Summary History of Economic Thought

Chapter 3 – Mercantilism, Physiocracy, and Other
Precursors of Classical Economic Thought
Mercantilism
Mercantilismlimthemnasemglvenmtomthemeconoslcmilteratrremandmpractcemofmthemperlodmbetweenm1500-1750.

Themilteratrremprodrcedmfocrieimonmqreitonimofmeconoslcmpoilcymandmwaimriraiiymreiatedmtomampartcriarmlntereit
themserchant-wrltermwaimtrylngmtomprosote.mFormthlimreaion,mtheremwaimofenmconilderabiemikeptclismregardlngm
themanaiytcaimserltimofmpartcriarmargrsentimandmthemvaildltymofmthelrmconciriloni.

Themagemofmsercantilismhaimbeenmcharacterlzedmaimonemlnmwhlchmeverymperionmaimhlimownmeconoslit.

Mercantilismcanmbeitmbemrnderitoodmaimanmlnteiiectraimreactonmtomthemprobiesimofmthemtsei.m Inmthlimperlodmofm
themdecilnemofmthemsanormandmthemrliemofmthemnaton-itate,mthemsercantilitimtrledmtomdeterslnemthembeitmpoilcleim
formprosotngmthempowermandmweaithmofmthemnaton.

Themsercantilitimproceededmonmthemaiirsptonmthatmthemtotaimweaithmofmthemworidmwaimfied.mUilngmthemiasem
aiirspton,mthemichoiaitcimhadmreaionedmthatmwhenmtrademtookmpiacembetweenmlndlvldraii,mthemgalnmofmonemwaim
neceiiarliymthemioiimofmanother.mThemsercantilitimappiledmthlimreaionlngmtomtradembetweenmnatoni,mconcirdlngm
thatmanymlncreaiemlnmweaithmandmeconoslcmpowermofmonemnatonmoccrrredmatmthemeipeniemofmothermnatoni.
m Internatonaimtrademaimamseanimofmlncreailngmweaithmandmpowermofmamnatonmand,mlnmpartcriar,mfocriedm
onmthembaiancemofmtradembetweenmnatoni.

Mercantilitimadvocatedmlncreailngmthemnaton’imweaithmbymilsritaneoriiymencorraglngmprodrcton,mlncreailngm
eiporti,mandmhoidlngmdownmdoseitcmconirspton.mThemweaithmofmthemnatonmreitedmonmthempovertymofmthemsany.

Accordlngmtomsercantilitmthlnklng,mamcorntrymihoridmencorragemeiportimandmdlicorragemlsportimbymseanimofm
tarlffi,mqrotai,mirbildlei,mtaiei,mandmthemilke,mlnmordermtomachlevemamio-caiiedmfavorabiembaiancemofmtrade.

Themfritmsercantilitimargredmthatmamfavorabiembaiancemofmtrademihoridmbemitrrckmwlthmeachmnaton.

Amcentraimfeatrremofmsercantilitmilteratrremlimltimconvlctonmthatmsonetarymfactori,mrathermthanmreaimfactori,marem
themchlefmdeterslnantimofmeconoslcmactvltymandmgrowth.mMercantilitimsalntalnedmthatmanmadeqratemirppiymofm
soneymlimpartcriariymeiientaimtomthemgrowthmofmtrade,mbothmdoseitcmandmlnternatonai.mChangeimlnmthemqrantty
ofmsoney,mtheymbeileved,mgeneratemchangeimlnmthemieveimofmreaimortprt.

Adam Smith:mthemieveimofmeconoslcmactvltymandmltimratemofmgrowthmdependimrponmamnrsbermofmreaimfactori:mthem
qranttymofmiabor,mnatrraimreiorrcei,mcapltaimgoodi,mandmthemlnittrtonaimitrrctrre.mAnymchangemlnmthemqranttymof
soneymworidmlnfrencemoniymthemgeneraimieveimofmprlcei.

BecariemSmithmandmothermciaiilcaimeconoslitimitreiiedmthemreaimforceimthatmdeterslnemthemieveimofmortprt,mthelrm
theorleimfocriedmaisoitmeicirilveiymonmirppiy.mHowever,mbecariemKeynesmesphailzedmthemroiemofmaggregatem
desand,mhemforndmiosemcossonmbondimbetweenmhlimtheorymandmthatmofmthemsercantiliti:mamfavorabiembaiancem
ofmtrademworidmlncreaiemdoseitcmipendlngmandmtherebymraliemthemieveimofmlncosemandmespioysent.

Themvlewmthatmthemiawimofmthemeconosymcoridmbemdlicoveredmbymthemiasemsethodimthatmreveaiedmthemiawimofm
phyilcimwaimanmlsportantmitepmtowardimirbieqrentmdeveiopsentimlnmeconoslcmtheory.

Onemlsportantmdlfferencembetweenmciaiilcaimandmsercantilitcmtheory:m
 Themsercantilitimbeilevedmtheremwaimambailcmconflctmbetweenmprlvatemlntereitimandmthemprbilcmweifare.m
Thereforemtheymconilderedmltmneceiiarymformgovernsentimtomchanneimprlvatemieif-lntereitmlntomprbilcm
benefti.
 Ciaiilcaimeconoslitimforndmambailcmharsonymlnmthemiyitesmandmiawmprbilcmgoodimaimfowlngmnatrraiiym
frosmlndlvldraimieif-lntereit.

,Influential Precursors of Classical Thought
THOMAS MUN (1571-1641)
Hlimthlnklngmwaimtyplcaiiymsercantilitcmlnmthatmhemconfriedmthemweaithmofmamnatonmwlthmltimitockmofmpreclorim
setaiimandmthereforemargredmformamfavorabiembaiancemofmtrademandmanmlnfowmofmgoidmandmilivermtomietiemthemtrade
baiance.

Hembeilevedmthatmgovernsentmihoridmregriatemforelgnmtrademtomachlevemamfavorabiembaiance,mencorragem
lsportatonmofmcheapmrawmsaterlaii,mencorragemeiportatonmofmsanrfactrredmgoodi,metc.

WILLIAM PETTY (1623-1687)
Hlimeconoslcmwrltngimweremnotmgeneraimtreatieismtheymweremthemreiritmofmhlimpractcaimlntereitimlnmsaterimirchm
aimtaiaton,mpoiltci,msoney,mandmseairresent.

BERNARD MANDEVILLE (1670-1733)
Mandevliie’imiatrlcaimpoesmwaimanmatackmonmthemio-caiiedmientsentaimsorailiti,mwhoiemappeiiatonmrefectim
thelrmbeilefmthatmsorailtymlimnotmsademofmprreiymratonaimprlnclpiei.

Themratonai,mieifihmdrlveimofmhrsanmbelngimworkedmtowardmthemioclaimgoodmbecariemsoraimientsentmtespered
egolismandmpersltedmanmrnderitandlngmofmthemdlfferencembetweenmrlghtmandmwrongmanmofmhowmtomchooiemthem
rlghtmway.
m Seifihneiimwaimamsoraimvlcembrtmthatmioclaimgoodmcoridmreiritmfrosmieifihmactimlfmtheiemactonimwerem
properiymchanneiedmbymthemgovernsent.

TomMandevliie,mthemendmreiritmofmprlvatemvlrtremlimeconoslcmdepreiilon.

Mandevliiemwaimamprremsercantilitmlnmhlimlnilitencemthatmgovernsentmregriatemforelgnmtrademtomenirremthatm
eiportimaiwayimeiceedmlsporti.

Mandevliie’impoiltonmonmiabormlimpartcriariymciearmandmaiarslng:mhemadvocatedmamiargempopriatonmandmchlidm
iabor,mandmhemcondesnedmldieneii.mAmiargempopriatonmwlthmhlghmiabor-force-partclpatonmrateimreiritimlnmiowm
wagei,mwhlchmglveimthemnatonmamcospettvemadvantagemlnmeiportimandmlnternatonaimtrade
 Amdownward-iioplngmiabormirppiymcrrve:mhlghermwageimredrcemiabormirppiy.

DAVID HUME (1711-1776)
Hrsemcoridmbemcaiiedmamilberaimsercantilit:mhemhadmonemfootmlnmsercantilis,mbrtmwlthmthemothermiteppedm
forwardmlntomciaiilcaimpoiltcaimeconosy.

InmlnternatonaimtrademtheorymHrse’imcontrlbrtonmhaimbecosemknownmaimthemprlcemipecle-fowmsechanlis.m
Hrsempolntedmortmthatmltmworidmbemlspoiilbiemformanmeconosymtomsalntalnmamfavorabiembaiancemofmtradem
contnroriiy,maimsanymsercantilitimadvocated.
 Ifmonemcorntrymhaimamfavorabiembaiancemofmtrade,miosemothermcorntrymormcorntrleimsritmbemhavlngmanm
rnfavorabiembaiance.

Seif-correctonmofmthemtradembaiancei:meiportimwliimdecreaiemandmlsportimwliimlncreaiemformthemeconosymwlthmthem
lnltaimfavorabiemtradembaiancembecariemltimprlceimaremreiatveiymhlghermthanmthoiemofmothermeconoslei.

Hrsemiearchedmformamconnectonmbetweenmeconoslcmfreedosmandmpoiltcaimfreedos.mHrsemsalntalnedmthatmthem
growthmofmeconoslcmfreedosmwentmhandmlnmhandmwlthmthemgrowthmofmpoiltcaimfreedos.

Hrse’imDlctrs:mthatmwatmorghtmtombem(norsatvemitatesenti)mcannotmbemderlvedmfrosmwhatmlim(poiltvem
itatesent).

RICHARD CANTILLON (1680-1734)
Cantiionmwaimpartmsercantilit,mpartmphyilocrat,mandmpartmphyilocrat-ciaiilcai.mHemwaimsodernmlnmthat:
1. Hemitartedmwlthmthemgoaimofmeitabilihlngmbailcmprlnclpieimofmeconoslcimthrorghmthemproceiimofm
reaionlng.

, 2. Hemwantedmtomcoiiectmdatamtomriemlnmthemproceiimofmverlfylngmhlimprlnclpiei.
Cantiion’imieslnaimvlilonmwaimofmamsarketmiyitesmthatmcoordlnatedmthemactvlteimofmprodrcerimandmconirseri
throrghmthemsedlrsmofmlndlvldraimieif-lntereit.mThemkeymactorimlnmthlimieif-regriatngmiyitesmwerementreprenerri
whomprodrcedmioclaimreiritimirperlormtomoneimthatmcoridmbemprodrcedmbymgovernsentmlnterference.

Hlimeipianatonmofmthemforceimthatmdeterslnemprlceimwaimirrprlilngiymsodernmlnmthatmhemdlitngrlihedmbetweenm
sarketmprlcei,mdeterslnedmbymihort-rrnmfactori,mandmwhatmhemcaiiedmlntrlnilcmvaire,miong-rrnmeqrlilbrlrsmprlcei.

Physiocracy
Phyilocratimpercelvedmthemlnterreiatedneiimofmthemiectorimofmthemeconosymandmanaiyzedmthemworklngmofm
nonregriatedmsarketi.
m Beganmarorndm1750.

Themwrltngimofmthemphyilocratcmichooimeipreiimresarkabiymconilitentmvlewimonmaiimsajormpolnti.mTheremaremthree
reaionimformthli:
1. PhyilocracymdeveiopedmeicirilveiymlnmFrance
2. Themldeaimofmthemphyilocratimwerempreientedmovermamreiatveiymihortmperlodmofmtse:m1750mtom1780
3. Phyilocracymhadmanmacknowiedgedmlnteiiectraimieader,mFrangois Quesnay (1649-1774),mwhoiemldeaim
weremacceptedmvlrtraiiymwlthortmqreitonmbymhlimfeiiowmphyilocrati.

Themcorrectmforsriatonmofmeconoslcmpoilcymreqrlredmamcorrectmrnderitandlngmofmthemeconosy.mThemphyilocrati’m
rnlqremldeamconcernedmthemroiemofmnatrraimiawmlnmthemforsriatonmofmpoilcy.mTheymsalntalnedmthatmnatrraimiawim
governedmthemoperatonmofmthemeconosymandmthatmhrsanimcoridmobjectveiymdlicovermthes.

Themphyilocratimfocriedmnotmonmsoneymbrtmonmthemreaimforceimieadlngmtomeconoslcmdeveiopsent.m Inmreactonmtom
themsercantilitcmnotonmthatmweaithmwaimcreatedmbymthemproceiimofmeichange,mtheymitrdledmthemcreatonmofm
phyilcaimvairemandmconcirdemthatmthemorlglnmofmweaithmwaimlnmnatrre.

Prodrctonmforsmiandmcreatedmthemirrpirimthatmthemphyilocratimcaiiedmthemnetmprodrct.

Themphyilocrati’mcontrlbrtonmtomslcroeconoslcmtheorymweremnotmaimilgnlfcantmaimthelrmcontrlbrtonimtom
sacroeconoslcmtheory.mTheymbeilevedmthatmthembailcmsotvatonmformthemeconoslcmactvlteimofmhrsanmbelngim
waimthemdeilremtomsailslzemgaln.mTheymconcirdedmthatmfreemcospettonmiedmtomthembeitmprlcemandmthatmiocletym
woridmbeneftmlfmlndlvldraiimfoiiowedmthelrmieif-lntereit.

Becariemthemphyilocratimbeilevedmthatmamnatrraimordermeilitedmthatmwaimirperlormtomanympoiilbiemhrsanmdeilgn,m
theymconcelvedmofmthemeconosymaimiargeiymieif-regriatngmandmthrimrejectedmthemcontroiimlspoiedmbymthem
sercantilitmiyites.
 Thempropermgoaimofmthemgovernsentmwaimtomfoiiowmampoilcymofmialiiezmfalre:mtomieavemthlngimaione.

Spanish Economic Thought
Azpilcueta:mthemqranttymtheorymofmsoneymeipialnimthatmthemkeymfactormcarilngmchangeimlnmthemgeneraimieveimofm
prlceimlimthemqranttymofmsoneymlnmclrcriaton.

, Chapter 4 – Adam Smith
The breadth of Adam Smith
Sslthmwaimlnfrencedmbymhlimteacher,mFrancis Hutcheson (1694-1746),mandmbymDavid Hume (1711-1776).mSslthm
iharedmHrtcheion’imitrongmdliapprovaimofmthemldeaimofmBernardmMandevliie,mwhoiemiatrlcaimityiemhadmglvenmhlim
preientatonmofmthemsercantilitmpoiltonmwldemcrrrency.

Sslth’imconceptonmofmthemicopemofmeconoslcimfoiiowedmthatmofmthemEngilihmsercantiliti.mHemwaimlntereitedmlnm
eipialnlngmthemnatrremandmcarieimthemweaithmofmnatoni.

Smith’s analysis of markets and policy conclusions
TheremaremtwompoiilbiemapproacheimtomthemwrltngimofmAdasmSslth:
1. Eiaslnemthemoveraiimtheoretcaimitrrctrremandmthempoilcymlspilcatonimthatmaremelthermlnherentmlnmthem
theoretcaimiyitesmormitatedmeipilcltiymbymSslth.
2. Eiaslnemthemtheoretcaimitrrctrremlnmdetalimtomevairatemltimlnternaimconilitencymofmiackmthereof.

WemwliimriemthemfritmapproachmbecariemSslth’imlsportancemlnmthemhlitorymofmeconoslcmthorghtmlimamreiritmof:
1. Hlimbroadmrnderitandlngmofmthemlnterconnectedneiimofmthemeconosy
2. Hlimlnfrencemonmeconoslcmpoilcy

Sslth’imgreatmitrengthmaimanmeconoslitmiaymlnmhlimvlilon:
1. Ofmthemlnterdependencemofmthemiegsentimofmthemeconosy
2. Ofmthempoilcleimtombemfoiiowedmtomprosotemthemweaithmofmamnaton

Sslthmadvocatedmialiiezmfalremnotmbecariemhembeilevedmsarketimtombemperfectmbrtmbecariemsarketimriraiiym
prodrcedmbetermreiritimthanmdldmgovernsentmlnterventon.

Poiltvemeconoslci:msater-of-factmreiatonihlpimbetweenmvarlabiei.
Norsatvemeconoslci:mqreitonimofmwhatmihoridmbe.

Conteitraimeconoslcmpoilcymlimjritmanothermwaymofmeipreiilngmthemldeamofmthemartmofmeconoslci.

ThemeconoslcimofmAdasmSslthmandmthemsercantilitimiharemcertalnmbailcmeiesenti:
 Itmwaimpoiilbiemtomdlicovermthemiawimofmthemeconosymbymseanimofmhardmanaiyili.mMater-of-fact,mcarie-
and-effectmreiatonihlpimcoridmbemreveaiedmthrorghmiclentfcmlnveitgaton.
 Hrsanmbelngimaremratonaimandmcaicriatngmandmiargeiymdrlvenmbymeconoslcmieif-lntereit.

Dlfferencei:
 Cospettvemsarketimeilit,mandmwlthlnmtheiemsarketimthemfactorimofmprodrctonmsovemfreeiymtomadvancem
thelrmeconoslcmadvantage.
 Amnatrraimproceiimatmworkmlnmthemeconosymcanmreioivemconflctimsoremeffectveiymthanmanym
arrangesentimdevliedmbymhrsanmbelngi.

Themkeymtomrnderitandlngmhowmiosemdegreemofmharsonymandmgoodmproceedmfrosmconflctmandmieif-lntereitmileimln
themactvlteimofmthemcapltailit.mSslthmihowedmthatmcapltailitimaremdrlvenmnotmbymaitrrlitcmsotveimbrtmbymamdeilrem
tomsakemprofti.

Sslthmconcirdedmthatmltmlimwonderfrimhowmthemsarket,mwlthortmpiannlngmormgovernsentaimdlrecton,mieadimtomthem
iatifactonmofmconirsermdeilreimatmthemioweitmpoiilbiemioclaimcoit.

Sslth’imsoitmilgnlfcantmcontrlbrtonmtomeconoslcmtheorymwaimhlimanaiyilimofmthemworklngimofmcospettvem
sarketi.mHemwaimabiemtomipeclfymwlthmgreatermaccrracymthanmprevlorimwrlterimthemsechanlismwherebymthemprlcem
reiritngmfrosmcospettonmworid,mlnmthemiongmrrn,meqraiimthemcoitmofmprodrcton.