Lecture 1 - Mercantilism
Mercantilism finds its origin in Europe between 1500-1800, after the medieval world. In this
period there was a huge growth of trade between nations, nation states became increasingly
important, as were the struggles between them.
What is the source of wealth for the state?
→ Gold and silver
What should a state do to become wealthier and stronger?
→ Imposing taxes on own import/foreign export
→ Support own exports/foreign imports
→ Preference for exporting manufactured goods over raw materials
→ Promoting the existence of a large and hard-working population to increase
the competitiveness of domestic goods. Keep the wages low.
All this supports an active/positive balance of trade.
Contributions of Mercantilism
→ Importance of money for the growing economy.
→ Importance of trade
→ Reconsidering the social status of merchants (handelaren/kooplui).
→ Economics is a part of political project
Working group 1 - Physiocrats, David Hume & the Classical School: Adam Smith
Physiocracy
A brief French school of thought (1756-1776)
Historical Context
In 18th century France the economy was over regulated, an extremely strong government,
exercising mercantilist policy. The tax system was chaotic. The economy was feudal, with
hardly any free trade.
Major tenets
→ Natural order → the rule of nature: laws govern society just as physical laws
govern the natural world. Regulation destroys the economy, we should
deregulate the economy.
→ Laissez-faire, laissez-passer → Let the people do without government
interference.
→ Emphasis of agriculture → value comes from nature → we should tax the
landowner, the are the ones creating value, let's tax the source of value.
, Contrast between Mercantilism and Physiocracy
David Hume and his critique of Mercantilism
David hume introduced the prices specie-flow mechanism:
● Increasing exports means increasing the quantity of money in the country.
● This creates inflationary pressures, making it more difficult to export and
cheaper to import.
● It is now more difficult to maintain an export-surplus.
● Focussing on exports makes it difficult to export.
→ Promotion of exports to accumulate gold and silver is a self-defeating
tactic → direct criticism of mercantilism.
The Classical School: Adam Smith
Division of labor
Fragmenting the supply chain to improve efficiency, because:
● Increased dexterity of an individual worker (specialization);
● Reduced time of moving from one operation to another;
● Stimulates the invention of new/improved machinery in the workplace.
This also means that more capital is added to the production process →
capital accumulation
Role of government
The government should be limited.
● Invisible hand: a competitive market tends toward an efficient outcome. Because if
everyone pursues their individual interest, the collective is served (harmony of
interests). (see knowledge clip)
● This idea extends to international trade → absolute advantages.
The government can still intervene, but only in cases that are important to public service, for
example national defense, administration of justice, public works.
Mercantilism finds its origin in Europe between 1500-1800, after the medieval world. In this
period there was a huge growth of trade between nations, nation states became increasingly
important, as were the struggles between them.
What is the source of wealth for the state?
→ Gold and silver
What should a state do to become wealthier and stronger?
→ Imposing taxes on own import/foreign export
→ Support own exports/foreign imports
→ Preference for exporting manufactured goods over raw materials
→ Promoting the existence of a large and hard-working population to increase
the competitiveness of domestic goods. Keep the wages low.
All this supports an active/positive balance of trade.
Contributions of Mercantilism
→ Importance of money for the growing economy.
→ Importance of trade
→ Reconsidering the social status of merchants (handelaren/kooplui).
→ Economics is a part of political project
Working group 1 - Physiocrats, David Hume & the Classical School: Adam Smith
Physiocracy
A brief French school of thought (1756-1776)
Historical Context
In 18th century France the economy was over regulated, an extremely strong government,
exercising mercantilist policy. The tax system was chaotic. The economy was feudal, with
hardly any free trade.
Major tenets
→ Natural order → the rule of nature: laws govern society just as physical laws
govern the natural world. Regulation destroys the economy, we should
deregulate the economy.
→ Laissez-faire, laissez-passer → Let the people do without government
interference.
→ Emphasis of agriculture → value comes from nature → we should tax the
landowner, the are the ones creating value, let's tax the source of value.
, Contrast between Mercantilism and Physiocracy
David Hume and his critique of Mercantilism
David hume introduced the prices specie-flow mechanism:
● Increasing exports means increasing the quantity of money in the country.
● This creates inflationary pressures, making it more difficult to export and
cheaper to import.
● It is now more difficult to maintain an export-surplus.
● Focussing on exports makes it difficult to export.
→ Promotion of exports to accumulate gold and silver is a self-defeating
tactic → direct criticism of mercantilism.
The Classical School: Adam Smith
Division of labor
Fragmenting the supply chain to improve efficiency, because:
● Increased dexterity of an individual worker (specialization);
● Reduced time of moving from one operation to another;
● Stimulates the invention of new/improved machinery in the workplace.
This also means that more capital is added to the production process →
capital accumulation
Role of government
The government should be limited.
● Invisible hand: a competitive market tends toward an efficient outcome. Because if
everyone pursues their individual interest, the collective is served (harmony of
interests). (see knowledge clip)
● This idea extends to international trade → absolute advantages.
The government can still intervene, but only in cases that are important to public service, for
example national defense, administration of justice, public works.
