unit 1: Introduction to
Economic Thought
(Pages 1-20)
Unit 2: Mercantilism
(Pages 21-42)
Unit 3: Physiocracy
(Pages 43-60)
Unit 4: Classical School-I
(Pages 61-100)
Unit 5: Classical School-II
(Pages 101-120)
Unit 6: Socialism
(Pages 121-136)
Unit 7: Schools of Socialism-I
(Pages 137-146)
Unit 8: Schools of Socialism-II
(Pages 147-158)
Unit 9: Institutional Economics-I
(Pages 159-168)
Unit 10: Institutional Economics-II
(Pages 169-178)
Unit 11: John Maurice Clark and John
Kenneth Galbraith
(Pages 179-188)
Unit 12: Indian Economic Thought I
(Pages 189-230)
Unit 13: Indian Economic Thought II
(Pages 231-284)
Unit 14: Welfare Economics
(Pages 285-302)

UNIT 1 INTRODUCTION TO ECONOMIC THOUGHT
1. Introduction
2. Objectives
3. Meaningof Economic Thought
1. Lack ofAgreement in Economic Thought
4. Development
5. Nature and Approaches
6. Significanceof the Historyof Economic Thought
7. Answers to Check Your Progress Questions
8. Summary
9. Key Words
10. Self Assessment Questions and Exercises
11. Further Readings
UNIT 2 MERCANTILISM
1. Introduction
2. Objectives
3. Introduction and Forms
1. Main Characteristics
4. Thomas Mun
6. Summary
7. Key Words
9. Further Readings
UNIT 3 PHYSIOCRACY
1. Introduction
2. Objectives
3. Evolution of Physiocracy
1. Main Ideas and Theoretical Concepts of Physiocrats
4. Natural Order
5. Primacy ofAgriculture
1-20
21-42
43-60
CONTENTS

5. The Circulation of Wealth and Social Classes:Tableau Economique
6. Taxation
7. Other Important Concepts of Physiocracy
9. Summary
10. Key Words
UNIT 4 CLASSICAL SCHOOL-I
1. Introduction
2. Objectives
3. AdamSmith
4. T.R. Malthus
5. David Ricardo
6. J.S.Mill andhis Theoryon Utilitarianism
7. J.B. Say
9. Summary
10. Key Words
UNIT 5 CLASSICAL SCHOOL-II
1. Introduction
2. Objectives
3. AlfredMarshall
4. J.A. Schumpeter
5. Pigou
7. Summary
8. Key Words
UNIT 6 SOCIALISM
1. Introduction
2. Objectives
61-100
101-120
121-136

2. Socialism:Meaning,Scope and Role
3. Karl Marx
1. Theory of Economic Development
5. Summary
6. Key Words
8. Further Readings
UNIT 7 SCHOOLS OF SOCIALISM-I
1. Introduction
2. Objectives
3. Different Schools of Socialism
1. Utopian Socialism
2. ChristianSocialism
5. Summary
6. Key Words
8. Further Readings
UNIT 8 SCHOOLS OF SOCIALISM-II
1. Introduction
2. Objectives
3. Fabian
1. Rejection of Marxian Theory of Class Struggle
4. GuildSocialism
1. Main Tenets of Guild Socialism
5. Syndicalism
7. Summary
8. Key Words
UNIT 9 INSTITUTIONAL ECONOMICS-I
1. Introduction
2. Objectives
3. Gunnar Myrdal
137-146
147-158
159-168

9.2.1 Myrdal’s Model of Circular and Cumulative Causation
3. ThorsteinVeblen
5. Summary
6. Key Words
7. Self Assessment Questions and ExerciseS
8. Further Readings
UNIT 10 INSTITUTIONAL ECONOMICS-II
1. Introduction
2. Objectives
3. Romesh Dutt
1. CriticismofBritishEconomic Policy
2. Economic Ideas
4. WesleyClair Mitchell
1. Economic Ideas of Wesley Clair Mitchell
2. CriticalEstimate of Mitchell’s Economic Ideas
6. Summary
7. Key Words
9. Further Readings
UNIT 11 JOHN MAURICE CLARK AND JOHN KENNETH GALBRAITH
1. Introduction
2. Objectives
3. Economic Ideas of John Maurice Clark
4. Economic Ideas of John Kenneth Galbraith
1. Economic Ideas of John R. Commons
2. Economic Ideas of Wesley C. Mitchell
6. Summary
7. Key Words
9. Further Readings
UNIT 12 INDIAN ECONOMIC THOUGHT I
1. Introduction
2. Objectives
169-178
179-188
189-230

2. Thiruvalluvar
1. Economic Thoughts
3. Gopal Krishna Gokale
1. Economic Ideas
2. Agricultural Ideas
3. Foundations of Indigenous Capitalism
4. DadabhaiNaoroji
1. Drain Theory
2. Criticisms
3. Long-Run Relevance
5. Mahadev Govind Ranade
1. Agrarian Policy
2. Railway Investment
3. Methodology of Economics
7. Summary
8. Key Words
UNIT 13 INDIAN ECONOMIC THOUGHT II
1. Introduction
2. Objectives
3. Jawaharlal Nehru
1. Economic Policiesof Nehru
4. Mahatma Gandhi
1. Gandhian Economics
5. E.V. Ramasamy
6. Amartya Sen
8. Summary
9. Key Words
UNIT 14 WELFARE ECONOMICS
1. Introduction
2. Objectives
3. Meaning of Welfare Economics
231-284
285-302

3. Education
4. Health
5. Poverty
7. Summary
8. Key Words

Introduction
NOTES
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INTRODUCTION
Economics describes and analyses the production, distribution and consumption
ofwealth.Asasocialscience,economicscomprisesmanyschoolsofthoughtthat
discuss the widevarietyof ways of conductingthe aforesaid analyses.The most
influential of these schoolsof thought in the 20th centuryincluded neoclassical
economics,MarxianeconomicsandKeynesianeconomics.However,theinfluence
of economic schools of thought is not static, but rather, it is ever changing.
Throughouthistory,a widerangeofeconomicthinkinghasheldsway.Thisis also
trueofIndia.
Throughout the historyof human thought, India has produced important
economictheorists.Manu,ShukraandChanakyawerethegreateconomicthinkers
of ancient India. Dadabhai Naoroji, Gopal Krishna Gokhale, R.C. Dutta, M.G.
Ranade,M.N.RoyandM.K.Gandhi emerged as greateconomicthinkersduring
India’sstruggleforIndependence.ContemporaryIndianeconomicthinkersinclude
Deen Dayal UpadhayayandAmartya Sen.
This book, History of Economic Thought, is divided into fourteen units
thatfollowtheself-instructionmodewitheachunitbeginningwithanIntroduction
totheunit,followedby an outlineoftheObjectives.The detailed contentis then
presentedinasimplebutstructuredmannerinterspersedwithCheckYourProgress
Questionstotestthestudent’sunderstandingofthetopic.ASummaryalongwith
a list of KeyWordsand a set of SelfAssessment Questions and Exercises is also
provided at theend of each unit for recapitulation.

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Material 1
Introduction to
Economic Thought
UNIT 1 INTRODUCTION TO
ECONOMIC THOUGHT
NOTES
Structure
1. Introduction
2. Objectives
3. Meaningof Economic Thought
4. Development
5. Nature and Approaches
6. Significanceof the Historyof Economic Thought
8. Summary
9. Key Words
1. INTRODUCTION
The history of economic thought studies the origin of economic ideas and their
interrelationinadditiontotracingthecontributionsmadebyscholarsandeconomists
intermsoftheoriesandeconomicconceptsstartingrightfromtheancienttimesto
the present. In ancient Greece, scholars like Aristotle grappled with questions
relatedtoacquisitionofwealthandwhetherpropertyshouldbeleftinthehandsof
individuals.Intheclassicalschoolofeconomicthought,severalinfluentialeconomists
propounded theories that changedthe course of economicstudies. Adam Smith’s
Wealthof Nationswas the veryfirst bookthat talked extensivelyabout economic
matters.The central thesis of this bookwas thatourindividual needto fulfil self-
interestleadstosocietalbenefitswhichhetermsasthe‘invisiblehand’.
Inthisunit,ananalysisofthedevelopmentandtheapproachestoeconomic
thoughthas beenundertaken.
1. OBJECTIVES
Aftergoingthroughthisunit,you willbeableto:
 Understand themeaningofeconomic thought
 Discussthedevelopment, natureand approachesofeconomic thought
 Describe thesignificance ofhistoryofeconomic thought

Introduction to
Economic Thought
NOTES
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2 Material
1.2 MEANING OF ECONOMIC THOUGHT
As human knowledge accumulates, it is analyzed and categorized into different
sciences. Economic science is also a result of the same process and includes
doctrines and generalizations which deal with economic phenomena of our life.
Economicscience, likeothersciences, has hadto undergoa process of evolution
andis theresultofinnumerablecontributionsbyvariousthinkers.Inmanycases,
specific contributions went unnoticed for a period of time, while certain other
contributions were recognized during the verylife-time of their contributors. In
some cases the views of thesethinkers had a great impact upon that mouldingof
future patterns of economic thought.The role played bydifferent thinkers in the
process of its evolution has been uneven.Some thinkers appeared like luminous
starsintheskyanddazzledeverythinginsight,whileothersappearedratherdim.
However,evenwhenthecontributionsbysome thinkerswerenotveryspectacular
when theywere made, everycontribution has its own place and relevance in the
developmentofeconomicscienceandinimprovingourcomprehensionofeconomic
phenomena.
Ordinarily economic thought would be taken to cover the set of theories,
doctrines,lawsandgeneralizations,andanalysesappliedtothestudyandsolution
of economicphenomena andproblems. It should be noted,however,thespecific
contentsofeconomicthoughthavenormallycommandedanunevenprominence-
some attracting more attention than the others; and the overall composition of
economicthought is alsosubject to a continuous variation.Economic thought is
not a givenandfixedsetofeconomictheoriesortoolsandtechniquesof analysis.
Economics is a dynamic science, a feature that it acquires on account of various
reasons. This characteristic of it partly follows from the fact that it is a social
science.Itbringsforthabodyofgeneralizationswhich,asinothersciences,involve
cause-effect relationships.But from amongst theset of causal forces at work, the
relevant ones have to be sorted out for the problem at hand; and similarlyon the
side of effects a sifting process has to be undertaken. These tasks admit of a
difference of judgement and opinion. Since human society is a complex
phenomenon, averylarge numberof causes arelikelytobeat workin most cases
anddifferentinvestigatorscouldverywelldifferastothechoiceofthemost‘relevant’
causesatwork.Alsoinvestigationscouldunearththoseforceswhichwerehitherto
thought irrelevant or not of particularimportance.Moreover, the identificationof
the causal forces at work does not imply that these causes would not change till
theirfinaloutcomeisencountered.Overtime,thevaryrolesofspecificforcesare
likelyto undergo a change. Theresponses of economicunits (individuals, firms,
governments,etc.)wouldvaryfromonesituationtotheotherinviewoftheprevailing
moral,political,religiousandsocialphilosophyasalsotheinstitutionalframework
ofthesociety.

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Introduction to
Economic Thought
Aneconomyis a dynamicphenomenon andthereforeeconomicscienceis
a dynamicone.Withsocial change,neweconomicquestions presentthemselves.
Andman’sthinkingisinfluencedbyhissocialandphysicalenvironment.Economic
thoughtdevelopsalongtwolines.Ontheonehand,withinthebasicframeworkof
a giveneconomyanditsinstitutionalsetup,thereis alwaysa scopefordeeperand
intensiveinvestigationwhichprovides a basis forfurther analysisandtheorizing.
Ontheotherhand,theverydynamismofan economyprovidesa basisforfurther
investigation.Inastaticandstagnanteconomy,thereisnotmuchscopeforfurthering
thescienceofeconomics.Buta changingeconomyposesnewerchallengeswhich
economicthinkershaveto meet.Normally,overtime,a dynamiceconomywould
increaseincomplexityandwouldthusdemandnewandbettertoolsandtechniques
ofanalysis,as also a widercoverageof economicissues.Astudyof thehistoryof
economic thought, therefore, covers both these aspects of the development of
economicscience.Theroleandgrowthofeachsignificanttheory,thesetoftheories
and policy prescriptions provided by each school and even the significant
contributionsbyindividualeconomistsmustbeviewedinthecontextoftheprevalent
economic environment. At the same time, the study must take note of the way
economicthoughtinfluencedthemovementofeconomiesandtheresultanteffects
on economic science itself. In this connection, it may be pointed out that an
importantmotivatingforceinthegrowthofeconomicsciencehasbeentheconcern
of the economists with the overall enhancement of ‘efficiency’of the economic
system and economic welfare ofthesocietyasa whole oritsparticular sections.
The result is that economic science is always undergoing a change. Over
successivetimeintervals,specificsetsofeconomicideas,theories,doctrines,tools
andtechniquesacquirerecognitionandacceptanceimplyingtherebythatindifferent
contextswehavedifferentsystemsofeconomicthought.Thestudyofthehistory
of economic thought, therefore, automatically becomes a studyof these various
systemsofeconomicthought.InthewordsofHaney
,thestudyofeconomicthought
‘may be defined as a critical account of the development of economic ideas,
searchingintotheirorigins,interrelations,andmanifestations.’Aswouldbeexpected,
to begin with most economic ideas and doctrines have been in a fluid form.
However,with thepassageof time,therehas been a development in the concepts
and tools and techniques of analysis. Old economic concepts acquired greater
precisionandnewconceptswerecontinuouslyintroducedtocopewiththeemerging
theoreticalandpracticalproblems.Alongwiththedevelopmentofconceptsthere
has also been a sharpening ofthetools and techniques of analysis.
Inthisconnection,weshouldkeepinmindthedistinctionbetweeneconomic
ideas as such and economic science or economics proper. Economic ideas have
been there since time immemorial, but it is onlyrecentlythat theyassumedthe
formofasystemofthoughtwhichmaybetermedeconomicscienceoreconomics.
Referencestoeconomicquestionsarescatteredalmosteverywhereinoldliterature.

Introduction to
Economic Thought
NOTES
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4 Material
Theyare found in Plato, Aristotle, and others. Aristotle, for example, discusses
currency,populationandslavery.InIndiaalso,Kautalyaisknownforhisdiscussion
of various economic questions. But in all these cases we have onlyfragments of
informationand analysis.So longas we arenot able to adequatelygeneralizeon
theseeconomicideasandeconomicviewswithanygreatsignificance,wecannot
claimtheemergenceofeconomicthought.Inthatsense,thetimewhentheseideas
startedgettingcrystallizedintoeconomicthoughtisaroundthetimeofmercantilism.
The birth of economic science might be said to have coincided with the rise of
physiocracy,becauseitisinthissystemthatforthefirsttimewefindacomprehensive
economic theory. According to a widely held opinion, Adam Smith’s book An
Inquiry into the Nature and Causes of the Wealth of Nations (published in
1776) was the first systematic work of economic problems, while now modern
critics havebeenmoreandmorepersuadedandrightlyso,toattributethatpriority
to Richard Cantillon, author of Essia sur la nature du commerce, published in
1755. Economicthought is a bodyof economic ideas and generalizations which
can be seen to ‘belong’to each other. There are theoretical underpinnings of the
economic investigations and policy prescriptions. There is a logical reasoning
involved in the process of arriving at conclusions, and there is also an aspect of
abstracttheorizing.Itisonlyatthisstageofformationandcohesionthateconomic
ideascollectivelybecomeeconomicthought.Itis notofcoursenecessarythatthe
economic ideas in a system of economic thought must be conforming to each
otherorthattheymustbelongtoonemainbody;it is theoverallthinkingprocess
which lends economic ideas the colour of mutual association and belonging and
therefore bringsforththephenomenon ofeconomic thought.
Individual economic ideas are almost always problem-oriented. There are
generalizationsaboutcertainfactsandproblemsandthedesirablesolutionsthereof.
Among various problems which man faces in his daily environment, there are
economicproblemsalso.Accordinglyhehastotrytosolvethemalongwithother
problems. Wefind, therefore, that traces of economic ideas have always been
thereinthetotalthoughtsystemofmankind.Therehavebeendiscussionsofvarious
economic problems and their possible solutions. For example, in the beginning
therewasa concentrationofeconomicideasontheeconomicproblemsconnected
with slavery, agriculture, usury, and to some extent with trade, commerce, etc.
However, economicscience as ascienceimplies that the economicproblems and
their solutions must be viewed in a totality, and their interrelationships must be
recognized.Ineconomicscience,thereisagooddealoftheorizingandgeneralization
about the nature of economic problems; the typical response which different
economicunits(individuals,firmsetc.)showtovariousstimuliarerecognizedand
categorized and the typesof feasible and actual solutions get listed. Thereis also
a concern with the ‘efficiency’of the economic system and the way in which it
could improve its working. All this involves the use of numerous concepts and
theirdefinitionsbecomeprogressivelyrigorousas timepasses.Thedevelopment
of economic science is accompanied by the introduction of new tools and

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Material 5
Introduction to
Economic Thought
sharpeningoftheoldones.Notonlythis,inthedevelopmentofa scienceabstract
theorizing plays aprominent role and economics isnoexception.
Theplaceofabstractionineconomicsmayalsobenotedviathedistinction
between inductive and deductive methods of analysis. In the inductive method,
economic phenomena are investigated and data are gathered, interrelationships
between different interacting forces are ‘found out’ and then corresponding
inferencesandgeneralizationsarederived.Thisapproachproceedsonempiricism
andrelieson‘correct’interpretationoftheinterrelationsbetweeneconomicforces.
On the other hand, deductive method relies on abstraction. A set of causes is
chosen as the one which is relevant to the problem in hand and the process of
interactionbetweentheseforcesisdeterminedonthebasisofsetrules.So longas
we have only economic ideas, there is hardly any generalization, or deductive
analysis or abstraction.On the other hand, in economicscience proper, there is a
gooddealofscopeforgeneralizations,deductiveanalysisandabstraction.Actually,
evenempiricismorinductiveanalysisbecomesacceptableonlyifit satisfieswell-
accepted rules of analysisandtheorizingand when it uses acceptabletechniques
and tools.
Historyofeconomicthought,therefore,isnotbasicallyahistoryofeconomic
ideasbutthatofeconomicsproper,thoughforthesakeofcompletenessadiscussion
oftheoriginofimportantideasmaybeincluded.Suchahistoryofeconomicsmay
be attemptedin numerous ways.Onemay,forexample,takeupimportantstrands
ofeconomicthoughtandpursuetheirdevelopmentovertime.Wemay,forexample,
takeupthedevelopmentofthedoctrineoflaissez-fair,orthatofeconomicwelfare,
or the theory of utility, etc. Another approach could be to pursue the study of
economic thought in terms of ‘schools’, i.e., in terms of theories, inferences and
policy prescriptions which formed broad harmonious sets in themselves, had a
common set of premises, and which were put forth by identifiable groups of
economists.Exampleswouldbeofthe‘historicalschool’,the‘Utopiansocialists’
and the ‘marginalists’. Another approach could be to take up important
personalities,i.e., economistswhomadegreat andsignificantcontributionstothe
advancement of economic science or contributed in an important way to the
investigationof economicphenomena and empirical problems. It is obvious that
anyonesuchapproachwouldonlyserveparticularpurposesandmaynotbefully
satisfactoryfromotherpointsofview.Itwouldthereforebepreferableifa blended
view of the development of economic science is taken in which due emphasis is
accordedtotheindividualeconomists,totheschoolsandalso tothedevelopment
ofimportantstrandsofeconomicthought.
Economicthoughtiscloselyrelatedtoeconomicenvironment.Thegrowth
ofeconomicsciencecanbetracedalongwiththegrowingcomplexityoftheworld
economies.Eveninpureabstracttheorizing,economicshasitsmooringsinspecific
economicframeworkofasociety.Economictheorizingmaybeinthecontextofa
market economy, a centrally planned economy or an economy of some other

Introduction to
Economic Thought
NOTES
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6 Material
type.However,irrespectiveoftheextentofeconomictheorizing,economicanalysis
doesnotloseitsmooringsofrealityinthesensethatitisalwaysinthecontextofa
certain economic framework-real or assumed. For example, a good deal of
economic thought has developed in the context of a market economyand on the
assumptionof‘economicrationality’onthepartofindividualeconomicunits,though
economicscience as a wholehad its originin the form of ‘political economy’-or
the study of the economic problems and their solutions which the society as a
wholeoritsrepresentative,thegovernment,faced.Thedevelopmentofeconomic
scienceisintimatelyrelatedtothedevelopmentofeconomicenvironment;andthe
two interact with each other. Economics assumes the framework of technology
and resources available to the society as a whole as also the set of relationships
withother economies. The appropriate identification, description and analysis of
theresponsesofeconomicunitsisanimportantstageintheformulationofeconomic
generalizations.Nowthe exactnatureof responsesdependsupontheinstitutional
framework of the society. As the institutionalists claim, there are two types of
responses by individuals, the natural or instinctive responses and the acquired
responses. The latter, when performed by a large number of individuals in a
particular way assume the form of social customs and behaviour. This way the
customsandbehaviourgetcrystallizedintoinstitutions.Economictheorizingand
investigation, therefore, haveto be in thecontextof andwithintheframework of
an economy.Through economictheorizing and investigationthe efficiencyof an
economy in the context of its particular institutional framework is judged and
remedial actions,ifany,prescribed.
There are several reasons to believe that we should not expect a uniformityof
conclusions and opinion amongst economists on issues of either theoretical or
practical importance.
(a) Economics is a social sciencein which controlled experiments arenext to
impossible.Accordinglythereisalwaysapossibilityofdifferenceofopinion
regarding the choice of relevant causal forces and the process of their
interaction.Inthesameway,inabstracttheorizing,thechoiceoftherelevant
factors andforces as also that ofthelimitingassumptionsisimportant.
(b) There are chances that differences would exist with reference to the
assessment of facts, especially when they are mixed with other ones.
Determining the precise direction and strength of a particular force is a
matter of investigation, judgement and opinion.Relevant phenomena are
investigated and estimated with the help of available data and tools and
techniquesof analysis.All thesethings aresubject to a modification. Data
keep on changing; old data are replaced or supplemented by new ones.
Similarly, there is a constant improvement in the tools and techniques of
analysis.

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Introduction to
Economic Thought
(c) Economicanalysisadmitsawidevarietyofmethods.Asaresult,evenwith
giventoolsandobjectives,themethodofanalysismayvaryfromoneanalyst
tothe otherand yield non-identical results.
(d) Apart from these reasons, differences arise on account of the purpose for
whichaneconomicinvestigationisbeingundertaken.Thisismoresointhe
caseofpracticalproblemsandtheirsolutions.Thecause-effectrelationship
between different forces would be assigned to suit a particular philosophy
and purpose. Thus duringthe British colonial days,the Indian economists
were generally motivated by nationalist feelings and objectives and they
wouldlookattheIndo-Britisheconomicrelationshipfromthepointofview
ofIndianinterests,whilethesameissueswouldbeconsideredbytheBritish
economists fromadifferent angle.
(e) Another reason for the divergence of opinion arises on account of the
materialistic and idealistic attitudes of the economists. Economists, in the
ultimateanalysis,areasmuchhumanbeingsandindividualsasanyoneelse,
and theyare quite frequentlyswayed bythe final conclusions which they
would liketopress forth.
1.3 DEVELOPMENT
Let usnowlookatthecauseswhich account foratardydevelopmentof economic
thought initsearlyphases.
Wehavenoted earlierthat humansocietyis a complex phenomenon andis
subjecttoa largenumberofinteractingforces.Tobeginwith,therefore,economic
ideas wereboundtobe tiedupwithotherideas.Man’sactivities arerelated to his
environment. Between environment and economic ideas, there is a close
relationship.Environment motivates thinking, andthinkingin economicmatters
bringsforth explanations.Likemost social disciplines,which have emergedover
time,economicideaswere alsoproblem-oriented tobeginwith.Pure abstraction
cameonlylaterandeventhenthemooringsofabstractanalysishavealwaysbeen
in therealmofreality.Accordingly,thetendencytobringinnon-economicfactors
inthestudyofeconomicproblemssloweddowntheprogressofeconomicscience.

Introduction to
Economic Thought
NOTES
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8 Material
It is not to be claimed that with the passage of time, economic aspects of
our life have got delinked from non-economic aspects. The interdependence
between the two is significantly strong even now and we should not expect
economic science to become fully detached from the considerations of non-
economicphenomenaand socialphilosophy.As Taylorputsit,wecannotbelieve
inthepossibility“thateconomicscience,ortheoreticalworkinit,isorhasbeenor
can be so perfectly or absolutely scientific—objective, unbiased, neutral, and
throughout secure as opposed to ‘speculative’—as to make it possible to say,
generally, that the great contributions which have been made to its development
bygreateconomistshavebeenwhollyuninfluencedbythepoliticalphilosophies
shared, and oftenpartlycreated, bythoseeconomistsin theirotherroles as more
than that—human thinkers,in their human environments, about human life and
affairsingeneral.”Whatcontributedtothedevelopmentofeconomicsasaseparate
sciencewas theever-growing importanceofeconomicphenomenaas such.
It should be noted that in the early stages of economic development, the
share of economic problemsin the totalityof social life was a small one, both in
absoluteandinrelativesense,andtherefore, therewas not muchto studybyway
ofpureeconomics.Earlyhumancivilizationgrewandprosperedinwarmerclimates,
near areas where nature was bountiful. There was not much of a difficulty in
procuringthemeansoflivelihoodforthesimplelifewhichthosepeopleled.As a
result, economic problems did not appear as pressing as they did in later times.
‘Thougheconomicphenomenaexistedintherelativelystaticlifeofprimitiveman,
economic life was so limited, in the earliest ancient cultures, and so monotonous
as virtuallyto preclude speculation in humdrum activities.’Before the advent of
capitalism, economicorganization was a simple one. Division of labourwas not
carriedsufficientlyfarandthereforea gooddealofproductionwasmeantforself-
consumption. Exchange and marketing problems were simple and of limited
importance.Onthisaccount,therefore,therewasadearthofthecomplexeconomic
phenomenaandtheproblemstheycreate.Forexample,therewasalackofspecific
problemsofpublicfinanceandthemattersoffiscalpolicy.Theeconomicrelations
betweenvariousindividualeconomicunitsontheonehandandthosebetweenthe
economicunitsandtheStateontheotherhandwerequitesimpleandleftinsufficient
scopeforadjustmentandmanipulation.Accordingly, thevolumeand importance
of earlyeconomic thinking could be of only a limited significance. ‘Man cannot
begin to theorize about the economic process as long as this is of so simple a
character as torequire no special explanation.’
Economic phenomena failed to command adequate attention till the
emergence of capitalism. Those who had the time and resources to advance the
study of economics, did not have enough of will and incentive to do so. Haney
elaborates this point by saying that interest in certain economic problems is
specifically conducive to the development of economics; but there were times
whensomeoftheinterests mostconducive to economic studywere specifically

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deprecated.Theclimateofopinionandtheregnantsystemofvaluesdidnotfavour
growth. The degree of improvement in man’s material lot that was considered
desirableandtobe expectedwasquitelimited.Themedievaltheoristcondemned
as a sin precisely that effort to achieve a continuous and unlimited increase in
material wealth which modern sciences applaud as a quality, and the vices of
which he reserved his most merciless denunciations were the more refined and
subtleof theeconomicvirtues.‘Hewhohas enoughto satisfyhiswants’,wrote a
Schoolman of the fourteenth century, ‘and nevertheless ceaselessly labours to
acquireriches,eitherinordertoobtain a highersocial position,thatsubsequently
he mayhave enough to live without labour, or that his sons maybecome men of
wealth and importance-all such are incited by a damnable avarice, sensuality, or
pride.’Two and a halfcenturies later,in the midst of a revolution in theeconomic
andspiritualenvironments,Lutherinevenmoreunmeasuredlanguage,wastosay
thesame.
Thislackofinterestina numberofproblemsnaturallyhinderedthegrowth
of economics.The typical organization and philosophywere such that there was
not much concern about the economicwelfareof the societyas a whole. Insome
cases, artisan and labour classes were even despised. The upper layers of social
groupswereassuredofasubstantialshareofthenationalproduce,andtheyshowed
little concern for the poverty of the masses. Accordingly there was a kind of
indifferenceorevenaversiontothestudyofeconomicphenomena.Insteadgreater
attention was paid to fine arts, musicand the like.
Till the close of Middle Ages, non-economic aspects of social life were
accorded a great importance. The weightage assigned to material well-being in
human life for the attainment of happiness was quite low. Instead a life which
conformedto a codeof moral values was considered preferableto theonewhich
gave ‘undue’weightage to material well-being. Materialistic gains at the cost of
other aspects of a ‘good’life were looked at with disfavour. This philosophy in
whichidealism played a predominant part prevailed in Westerncountries alsotill
mercantilist philosophyshiftedthis composition infavourof materialism.At the
same time, the Western economies started showing a kind of dynamism through
which the totality of economic phenomena grew. More and more economic
problemswerefaced,andattemptstosolvetheexistingonescreatedyetadditional
problems. Of course, it is not contended that idealism has vanished now and
materialistic outlook holds the ground,but thereis certainlya sufficient concern
with materialistic aspects of our social life. There is now an active interest
in formulating the criteria for the efficient working of an economy and for
studying its actual performance in their light. So while in the past, economics
was only a problem-oriented study, now it also covers abstract theorizing and
generalizations. Thecontributionsmadebydifferentschoolsofeconomicthought,
and the meaning, rationale, and logic of those contributions must be viewed in
the context of the economic institutions and framework which these schools
assume.At the same

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time,innumerouscasestheactualtheorizingandconclusionshavebeeninfluenced
by,the methods of the analysis and their underlying philosophy. Therefore,while
studying the history of economic thought and judging the worth of various
contributions this fact of interconnection between realityand theorizing must be
keptinmind.
Haney points out that the belief in the omnipotence of the State also
discounted the need to studyeconomics. Ifthe State couldsolve most of its own
economicproblemsandthoseofthe‘higherclasses’throughtheuseofitspolitical
power, there was hardlyanyneed to emphasize the role of response to economic
forcesbyindividualeconomicunits.TheproblemsofStatewereviewedmoreas
politicalproblems.Thesamegeneralpoint concerningindifferenceoraversionto
economicphenomenamightbemadewithregardtofinancialmatters,thoughwith
someexceptions.Furthermore,as betweennationsalso, the acquisitionof wealth
was considered more a matterof political power and conquest rather than thatof
economicrelations.
Humanbeingshaveanaturalfascinationfordistantandmysteriousthingsas
compared with things which theyhave to deal with daily. Economic phenomena,
especially in the days of relative static and simple economic life, were slow in
arousinginterest.Becauseoftheirnearnessandthegeneralsuperficialfamiliarity,
theywerenot singled out for special study.The things close bydid not carryany
mysteryandfascination.
But with the passage of time, the forces restricting the development of
economics have given way to those which favour it. The expanding economic
activitiesofmoderngovernmentsareplayinganactiveroleinthedevelopmentof
economicscience.Theiroperations provide an importantsegment of the totality
of economic phenomena on the one hand and have helped in the provision of
necessaryinfrastructureforthegrowthofeconomicscienceontheother.Itisnow
realizedthe world overthatthe budgetaryand other activities of the government
cannot be neutral in their effects on the economy. This is true not only of the
centrally planned economies, or of mixed economies, but also of the market
economieswherethegovernmentsdonothaveanyspecificeconomicprogramme.
Thoughitisthereforerealizedthattheleastthegovernmentshoulddoistoensure
that its budgetaryand other activities do not cause obstruction in the way of the
societyinachievingitsgoals,inpractice,thegovernmentsareactivelyengagedin
guidingandinfluencingtheireconomies along‘properlines.’For anefficient discharge
of itsduties,a governmentshouldbe in possessionofrelevant data.Accordingly,
thesedaysgovernmentshavebecomeanimportantsourceofallkindsofstatistical
information. There is also an increasing output of these data in published form.
Alongwiththeavailabilityofdata,therehasbeenan expansionintheprofession
of economists also. Knowledgeof economics is now more widelyspread. It is a
popularsubject in theuniversities.There are also moreand bettercomputational
and other research facilities and an increasing use of mathematical and other

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techniques in assessing and investigating the role of different economic forces.
Formulations of abstract theories and models havehelped in the development of
rigorousconcepts.Asaresultofallthese,thedevelopmentofeconomicscienceis
now at a much faster rate than ever before.
1.4 NATURE AND APPROACHES
Astudyof economicideasfrom earliesttimestothepresentdayis theconcernof
thesubject-‘HistoryofEconomicThought’.A‘HistoryofEconomicThought’,as
thetitleitselfsuggests, is a probeintotheorigin and growthofeconomicideas. It
is a historical account of the development of economic doctrines as also of their
impactoneconomicinstitutionsandactivities.Thusthehistoryofeconomicthought
dealswiththeorigin anddevelopmentofeconomicideas andtheirinterrelations.
Economic thought plays a pivotal role at least in the industrial environment of
today.
Thereis a differencebetween‘HistoryofEconomicThought’and ‘History
of Economics’. History of economic thought deals with the development of
economicideas.Economic ideas havebeenthereever sincethebirthofmankind.
Historyofeconomicsdealswiththescienceofeconomics.Thehistoryofeconomics
studies the origin and growth of commerce, manufacture, trade, banking,
transportation and other economic phenomena and institutions. In short it is a
studyof the material or industrialdevelopment of the peoplein thepast. Though
theseare separate branches but there is close relationship between them.
Social dynamicsis principallya productofideasofmanandenvironment.
The questionwhetherit is environment which shapes ideas of man or vice versa
has beena moot controversyand reminds one of the classical problem regarding
whetherthehencamefirstortheegg.Butitistruethatbothideasandenvironment
interact with each other. The economic ideas of people at any time are coloured
and conditionedbytheirenvironment.Forexample,theeconomicideasofPlato
andAristotlewereinfluencedbytheinstitutionofslavery,forslaverywasapartof
theGreekcivilisationofthepast.AndtheindustrialrevolutioninEnglandandthe
development of the urban areas and the wage system provided the basis for the
socialist ideas ofKarl Marx.
ProfessorHaneyhasdefinedthesubjectinthefollowingwords-“Thesubject
the History of Economic Thought may be defined as a critical account of the

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development of economic ideas, searching into their origin, interrelations and
manifestations.”
AccordingtoSchumpeter,“Thesumoftotal ofallthe opinionsanddesires
concerningeconomicsubjects,especiallytimeandplacefloat inthepublicmind.”
According to Bell, “The History of Economic Thought is a study of the
heritage leftbywritersoneconomicsubjects,”
Thus,thehistoryofeconomicthought-”Tracesoutthehistoricalchangesof
attitudes,mentioninganalyticalperformancesinpassing.Suchhistorywouldneed
todisplaythecloseassociationthat existswithintheattitudesofthepublicmindin
thesensedefined;withthekindofproblemsthatatanygiventimeinterestanalysis
andfromgeneral attitudeofspiritinwhichtheyapproachtheirproblems.”
Thehistoryofeconomicthoughtmaybebroadlyclassifiedintotwoparts-
first part deals with the origin and development of economic ideas before the
development of economics as a separate science and the second part deals with
theeconomic ideas since thebirthofpolitical economyasa separate science.
Theoretical Approaches: There are different theoretical approaches adopted
by scholars and philosophers from time to time in the study of the science of
economics orinanalysing economic phenomena.Theseapproaches areasunder-
(i) ChronologicalApproach: Inthechronological approach,economicideas
are discussed in the order of time. Advantage of this approach is that it
ensures continuity and enables the reader to fix the time at which the
economic ideas have come intoexistence.
(ii) Conceptual Approach: In this approach, importance is given to the
developmentofeconomicconceptsandideas.Thebelieversof conceptual
approachwerenotinterestedintheschoolsofthoughtwhichhadpopularised
agiven idea.
(iii) Philosophical Approach: This approach was first adopted by Plato, the
Greek Philosopher. Afterwards it was adopted by earlywriters to discuss
economic ideas. Aristotle, Quesnay, Adam Smith and above all Mark, all
helddefinitephilosophicalviews.
(iv) Classical Approach:Ricardo, Malthus andJ.S.Mill were the economists
of the classical school. The classical economists believed that the laws of
economics areofuniversal applicationand that all economiclaws could be
formulatedbya simpleprocessofreasoningfromonefundamentalprinciple.
The classical deductive approach has come in for a lot of criticism at the
handofthehistorical school.
(v) HistoricalApproach:ThehistoricalschoolhaditsorigininGermany.The
historical approach lay emphasis on the inductivemethod. Theybelieved
that the laws of economics are not universal in nature. They are relatively
conditioned bytime,placeandhistorical circumstances.

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(vi) The Neo-classical Approach: The Neo-classical approach wants to
improve the classical theories bysuitablymodifying them bytaking into
account the modern developments in the theory of economics. The Neo-
classicalapproachisanattemptatthereconstructionoftheclassicaltheories.
The economists ofthis approachbelievedthat Inductionanddeduction are
bothnecessaryfor the science, just as the right and left foot are needed for
walking.
(vii) Welfare Approach: The welfare approach aims at providing a basis for
adopting policies which are likely to maximise ‘social welfare’. Welfare
economics is concerned with the conditions which determine the total
economic welfare of a community. The welfare approach emphasises on
utility,demandandconsumption.
(viii) InstitutionalApproach: Theinstitutional approach is atwentieth century
phenomenon. Veblen was the founder of this approach. The advocates of
this approachassertthat the “pricesystem”shouldnotbethe centraltheme
ofeconomics.Theyattachimportancetogroupbehaviourwhichisconstantly
changing.Theyconsidereconomiclawsasrelative.Theybelievedthathabits,
customsandlegalformsarethechieffactorsofgoverninghumanbehaviour.
(ix)Keynesian Approach: Amajor development in modern economics is
associated with the name of J.M. Keynes. Keynesian approach is termed
as Keynesian Revolution. The core of the Keynesian approach is that it
dealswiththeproblemsoftheeconomyasawhole,andnotonlywiththose
of the individual consumer. One of the greatest contributions of Keynes
was to tie economic analysis to the great public problems of the day.
Significance of History of Economic Thought: The significance of the history
ofeconomicthoughtliesinthebenefitsthat accruefromit.Thestudyofthesubject
givesoneaninsight intotheevolutionofeconomictheoryandtheformulationof
policies which controlled economic life, from the earliest time to present day.
Thoughtsofeveryageinthecontextoftheirsurroundingshavegovernedindividual
actions and policies and are therefore, important for us. The chief advantages of
thestudyofhistoryofeconomicthoughthavebeenverysellsummedupbyprofessor
Haneyas under-
1. The studyof ‘Historyof Economic Thought’reveals that thereis a certain
unityinthinkingofmanrightfromtheearliesttimestothepresentday.The
economicthoughtandthisunityconnectsuswithancienttimes.Thinkingis
the heritage of man. In every age, thoughts have been derived from
the environmental influences. Apparently, they look new but the fact
remains that there is a great continuity of ideas. It may be said that ideas
belonging to an age are drawn from those of earlier ages and under the
influence of different economic environment simply change in form and
emphasis soas toface problems ofthetimes.

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2. In spite of a tremendous improvement in the science of economics, even
today the nature and scope of economics is under dispute. The study of
economic thought assists us in tracing the origin and development of
economics, and in understanding its nature, scope and relationship with
othersciences.Economics,beingascience,isdynamicandwithoutstudying
ancientthoughtwecannotcorrectlyassessthedevelopmentsthathavetaken
placeinitsnatureandscope.Sothereisa greatvalueinstudyingthehistory
ofeconomicthought.
3. The study of economic thought leads to a change in the outlook of the
reader. He no more remains dogmatic. He starts examining and assessing
critically the practical value of each idea and theory in the context of his
own times and conditions. Thus it is clearthat most of theeconomicideas
arerelative.Theyareconditionedbytime,placeandcircumstances.Many
economic ideas of the past had their roots in institutional arrangements.
Aristotle justified slavery because slavery was an accepted social fact of
the Greek civilisation.Mercantilists’theories of foreign trade, physiocratic
ideas about agriculture andRicardian theoryofrentare stillstudied.
4. The studyof the historyof economic thought reveals that there has never
beenanageinwhichideashavenotdeveloped.ThepresumptionthatMiddle
Ages were dark ages leads one to think that no new ideas or philosophies
weredevelopedduringthis period.Of coursethereare somewritersonthe
subject who deny continuity in the evolution of economic thought. They
regardtheMiddleAgesasa completebreakbecausethethinkerofMiddle
Agesemphasisedonthenegativeaspectsoflife.Thishowever,isnottotally
true.Forevenduringthat periodtherewas speculationoneconomictopics
suchasmoney,interestandtheideasofthesethinkersweresimilarto those
of Greek thinkersofthe past.
5. Astudy of economic thought provides a broad basis for comparison of
different ideas which proves to be of great value. It will enable a person to
havea well-balancedandreasonablejudgment.Heisneitherguidedbyhis
own fads nor does he lose courage and get confused by controversies. He
cares moreforthe progress ofthe science.
6. Byastudyofeconomicthought,onemaybeabletotakeanobjectivepoint
of view.He will realise that economics is quite different from economists
andthatthetwoareseparateentitiesaltogether.Whileeconomicsisascience,
economistsareonlyhumanbeings.Thestudentswillrealisethateconomics
isonethingandeconomistsareanother.Theymayfinddifferencesofopinion
amongindividualeconomists.Discussionandcontroversiesonthesimplest
pointmayconfusethem,butlatertheyrealisethateconomicsisascience,a
systemised body of doctrines developed during the course of centuries,
encircledbytheview of different economists and gain confidence without
caringforthepersonalities.

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7. Bythe studyof the Historyof economic thought, students will realise that
old doctrines never die; they only fade away with a strange power of
recuperation in an appropriate environment. For example, some ideas of
Keynes, one the greatest of modern economists, may be traced back to
socialistwriterssuchasSismondi andProudhonand toMalthus.
8. BythestudyofHistoryofeconomicthought,wecometoknowthepersons
responsibleforformulationof theprinciplesthat constitutetheframework
of economics as at present taught. It will also help us to know at what
period these principles were enunciated and what circumstances were
accounted fortheirenunciation justat that period.
9. Thestudyof ‘HistoryofEconomicThought’alsorevealsthedifferencesin
the points of view of various thinkers and shows how a particular point of
view has been built, difference in opinion and points of view are boundto
occurowingtothedifferenceinthebasicphilosophyoflifeandthemethod
adoptedbyeachthinkerinstudyinga problem.Thusstudentsanalysethese
different philosophies that are accepted or rejected on their own merits.
The study of the subject undoubtedly proves to be a great guiding and
correctingfactor.ThesignificanceofthestudyoftheHistoryofEconomic
Thoughtcan therefore,hardlybe over-emphasised.It isanessential toolof
knowledge.
1.5 SIGNIFICANCE OF THE HISTORY OF
ECONOMIC THOUGHT
Itisalwayshelpfultohavesomeknowledgeofthehistoryofthoughtofthesubject
one is interested in. Every science grows and evolves over time and during the
process of its refinements and expansion, attracts numerous debate and
controversieswhichnotonlyrelatetothesubjectmatterofthedisciplineitself,but
alsoto its applicationtothe problemsof actual life.As such a studyof economic
thought enables a student of economics to realize that the current fluidities in
economic theories and inconclusiveness of various branches of thought are not
somethingto be disturbedabout; it is not indicativeof a weakness of the science,
but isa normal phenomenon withanyscience.

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Thestudyofeconomicthoughtlendsaperspectivetothesubjectandenables
the student to have a wider view of what he is studying. It enables him to realize
thateconomicsasascienceisa comprehensivewholeandthatindividualtheories,
tools and techniques have their meaning, importance and rationale only in the
context of thatoverall totality. Intheabsenceof a knowledgeof thehistoryof the
economicthought,a studentis apt tobemisguidedintobelievingthat thetheories
he isstudying are eitherfinal or haveno relevance at all. This is moreso because
eachtheoryis presentedon thebasis of certain assumptionsandinthe context of
a giveneconomicsystemwithalltheimpliedinstitutionalfactors.Ifa studentgets
afeelingofthefinalityofatheory,hemaynotfeelfreetousehisanalyticalabilities
for a deeper probe of the same.
Alternatively, he may be impressed bythe abstraction of a theoryand the
unrealistic assumptions upon which it is based and might therefore come to the
conclusion that everyabstraction ineconomics is anequallyuseless exercise.
Secondly, a knowledge of economic thought enables a student to realize
that economicsis a dynamicscience.On the one hand, economicsciencemoves
forth on account of the fact that new tools, techniques and concepts are being
added to the armoury of the economists and on the other additional economic
phenomenaarebeinginvestigatedandanalysed.Moreover,theverydynamismof
theworldeconomieslendsanelementofdynamismtoeconomicsalso.Bystudying
economic thought a student is equipped to assign to current controversies and
debates the place they deserve. He is not bogged down or disheartened bythe
heatedcontroversiesanddifferencesof opinion.Thesethingsappearto himsigns
of life within the science of economics and he knows that these are indicators of
continuousdevelopmentandrefinement.
Thirdly,astudyofthehistoryofeconomicthoughtbringshomethefactthat
economicaspectsareonlya partofthetotalityofourlife.Economicsis onlyone
ofthesocialsciences.Itdoesnot explainthetotalbehaviourofa society,nordoes
it provide a total solution to any problem. There is a need to study economic
problemsinthecontextoftheiroverallsocialframeworkandtheinterdependence
ofeconomicswithothersocialsciencesshouldnotbelostsightof.Thisrealization
also enables the student to appreciate the fact that similar problems would not
yield similar solutions in the hands of different economists. Economists are also
human beings living in a society, and the solutions which they offer must be
conditionedbythetotalityoftheirexistenceandviews.Therewouldbesubjective
elementsinvolvedintheinterpretationofeconomicphenomenaandsotheywould
proposedifferentsolutionsaccordingto theirpersonal views.An economist with
leftist views would advocate solutions which would be different from the ones
advocated byan economist of rightist views.Some solutions would take note of
theadministrativeandpoliticaldifficultiesinimplementingthesame,otherswould
not. In this way the contribution to economic science made by any
individual economist or a school of thought is to be appreciated only in the
context of the underlyingphilosophy.

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6. ANSWERS TO CHECK YOUR PROGRESS
QUESTIONS
1. Theroleandgrowthofeachsignificanttheory,theset oftheoriesandpolicy
prescriptionsprovidedbyeach school andeventhesignificantcontributions
by individual economists must be viewed in the context of the prevalent
economicenvironment.
2. References to economic questions arescattered almost everywhere in old
literature. They are found in Plato, Aristotle, and others. Aristotle, for
example,discussescurrency,populationand slavery.
3. Agooddealofeconomicthoughthasdevelopedinthecontextof a market
economy and on the assumption of ‘economic rationality’on the part of
individualeconomicunits.
4. Thedevelopmentofeconomicscienceisintimatelyrelatedtothedevelopment
ofeconomic environment; and the two interact witheach other.
5. AroundtheMiddleAges,a lifewhich conformedtoacodeofmoralvalues
was considered preferable to the one which gave ‘undue’weightage to
materialwell-being.
6. The operations of modern governments provide an important segment of
thetotalityofeconomicphenomenaon theonehandandhavehelpedinthe
provisionofnecessaryinfrastructureforthegrowthof economicscienceon
theother.
7. Thehistoryofeconomicthoughtdealswiththeorigin anddevelopmentof
economic ideas and their interrelations.
8. History of economics studies the origin and growth of commerce,
manufacture,trade,banking,transportationandothereconomicphenomena
andinstitutions.
9. TheeconomicideasofPlatoandAristotlewereinfluencedbytheinstitution
ofslavery, forslaverywas a part of theGreek civilisation of thepast.
10. The first part deals with the origin and development of economic
ideas before the development of economics as a separate science and the
second part deals with the economic ideas since the birth of political
economyas a

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separate science.
11. Thestudyof economicthought enablesa studenttorealizethat economics
as a science is a comprehensive whole and that individual theories, tools
and techniques have their meaning, importance and rationale only in the
context ofthatoverall totality.
12. Astudyofthehistoryofeconomicthoughtbringshomethefactthateconomic
aspects are onlya part of the totalityof our life. Economics is onlyoneof
thesocial sciences.
1.7 SUMMARY
 Economic science, like other sciences, has had to undergo a process of
evolutionandistheresultofinnumerablecontributionsbyvariousthinkers.
In manycases, specific contributions went unnoticed for a period of time,
whilecertainothercontributionswererecognizedduringtheverylife-time
oftheircontributors.
 Economics is a dynamic science, a feature that it acquires on account of
variousreasons.Thischaracteristicofitpartlyfollowsfromthefactthatitis
a socialscience.Itbringsfortha bodyofgeneralizationswhich,as in other
sciences, involvecause-effect relationships.
 Theroleandgrowthofeachsignificanttheory,thesetoftheoriesandpolicy
prescriptionsprovidedbyeach schoolandeventhesignificantcontributions
byindividual economists must be viewed in the context of the prevalent
economic environment.At the same time, the studymust take note of the
way economic thought influenced the movement of economies and the
resultant effects oneconomic science itself.
 Individual economicideas are almost alwaysproblem-oriented.There are
generalizationsaboutcertainfactsandproblemsandthedesirablesolutions
thereof.Amongvariousproblemswhichmanfacesinhisdailyenvironment,
there are economic problems also.
 Economicthoughtis closelyrelatedtoeconomicenvironment.Thegrowth
of economic science can be traced along with the growing complexityof
the world economies. Even in pure abstract theorizing, economics has its
moorings inspecific economicframework ofa society.
 Economicanalysisadmitsa widevarietyofmethods.Asa result,evenwith
giventoolsandobjectives,themethodofanalysismayvaryfromoneanalyst
tothe otherand yield non-identical results.
 Before the advent of capitalism, economicorganization was a simpleone.
Divisionoflabourwasnotcarriedsufficientlyfarandthereforea gooddeal
of production was meant for self-consumption. Exchange and marketing
problems weresimpleandoflimited importance.

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 Till the close of Middle Ages, non-economic aspects of social life were
accorded a great importance. The weightage assigned to material well-
beinginhumanlife fortheattainment ofhappinesswasquitelaw.
 Humanbeingshaveanaturalfascinationfordistantandmysteriousthingsas
compared with things which they have to deal with daily. Economic
phenomena, especiallyin the days of relative static and simple economic
life,were slowinarousinginterest.
 Thereis a needtostudyeconomicproblems in the context oftheir overall
social framework and the interdependenceof economics with othersocial
sciences shouldnotbe lost sight of.
8. KEY WORDS
 Physiocracy: It is an economic theory developed by a group of 18th-
centuryAge of Enlightenment French economists who believed that the
wealthofnationsderivedsolelyfromthevalueof“landagriculture”or“land
development” andthatagricultural products shouldbehighlypriced.
 Marginalism: It is a theory of economics that attempts to explain the
discrepancy in the value of goods and services by reference to their
secondary,ormarginal,utility.
 Mercantilism: It is an economic policythat is designed to maximize the
exportsandminimizetheimportsforaneconomy.Itpromotesimperialism,
colonialism,tariffsandsubsidiesontraded goodstoachieve that goal.
 Materialism: It refers to a tendencyto consider material possessions and
physical comfort asmoreimportant thanspiritual values.
 Socialism:Itisapoliticalandeconomictheoryofsocialorganizationwhich
advocates that the means of production,distribution, and exchange should
be owned or regulated bythe communityas a whole.
9. SELF ASSESSMENT QUESTIONS AND
EXERCISES
Short-AnswerQuestions
1. Alongwhichtwo lines doeseconomic thought develop?
2. Howcan the place of abstraction in economics be noted?
3. Writeashort note oninstinctive and acquired responses.
4. Whydideconomic problemsnot appear pressinginearliertimes?

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5. How dothe ‘Historyof Economic Thought’and ‘Historyof Economics’
differ?
6. What didthemedieval theorists condemn?
7. Howisthestudyofeconomic thought helpfultoa student?
Long-Answer Questions
1. Discussthedeductive andinductive methodsofanalysis.
2. Analyze thereasonsresponsibleforlackofagreement ineconomic thought.
3. Explain why in the early stages of economic development, the share of
economic problemsinthe totalityofsocial life was asmall one.
4. Examine anyfourapproaches used foranalysing economic data.
5. Discusshowthelackofinterestinanumberofproblemsnaturallyhindered
thegrowthofeconomics.
1.10 FURTHER READINGS
Hajela, T.N. 2000. History of Economic Thought. New Delhi: Konark
Publications
Loganathan, V
.1998. History of Economic Thought.NewDelhi: S.Chand and
Company.
Sankaran, S. 2000. History of Economic Thought. Chennai: Margham
Publications.
Desai, S.S.M.and N. Bhalerao. 1999. Economic History of Indian.New Delhi:
HimalayaPublishingHouse.

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Material 21
Mercantilism
UNIT 2 MERCANTILISM
Structure
1. Introduction
2. Objectives
3. Introduction and Forms
1. Main Characteristics
4. Thomas Mun
6. Summary
7. Key Words
9. Further Readings
1. INTRODUCTION
Mercantilismisaneconomicpolicythataimstoincreaseexportsandreduceimports
by a country in order to maximize gains thereby leading to an accumulation of
wealth. It promotes a large scaleproductionof goods and services byemploying
a large labour force at low wages. It lays emphasis on concepts like production,
balanceoftrade,alargepopulationtoprovidelabour,interestratesetc.Itdeveloped
as a meanstoincreasewealthandhencethepowerofa nationtotacklewith rival
nationsandgainanupperhandoverthembythe maintenanceofarmiesandnavies,
bothofwhich, required a huge amount of money.
1. OBJECTIVES
Aftergoingthroughthisunit,you willbeableto:
 Analyse theconcept ofmercantilism
 Discussthemaincharacteristicsofmercantilism
 Describe theviews ofThomasMunonmercantilism
2. INTRODUCTION AND FORMS
CommercialactivityinEuropestartedasearlyastheCrusadeswiththediscoveryof
silk,spices andotherrarecommodities.Tradepicked up inthesecondhalfof the
middle ages with the rise of the ‘spirit of discovery’, the network of trade routes
multipliedasnewlandswerediscovered,searoutestotheeastwerediscoveredby
the likes of Vasco da Gama. The 15th and 16th century saw great amassing of
wealth,riseofcapitalism,andneweconomicpractices.Therewasashiftfromthe
MediterraneantothewestEuropecountriesasthehubofcommercialactivityvirtually

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endingthemonopolyoftheTurksontradewiththeEast.Thesenationswerenow
competingagainsteachotherinthequestforwealthandtomeettheirgoals,extracted
all the wealth from their colonies. It was the Portuguese who established their
supremacyintradewiththeeastfollowingtheirbuildingasettlementinGoain1510.
ThisledtotradebetweenEuropeandChinainthe16thcenturyandlateraPortuguese
establishment in Macau, South China,in 1557. This was followed by Dutch and
laterTransatlantictradeoftheEnglishempireaswell.
Thecommercialrevolutionspanningfromthe16thtothe18thcenturywas
markedbyexpansion,increaseintradingactivityandtheriseofmercantileculture.
Therewas alsoa spurtinthebankingsectorand risein investmentapart from the
manufacturing sector.Close at the heels of the commercialrevolution came the
industrialrevolutioninthemiddleof18thcentury.
The following were the factors of the growth of commercial activities in
Europe.
(i) Geopolitical Factors
ThefallofConstantinoplein1453necessitatedthediscoveryofnewtraderoutes
asTurkscontrolledtheMediterraneanregion.TheEnglishalteredtheirlawstothe
advantageoftheirnavysothattheirmercantileaspirationswouldnotbehampered.
Aconsequence of this was that the Hanseatic League that carried on trade in the
northernregionofEuropebecamedysfunctional.Spainremainedadominantforce
throughoutthisperiodbecauseofitsmartialcultureowingtotheReconquistaand
carried on its expansionist policies. However, competition grew between the
European nations intheir quest forwealth andgreater power.
(ii) Monetary Factors
Tradegrewas therewasa greaterneedofpreciousmetalswiththeintroductionof
silvercurrency.TheEuropeansfacedacrunchofgoldandsilverasthesewerespent
ontradewiththeEast.Withtheiroreminesalsoexhaustedorcontainingmetalstoo
deepseated tobeextracted theonlyavailable choice wasfurthering trade.
(iii) Technological Factors
Themaritimeinventionsandscientificdiscoveriesfromthe16thtothe18thcentury
helped the colonial expansionof European nations. The first atlas alongwith 53
othermapswaspublishedina collectioncalledTheatrumOrbisTerrarumin1570.
These were created by Abraham Ortelius and published byGilles Coppens de
Diest. Bythe endof 1572,Latin,French, Dutch andGerman editionsof the atlas
emergedandstayedinvoguetill1612.Experimentswerecarriedoninshipbuilding
andskeletonbasedshipbuilding,Galeaandothertoolsforeasynavigationemerged.
Issac Newton’s theories on motion published in the Principia helped sailors
manoeuvreusingtheirknowledgeof themotionofmoon.By1670,theearthwas
measured in latitudes. There was now the quest to determine longitudes and the
BritishParliament even announceda prizeforthispurposein1714.

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Mercantilism
(iv) Sociological Factors
The development of mercantilism was the consequenceof the amalgamation of
cultural,religious,politicalandeconomicfactors.Inordertoexaminethesecauses,
what may be highlighted is that in the start of the 16th century, Europe came
across great religious and intellectual awakening because of Reformation and
Protestantism.
ErasmusandMartinLutherwhostartedthesetwomovements,respectively,
gavea greatstimulustotheconceptsofindividualismandprivatefreedom.These
movementswenta longwayinevolvingtheideasofpropertyand contractrights,
whichultimatelyledtothegrowthofcommerceandfreeexchange.Renaissance
played an even more important role and stressed on the element of humanism. It
challengedthemedievaltheologianideathathappinessinheavenshouldbepreferred
over worldlyhappiness; rather, it asserted that happiness on this earth was to be
preferred over the promised pleasures ofthe other world.
Inotherwords,itemphasizedonthematerialisticfactorofhumanhappiness.
Alargenumberofwriters,artistsandphilosophersemphasizedtheeconomicbasis
of thesocietyin theirworks, oncethe principles of humanism andindividualism
were accepted.Theyshookthe foundationsoftheedifice ofthechurchtheology.
Intheeconomicsphere,thedeclineof feudalismcontributedtothegrowth
ofmercantilism.Thefeudalsystemwasdistinguishedbyeconomicself-sufficiency,
agriculturalproductionandabsenceofexchangeeconomy.Theagriculturistswere
needed towork free of charge on the fields of the lordsfor a stipulatedperiod.
Theywerealsorequiredto workas soldiersforthe lordsduringwartimes.
As there were no organized industries and even commercial crops were not in
muchdemand,theseagriculturistsworkedforlocalself-sufficiencyinfoodgrains.
In the absence of organized markets, the manufacture was undertaken mainlyto
meetthelocalrequirements.Thisledtothedevelopmentofanindependentdomestic
economy. Itwas based on local self-sufficiency.Especially, there was no effective
state organization. In the cities and towns, the guilds and municipalities tried to
regulate the trade between the various localities. The surplus acquired by the
manorial lords couldbechannelized onlyintrade,especially, overseastrade.
Mercantile activities first grew in the Scandinavian countries because of
theirpowerful navythat couldsailthrough thedeepsea even across theAtlantic.
Later, this efficiency came down to south-west Europe in Portugal and Spain,
which had the added advantage of access to the Mediterranean Sea. England
enteredintothefield inthe 16thcentury.
Definition of Mercantilism
MercantilismasaneconomicideologystartedinEuropeinthe18thcentury.Ithad
itsrootsin thecommercialrevolutionthat had startedinthe16thcentury.Itsmain
aimwastoincreaseanation’swealthbygovernmentregulationofallofthenation’s
commercialinterests.

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The commercial revolutionwas aphaseof European economic extension,
which lastedfrom more or less the 16th centuryuntil the early18th century.The
commercialrevolution,alongwithotherchangesintheearlymodernperiod,had
spectacular effects on theworld.
Nouniversaldefinitionofmercantilismiscompletelysatisfactory;however,it
maybe thought of as a compilation ofpolicies madeto keep the stateaffluentby
economicregulation.Thesepoliciesmayormaynothavebeenappliedatthesame
timeorplace.Mercantilistideashavedevelopedoverthecenturiesinreactiontothe
developmentofothertheoriesof globalpoliticaleconomy,namelyliberalismand
structuralism,andastheglobalpoliticaleconomyitselfhasaltered.Mercantilismis
aneconomicstrategywhereanationtriestoaccumulateasmuchmoneyaspossible
andbywhatevermeansnecessary.Itwasthoughtthatthericherthenation,themore
powerfulitwas.Mercantilismisaneconomictheorythatstatesthattheworldonly
contained a fixed amount of wealth and that to increase a country’s wealth, one
countryhastotakesomewealthfromanotherthroughhavingahigherimport/export
ratioandthroughtheactualconquestofnewlandsandresources.Thiswasconsidered
essentiallyfair as an effort to achieve economic unity and political control. The
followingconceptsarealsoassociatedwithmercantilism:
(a) Mercantilism refers to the supposed mercantilist periodof European
history (approximately 16th–early 18th century) when the
contemporary idea of the ‘nation state’was born.
(b) Economic gains byone nation state usually came at the expense of
other nation states (as states fought for territory), thus leading to a
zero-sum game. In a zero-sum game, for example, poker, what one
partywinsis equal to what the other loses.
(c) Themercantilistphaseofhistoryoverlapswiththephaseof‘classical
imperialism’, when war, conquest and colonial developments were
frequentoccurrences.
Mercantilism: Expansion and Rivalries
Withtheincreaseofcommerce,conflictingindividualtradinginterestscametothe
fore. Almost all of them looked for a strong central authorityto look after them
against their competitors. In the absence of a national government, this was not
feasible andtherelationship wasdefinitelya weak link.
Thegrowthofcommerceanddevelopmentofdomesticeconomygaverise
to the issue of labour and distribution. However, possibly the most significant
factorthatstimulatedthedevelopmentofmercantilismwasthematerializationof
theexchange economy.
Thisresultedinthedevelopmentofinternationaltradeandencouragedlarge-
scaleproduction.Fora fullerexploitation of the availableeconomicresources, it
wasfeltthattheeconomiclifeshouldberegulated.Theurgefornewmarketsresulted
inthediscoveryofnewislandsandcountriesandthus,thedevelopmentofcolonialism.

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Mercantilism
Inshort,itcanbesaidthatmercantilismwasmotivatedbyfactorslikedecline
of feudalism, lack of state organization, rise of free labour classes, competition
anddevelopmentofexchangeeconomy.
But,thegreatestchallengecamefromindustrialcapitalism.Themerchants
carriedonthebusinessirrespectiveofnationalinterest.Whenindustrial capitalism
camein England, for instance, English foreign trade was dominated bythe East
India Company,which was purchasinghigh qualitycotton goods from India and
sellingthem in England and her colonies.Thisharmedtheinterestof Lancashire
cottonkills.From abouttheendofthe18thcentury,continuouspressurefrom the
industrialistcapitalistofEnglandledtothecurbingoftheactivitiesoftheEastIndia
Company,and, finally, it closure. Industrial capitalism thus cameto dominatethe
Western economy, and England was at its head.
Forms of Mercantilism
The mercantilist policiestook manyforms.Domestically, governments tried to
encourage mercantilism throughthefollowingmeans:
 Offered capital tonew industries
 Exempted newindustries from guildrulesandtaxes
 Established monopolies overlocal andcolonial markets
 Grantedtitles andpensions tosuccessful producers
Inthetradepolicy,thegovernmentassistedlocalindustrybyimposingtariffs,
quotas and prohibitions on imports of goods that had competition with local
manufacturers.Governmentsalsoforbadetheexportoftoolsandcapitalequipment
andthe mass departureof skilledlabourthatwouldpermit foreigncountries, and
even the colonies of the home country, to compete in the manufacturing of
manufacturedgoods.Simultaneously,diplomatsencouragedforeignmanufacturers
tomovetothediplomats’countries.
Shippingwasparticularlysignificantduringthemercantileperiod.Withthe
increaseof colonies andtheshipmentofgoldfromtheNewWorldintoSpainand
Portugal,thecontroloftheoceanswasthoughttobecruciallyimportanttonational
power.Thegovernmentsoftheeradevelopedstrongmerchantmarinessinceships
couldbeusedformerchantormilitarypurposes.InFrance,Jean-BaptisteColbert,
theministeroffinanceunderLouisXIVfrom1661to 1683,increasedportduties
onforeignvesselsenteringFrenchportsandofferedbountiestoFrenchshipbuilders.
InEngland,thenavigationlawsof1650 and1651forbadeoverseasvessels
from engaging in coastal trade in the country and stressed that all commodities
importedfrom thecontinent ofEuropebetransported oneitheran English vessel
oravesselregisteredinthecountryoforiginofthecommodities.Inconclusion,all
trade between England and its colonies had to be carried in either English or
colonialvessels.TheStapleActof1663 extendedthe NavigationActbymaking
it essential that all colonial exports to Europe be landed through an English port
before beingre-exported to Europe.

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France, England, and other powers had strong navigation policies. These
policiesweremainlydirectedagainsttheDutch,whocontrolledcommercialmarine
movementinthe16thand17thcentury.Duringthemercantilistera,itwasfrequently
proposed, if not believed, that the principal advantage of foreign trade was the
import of gold and silver. According to this viewpoint, the advantages to one
nationwerematched byexpenditures to the othernations that exported gold and
silver,andtherewerenooverallgainsfrom trade.Fornationsalmost regularlyon
the verge of war, draining one another of precious gold and silver was thought to
be approximatelyas desirable as the direct advantages ofthe trade.
Essence of Mercantilism
The essence of mercantilism was exchange of commoditiesfor profit. It needed
coloniesasreadymarketsforbuyingandsellingthingsatprofitwithoutcompetition.
InthecommercialperiodAmericawascolonizedbytheSpaniards,thePortuguese,
theBritishand theFrench.
2.2.1 Main Characteristics
It is not easyto state in which year or centuryMercantilism came into existence
and died out. According to L.H. Haney, the period of mercantilism was 16th to
18th century.AlexanderGrayrevealed, that Mercantilism cameinto existence at
theendoffourteenthcenturyorbeginningoffifteenthcentury.Cannanhasasserted
that Mercantilism proper only appeared in the 17th century. In fact it was in the
seventeenthcenturythatmaximum numberofmercantilist writingsappeared.
Accordingto Newman, “The economic views which prevailed during the
period falling roughly between the end of middle age and the beginning of the
American Revolution have been named as the commercialor mercantile system
byAdamSmith.”
Accordingto Haney. “Mercantilism comprises the economic views which
prevailed among European statesmen from sixteenth to the latter part of the
eighteenthcentury.”
TheeconomicideasandpolicieswhichwerefollowedbyEuropeanstatesmen
from fifteenth centuryuntil the second half of the eighteenth centuryhave been
describedasmercantilism.Likeothersystemsofthought,itwasasystemcomprising
the views of manywriters whowerespreadthroughout Europe. It covered such a
longperiodthatvariationsandamendments,refinementsandimprovementsinthe
viewsaccordingtochangingconditionsoftimeandlocalcircumstanceswerequite
natural.Theearlymercantilistsbelievedthatthewealthofanationconsistedinthe
amount of bullion (gold and silver) possessed by it. So theysuggested ways and
means toincreasingthestockofgoldandsilverinthecountry
.
It maybestated that the growth ofmoneyeconomyand the riseof nations
werethecorner-stonesofMercantilismanditbegantodisappearwiththeindustrial
revolutionandthegrowthofpolitical freedom

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Mercantilism
Different Names of Mercantilism-Mercantilism prevailed in many countries
whose conditions were different and so the difference in the views of writers of
one country and those of other countries was bound to occur. That’s why
Mercantilism hasbeenknownbydifferent namesindifferent countries.
A. It was known as metalism because of mercantilists’emphasis to increase
thestockofgold,silverand valuablemetals.
B. InFranceitwasknownasColbertism,afterthenameofColbert,theeminent
Finance MinisterofLouisXIV.
C. In Germany and Austria it was known as Kameralism. In the words of
Haney’ “Kameral’s affairs concerned the economy of the prince and
Kameralismwastheartwhichmaintainedandadministeredtheroyalincome.”
D. Themercantiliststhoughtthatthewealthofthenationcouldbeincreasedby
trade and commerce. Theygave importance to trade and commercehence
mercantilism isknownasacommercial system.
E. The mercantilists were against free trade.Theywere in favour of balance
trade.SomewritershavecalleditRestrictiveSystem,owingtotherestrictions
imposed onthecommerce forsecuring favourablebalance oftrade.
Fornearlythreehundredyears,mercantilismwasapowerfulforceinEngland,
Holland,France,Germany,Austria,Italy,Spain andinalmosteveryotherEuropean
nations.
Factors giving rise to Mercantilism- Many political, economic, social and
religious factors wereresponsible fortheriseofmercantilism.
Political Factors- Toward the close of the middle ages, nationalism became a
strongforce.Europechangedgreatlyduetoreformation,renaissance,andinventions.
As a result of these developments, there was a fundamental political change. It
replacedfeudalismwithnationalism.Itresultedintheemergenceofstrongnation
states. Feudalism came to an end and the king became all powerful. In order to
create strong and powerful states, the importance of economic unity was also
recognised.The merchant was an important sourceof moneyand wealth.Hence
themercantiliststriedtoregulatethepoliticalandeconomicactivitiesofthepeople.
Outside of the national boundaries, there was a problem of competition
with other growing states. Each state wanted to preserve its independence and
consideredtheotherstatesasitsrival.Thestrongfeelingofnationalismwasactually
responsible for this situation. It was felt that a strong nation must have well
equippedarmyandnavyto defenditselfandto protectitspoliticalinterestsinthe
outerworld.Itwasfoundthattheexistenceofarmedforcesimpliedhavingadequate
financialresources,whichinthosedayswereequivalenttohavingadequatestocks
of precious metals (gold andsilver).Themerchant has started theirtradeto other
nationsto acquiringgold andsilver.Customslaws andnavigationlaws wereused
in this direction as the chief tools. In order to maintain the armed forces, the
monarchy needed wealth, which could only be achieved through a favourable

Mercantilism
NOTES
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balance of trade. That’s why almost all the thinkers of this age emphasised the
importance ofbalance oftrade.
EconomicFactors-Therewereotherfactors,economicin character,whichgave
rise to mercantilism.Toward the end of the 15th century,remarkablechangeswere
also takingplace in the economic set-up of the society. Feudalism as amethodof
organising agricultural production was losing ground, due to modern changes in
farmingmethods.Consequentlyincomeoffeudallordshavingbeenreduced,they
hadtoresorttotradeandmanufacture.Tradeprovedtobeofsuchvitalimportance
that it shooktheveryfoundationofsocio-economic set upoftheMiddleAges.
DuringtheMiddleAges,moneywas scarce and emphasis was laidonself-
sufficiency. The result was that there was little exchange. But from 16th century
onwards, exchange economy became the rule. Markets developed and money
wasusedinexchange.Thesphereofexchangewaswideningasinternalaswellas
foreign trade were fast developing. The fast growing exchange and trade
necessitatedtheuseofmoneywhichwasmadeavailableinabundanceintheform
of gold and silver bythe discovery of the new world. Inflation was the natural
consequence. Rising prices hit the government and the labour classes hard. The
needofthegovernmentgrewto suchanextentthattherevenueobtainedfromthe
royal estates and prerogatives proved inadequate and therefore option had to be
taken to increase taxationand undoubtedlythe development of the industryand
commerce provided fertile ground for it. Accompanied with the expansion of
commerce & trade and increased supply of money, there started an era of cheap
means oftransport,improved agriculturalmethodsandriseinpopulation.Mostof
themercantilist viewsweretheoutcomeofthesedevelopments.
Religious Factors- During the Middle Ages, both economic and political life
was dominated byreligion and ethics. The Church was more powerful than the
king.Thekingledaluxuriouslife.Thereformationmovementraisedavoiceagainst
thesupremacyof Roman CatholicChurch and challenged the absoluteauthority
of the Pope in religious and political matters. Protestantism gave more rational
meaningtoChristianityandpointedouttheimportanceofmoney,economicefforts
andthriftinman’slife,asagainstCatholicismwhichpreachedtotaldetachmentof
man from material things. InEurope,theking andtheflourishingmerchant class
adopted the protestant religion, broke all the relations with the Roman Catholic
Church and established their ownchurches.
The power of the Church declined and one of the monarch’s rivals for
political powerwas thus removed.The kinghad a feudal militaryservicewhich
usedtofightintimesofwar.Theselordsweregivenlandto maintainthemselves.
Similarly, the church was the biggest landed proprietor. The king used to derive
revenueeitherfromthefeudallordsorfromhisownestates.Nowthekingstarted
imposing taxes. He started maintaining a mercenary army. Tothe king, wealth
acquired from international trade was more important than the wealth acquired
fromnaturaleconomy.

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Mercantilism
Cultural Changes- Europe was undergoing sharp changes in terms of culture
too.Therenaissancegavea newlightandlearningtothepeople.Accordingtothe
theologicalteachingsoftheMiddleAges,themiserablelifeonthisearthwasnotto
be considered source of worry, as it will be compensated by the pleasures in
heaven.Butundertheimpactofthereformationandtherenaissance,peoplewere
made to realise that this life was more important than the life of the other world.
These ideas were depicted in the literary and art works. Writers, artists and
philosophers,all weretryingto immortalisethe new ideas. In‘Utopia’, the book
bySir Thomas More, outlined an ideal state of society and threw a challenge to
the existingpattern of society.As a consequence, moneycameto occupya place
ofprideinhumanrelations andmaterialism startedgainingstrengthdaybyday.
Scientific and Technological Changes- In the field of science and technology,
great advancements and inventions were made which helped in strengthening
mercantilist philosophy and policies. The discoveryof mariner’s compass and
invention of printing were of far reaching importance. Navigation had become
easieranditledtothediscoveryofnewcontinents.ColumbusdiscoveredAmerica.
Anew sea routeto India was established in 1948.The discoveries opened up the
gates to a great variety of raw materials, a wide market and a wider field for
regionalspecialisation.Consequentlythecost of transportationhadbeen reduced
andscopeofforeigntradewasextended.Theinventionofprintingpresshelpedin
the spread ofnew ideas and knowledge.
Alltheabovefactorsprovidedanatmosphereformercantilistviewstoflourish
and gain strength every day. The mercantilists were practical men. Theywere
interestedin practicalproblems.Theirmainproblemwas the creationof a strong
state.ThatiswhyithasbeensaidbySchmollerthatmercantilismismerely“state
making”ontheeconomicside.Mercantilismwasnot anendinitself.It wasonly
an economicmeansfora political end,the endbeingcreationofstrongstate.The
mercantilists regarded wealth as a source of a nation’s power. They saw in the
wealthsecretofnation’sstrength.
General outlines of Mercantilism- The fundamental aim of the mercantilist
was to make his countrystrong. It was felt that a strong countrymusthavewell-
equippedarmyandnavytodefenditselfandto protect itspoliticalinterestsinthe
outerworld. Itwas foundthat maintainingarmed forcesimpliedhavingadequate
financialresources,whichinthosedayswereequivalenttohavingadequatestocks
of precious metals.Thestatepowerwas themilitarypowerwhichin turn needed
wealth.Onlywealthycountrycouldhaveandmaintainstrongforcesandnation’s
unityis a pre-requisiteforstate’spower.Ingeneralit is believedthat mercantilism
aimedatstrongpower,thoughasnotedabove,Schmollerbelievedittobenational
unity. To Eric Roll, the mercantilist theory was nothing but the philosophical
expressionofthecapitalneedsoftherisingmerchantclass.Theyneededastrong
statetoprotectthemandtheyneededcapitalfortradewhichinthosedaysconsisted
ofgoldandsilver.

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Mercantilistsregardedmoneyandbullionasthesignofwealth.Theybelieved
that if country has mines, it can get gold and silver and it can accumulate those
preciousmetalsbyimposingrestrictionsonexportofgold.Butifa countryhasno
mines,it cangetgold andsilveronlythroughtrade.Trademustbe conductedand
regulated in such a waythat gold and silver maycome into the country. In order
that a country may have more bullion, there must be a “favourable balance
of trade.” In other words,there should be an excess of exports over imports.
According to mercantilists, trade was the most important occupation.
IndustryandmanufacturewererankedsecondinimportanceAgriculturewasleast
importantofall. Thoughagriculturemightfeedthepopulationitbroughtnomoney
in the form of gold and silverintothe country.Therefore, theythought that it was
not as important as trade and industry.
Theeconomicdoctrineof mercantilistswas characterisedbythefollowing
features.Intheirpolicies:
(i) Mercantilists gave importance onlytonation advantages;
(ii) Mercantilists laidgreat emphasisonnationalpolicies forincreasingstockof
preciousmetals;
(iii) Theiraimwasmaximumexportandminimumimports;
(iv) Theysought favourable balanceoftradebydirectpromotionofexportand
restrictionofimports;
(v) Theultimate aim was thecreation ofastrongand powerfulstate.
EconomicIdeasofMercantilism-Mercantilistwritershavedifferencesofopinion
on manytheorieswhichgenerallydescribeas mercantilisttheories.Mercantilism
was rootedin practice.As a practical philosophy, it was productsof the minds of
statesmen, civil servants and business leaders of the day. According to Professor
Scott,Mercantilismconnotesa systemofdoctrines,butit willnotbeunfairtosay
that theorisation on economic matters was hardly the business, with which the
mercantilist writers were concerned in the 15th and 16thcenturies.Insimplewords,
in the domain of thought, emphasis was shifted from political and religious to
economic matters and for this, the credit should be given to earlier mercantilists
alone. The earlier literature was scattered and fragmentaryand it was onlyin the
17th century when mercantilist thought, was published in the form of books. To
EricRoll,themercantilisttheorywasnothingbut thephilosophicalexpressionof
the capital needs oftherisingmerchant classes.
We shall now discuss in detail the views of the mercantilists. Their main
views are clustered inthe followingconcepts-
1. The Role of Money- Money was considered to be the most important
source of strength to the nation. The mercantilists were of the view that
money, usually in the form of precious metals or treasure, had played an
importantroleindeterminingtheeconomicwell-beingofanation.Therefore,
themercantilistspaidalotofattentiontotheaccumulationofpreciousmetals.
Itwasfeltthatanadequatesupplyofgoldandsilverintheformofbullionwas

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Mercantilism
essentialto thesafetyof a nation.Ithasbeensaidthat mercantilistsgrossly
confused money with wealth. But it is only fair to say that they regarded
preciousmetalsasasignofwealth.AccordingtoChild,“Thatgoldandsilver
shouldbetakenasthemeasureandstandardofriches waswellfounded.”
Nearlyallthemercantilistsrecognisedpreciousmetalsasthemostimportant
form of wealth. They advocated storing of wealth in the form of precious
metals because gold and silver were durable and they had high value per
unit.Accordingto William Patty, “The great and ultimate effectof tradeis
not wealth at large, but particularly abundance of silver, gold and jewels,
which are not perishable nor so mutable as other commodities, but are
wealthat alltimesandplaces,soastheraisingofsuch,andthefollowingof
suchtrade,whichdoesstorethecountrywithgold,silverandjewelsetc.,is
profitablebeforeothers.”
Mercantilistsbelievedthattherewasacloserelationshipbetweenproduction
oremploymentandqualityofmoneyincirculation.Theywereawareofthe
existenceof employedlabourand natural resources in the country.So they
believed that theincreaseinthesupplyofmoneywould helpinincreasing
production and export of manufactures.Hencetheir emphasis on theways
andmeansofincreasingthestockofpreciousmetalsbymaximisingexports
and minimising imports. In the words of Mun, “All nations who have no
minesoftheirownareenrichedwithgoldandsilver(acquiredbyincreasing
exportanddecreasingimports).”Columbusdeclaredinunequivocalterms,
“Goldisa wonderfulthing,whoeverpossessesitis masterofeverythinghe
desires.With thegold one can get soul into paradise.”
2. Nationalism- Nationalism was the pivot on which their main ideas were
centered and they emphasised on the national strength and prosperity.
Schmoller and Heckscher felt that the stress was on national economic
unity, which naturally implied the enhancement of the power of the state.
Every aspect of life was made subject to regulation by the ruler. The
mercantilists believed that state intervention was necessaryfor the proper
management ofsociety’s economic affairs.
Militaryaggrandisementandtheexploitationofnewcountrieswerethechief
aims. Economically, the expansion of commerceand trade, and politically,
success inwars werethenatural goals which couldnotbeachieved without
a strongnavy.
Low wages and cheap food were considered essential for decreasing the
cost of production and thus for enlarging the volume of exports. With the
objectofmaximisingexportsandminimisingimports,thegovernmentput
heavy import duties to discourage imports of foreign goods and granted
bounties andothertax concessions toencourage exports.
In Mercantilism, the government allowed direct importation of foreign
workers in order to establish new industries. It fixed prices and wages in
order to encourage production. It passed navigationActs to encourage

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32 Material
shippingandtheactivitiesoftheNavy.Itofferedvariousprivilegestotrading
companies.Italsohelpedintheestablishmentofcoloniesinordertosecure
raw materials as well as a market for the finished goods. As there was so
much of economic activity and regulation by the state, mercantilism has
been described asa policyofperpetual governmental activity.
3. Balance of Trade- Foreign trade was considered to be the only source of
acquiring gold and silver. Thomas Mun was fullyconvinced that all those
nations which did not possess their own mines could become rich after
getting gold and silver from foreign countries through trade. He declared
that the ordinary means to increase our wealth and treasure is byforeign
trade.Theyadvocatedforeigntradeasa toolforincreasinganation’swealth
andtreasure.
Theideaofbalanceoftradewasthecentraldoctrineinmercantilistthought.
While talking of a favourable balance of trade, almost all of them did not
signify whether they meant an overall favourable balance of trade, or a
favourablebalancewitheachcountry.ThomasMunwastheonlyexception
who was veryclear about it.
Themercantilistsbelievedthatstateinterventionwasnecessaryto promote
favourablebalanceoftrade.Withtheobjectofachievingafavourablebalance
oftrade,themercantilistsfollowedapolicyofdiscrimination,regulationand
protectioninthemattersoftrade.Themercantilistsgaveprioritytocommodities
withahighlabourrequirementintheirschemeofexportsbecausetherewas
anabundantsupplyofunskilledlabour.Themercantilist’sidealseemedtobe
zeroimports,andexportsonlyinexchangeforthepreciousmetals.Theexport
of raw materials was to be restricted; the imports, especiallyof luxurious
items,weretobekepttotheminimum.However,inpractice,theybelievedin
importing only if it was essential: if commodities could not be produced
domesticallyor if their production would require the transfer of resources
fromexportindustries.AccordingtoChild,thetradewhichemployedshipping
mustbeencouragedmorethanothers,“forbesidesthegainaccruingbythe
goods,the freight, whichis in suchtrades oftenmore than thevalueof the
goodsis allprofittothenations.” SirThomasMunalsoheldthesameview.
Althoughtheydidnotmentionitspecifically,themercantilistsalwaysreferred
toanoverallbalanceofinternational payments.
4. Population-Mercantilistsfavouredalargeandrapidlyincreasingpopulation
for making the nation militarily strong and for increasing its productive
capacity.Theybelievedthatanincreasingpopulationmeantbothanincrease
inpotentialnumberofsoldiersandsailorsandanincreaseinthenumberof
productive workers .They felt that cheap and abundant supply of labour
force would help in keeping the cost of production low thus enabling the
country to compete successfully with the world market. According to
Davenant, “people are the real strength of a country”.

NOTES
Self-Instructional
Material 33
Mercantilism
5. Production-Theideasof mercantilistson productionweremost primitive
intheirnature.Thefeltthattheprocessofproductionwasonewhichinvolves
theapplicationofhumanlabourtoresources.Consequently,theyadvocated
an increase in both labour and resources of production. Mercantilists
regarded agriculture as insignificant. Theyargued that agriculture did not
contribute directlyto the strengthand prosperityof the nation like foreign
trade. Mercantilists believed that foreign trade and commerce were the
most productive professions and that agriculturewas the least productive.
Artisans occupied second place after the merchants. Theybelieved that in
thenationalinterest,manufacturingindustriesweremorecloselyassociated
with foreign commerce than with agriculture therefore it must receive
maximumattentionfromthegovernment.Theyalsodrewdistinctionbetween
productive and unproductive labour. According to mercantilists,
manufacturers, farmers and merchants belong to the productive category
while professional persons such as doctors, lawyers, shopkeepers, stock
brokers and clergymen were included in the unproductive category. Petty
revealed that labour is the father and active principle of wealth as land is
mother. Davenant considered labour as the most important factor and
declared that “thewealthof all nations arises from the labourand industry
ofthepeople.”Thusit is clearthatland andlabourweretheonlyfactorsof
productionwhichweregiven importance bymercantilists.
6. Rate of Interest- Among the mercantilist writers, there were two main
streams of thoughton thesubject ofinterest-onejustifyingthe chargingof
interest while the other opposing it. Thomas Mun was the leader of those
whowerein favourofinteresttaking.Inhisview,moneylendingprovided
capitaltopoormerchants.Themercantilistsadvocatedalowrateofinterest
on economic grounds. They believed that economic development could
proceedeffectivelyonlyifinterestratewaslowandrateofinterestcouldbe
low only if the supply of money was adequate. Further, labour and other
sources of productionwould be fully employedonly if the moneysupply
was adequate. So theyarguedthat the accumulationof wealth would tend
to lowerthe rateof interest and increasethe availabilityof credit. Thomas
Mun and his followers said that the rate of interest would be high or low
depending upon industrial conditions of the country. Manley and Locke
declared that the scarcity of money makes the rate of interest high while
plentyof moneymakes it low.Most of the writers were against a high rate
ofinterest.Davenant consideredinterest tobe anunearnedincome. Further
hetold,“Theuserswhoarethetruedronesofa commonwealthlivingupon
honeywithoutofthe labour, shouldbetaxes.”
7. Wage and Rent- The mercantilists were primarily preoccupied with the
problemofproduction.Theydidnotgivemuchimportancetotheproblems
of distribution, especially those related to the payment of wage and rent.
Pettysaidthat the value of labourdepended uponits productbut as these

Mercantilism
NOTES
Self-Instructional
34 Material
ideas werenotdeveloped at all, theycanonlybetreatedas casual remarks.
AccordingtoCantilon,the valueoflabourequals that ofmaterial whichis
requiredforsubsistenceoflabour.Thus,hegavethebasisforthesubsistence
theoryofwages.
8. Taxation-Themercantilistswereinfavourofthemultipletaxsystem.Based
on the basic principle,each shouldpayaccordingto the benefits received
fromthestate.GrotiusandPufendorfannouncedthat manshouldbetaxed
in accordance with the benefits received in the form of protection. While
Hobbes said that man should be taxed on expenditure incurred by him.
Petty’s views on taxation were most scientific. To use his words, “it is
generallyallowedbyallthatmenshouldcontributetothepubliccharge,but
accordingto theirshareandinterestthat theyhavein publicplaces,thatis,
accordingto theirEstate and Riches.”Someothermercantilists,who were
directly employed bythe state, also expressed their views on the subject.
Generally the mercantilists favoured low custom excise duties, a tax on
interest etc.Their chief canon oftaxation was that of equality
.
9. Value-Valuewas regarded as an intrinsic qualityof commodity. It depends
upontheutilityofthecommodityoritdependsuponthesatisfyingpowerof
human being. Inthe mercantilist literature, one comes across two types of
value(1)intrinsicvalue(2)Extrinsic/Marketvalue.Intrinsicvaluedepends
onhumanneedsanddesires andthepowerofcommoditiestosatisfyhuman
wants and extrinsicvaluedepends upon costofproduction.Earlierwriters
regarded value as the intrinsic worth of commodity. Theyemphasised the
subjectiveaspectcalledutility.Thelaterwritersregardedvalueasextrinsic,
they called it artificial value or exchange value. Locke and Fortrey
had drawn distinctions between natural value depending on cost and
market valuedependingondemandand supply.
Decline of Mercantilism
MercantilismdeclinedinEnglandand otherparts oftheworld towardstheendof
eighteenth century. The following were the main reasons for the decline of
mercantilism:
(i) UndertheinfluenceoftheteachingsofAdam Smith,the‘policyof plenty’
began to replace the ‘policy of power’.
(ii) Thedevelopmentofbanking,both domesticandinternational,reducedthe
importanceofbullion(gold andsilver)andcoins.
(iii)The expansion of market economyshowed that real estates, factories and
machineryweremoreimportant itemsofwealththangoldandsilver.
(iv) TheeconomicgrowththattookplaceduringtheIndustrialRevolutionmade
itpossibleforthesocietyto relyoncompetitiveforces andlaissez faireand
rather thanpromotingandregulatingmonopolies.
(v) The great progress made in science and technology taught people that a
countrycould becomerichernotonlybyimpoverishingitsneighboursbut

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