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History of Economics summary
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Summary of the course History of Economics in the second year of Economics and Business Economics at Radboud University.
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History of Economics SummaryHistory of economics means; dealing with the past, engaging with the ideas of past thinkers and with the schools of
thought (intellectual history), learning about important debates and telling a story.
- History of thought; history as important for its own sake, historical context, schools/individuals
- History of analysis (whig history); important only as anticipating today’s knowledge, logic,
concepts/problems.
Chapter 2; the first school; mercantilism (between 1500 – 1800)
The economic doctrine known as mercantilism appeared between the Middle Ages and the period of the triumph of
laissez-faire. Mercantilism can be dated roughly from 1500 to 1776. These dates vary, however, in different countries
and regions.
- Growth of trade
- Increasing importance of the nation states and struggles between them
Questions that were asked;
- What is the source of wealth for the state?
o Gold and silver
- What should the state do to become wealthier and stronger?
o Imposing taxes on export
o Supporting imports
o Preference for exporting manufactured goods over raw materials
o Promoting the existence of large and hard-working population increasing competitiveness of
domestic goods
Mercantilist school (1500 – 1776); a body of doctrine that superseded feudal concepts, promoted nationalism, gave
new dignity and importance to the merchant and justify a policy of economic and military expansion.
Historical background of the Mercantilist School;
- The self-sufficiency of the feudal community slowly gave way to the new system of merchant capitalism.
Cities became increasingly important and trade flourished both within countries and between countries, so
the use of money expanded. The discovery of gold started the growing volume of commerce
(handelsvolume) and stimulated theorizing about previous metals.
Major Tenets of the Mercantilist School (important principles);
- Gold and silver are the most desirable form of wealth, so the wealth and power of a country is measured in
gold and silver. The goal was to increase this wealth through a surplus of exports.
- Nationalism; one’s own country should promote exports and accumulate wealth at the expense of its
neighbours, because countries could not simultaneously export more than they imported. One country could
increase its resources only at the expense of another. Only a powerful nation could keep its colonies through
competing in international trade and winning wars with strong navies and merchant fleets (militarism)
- The fear of goods; duty-free importation of raw materials that could not be produced domestically,
protection for manufactured goods and raw materials that could be produced domestically and export
restrictions on raw materials.
- Colonization and monopolization of colonial trade; Merchant capitalists wanted to keep the colonies
eternally (eeuwig) dependent upon and subservient to the mother country.
- Opposition to internal tolls, taxes and other restrictions on the movement of goods, because this could
throttle business enterprise and drive up the price of a country’s exports.
- Strong central government; was needed to promote mercantilist goals (nationalism, protectionism,
colonialism, international trade unhampered by tolls and taxes). The government restricted free entry into
business to limit competition, it promoted mining, agriculture and industry with subsidies and protected
imports via tariffs. It also regulated the methods of production.
- The importance of a large, hard-working population; it will keep the wages low, so lower prices on export,
more inflow of gold & it would reduce idleness (luiheid) and promote a greater participation in the labor
force. A sizable, industrious population also provides soldiers and sailors to fight for the glory of the wealth
of nation.
,Mercantilists believed that low wages were necessary to reduce idleness and promote participation in the labour
force. The income effect of a higher wage would be that the workers could buy more leisure (free time) and reduce
the number of hours they work. BUT the substitution effect, which the mercantilists overlooked, would be that the
leisure hours would be more expensive (in terms of goods), because goods were more expensive due to higher
production prices. Because the goods are more expensive, people buy less and work more so they substitute work
for the more expensive leisure. It is not clear how workers would react if wages increase.
Whom did the mercantilist school benefit or seek to benefit?
- Those who were most powerful and entrenched (rooted) and had the most favored monopolies and
privileges.
Mercantilism can be understood as an example of rent seeking behavior; attempts by private parties to increase
their profits by securing favorable laws and regulations from government.
The mercantilists made a lasting contribution to economics by emphasizing the importance of international trade.
They developed the Balance of payments between an nation and the rest of the world. They only contributed a few
direct things to the economic theory of today, but they did indirectly contribute to economics and economic
development.
- They emphasized the importance of money for the growing economy.
- They permanently influenced attitude toward the merchant (new ideology supporting business).
- They made an indirect impact on economics by promoting nationalism (central government regulation).
- They made economics as a part of a political project.
- The privileged chartered trading companies, ancestors of the modern corporation, helped transform the
economic organization of Europe by bringing new products, providing outlets for manufactured goods and
furnishing incentives for the growth of capital investment.
- They made a permanent contribution to the economic development by expanding the internal market,
promoting free movement of goods unhampered by tolls, establishing laws and taxes and protecting people
and goods in transit within and between countries.
Chapter 3 the physiocratic school
The Physiocratic School (1756 – 1776) appeared in France toward the end of the mercantilist epoch.
Historical context;
- 18th century in France; overregulated economy exercising mercantilist policies.
- Chaotic tax system
- Feudal economy (beheerst door adel); hardly any free trade, peasants dependent on their lords.
- There was a limit to free exchange of goods, to the output and pricing (remnant of Mercantilism)
Major tenets (most important principles);
- Natural order and natural rights; the rule of nature govern societies just as physical laws govern the natural
world (Newton). All human activities should be brought into harmony with these laws.
- Laissez-faire, laissez-passer (Vincent de Gournay); ‘let people do as they please without government
interference’. Government should never extend their interference in economic affairs beyond the minimum
absolutely essential to protect life and property and to maintain freedom.
- Emphasis on agriculture; Value comes from nature. Only agriculture was productive, because it produced a
surplus (a net product above the value of resources used in production). Only nature creates ‘new’ value,
because labor (and capital) can only ‘reprocess’, so industry, trade and the professions were useful but
sterile and didn’t create a surplus.
- Taxation on landowners; only the landowners should be taxed, because they only produce a surplus that
they receive in the form of rent.
- Interrelatedness of the economy; there is a circular flow of goods and money in the economy.
- They emphasized production rather than exchange as a source of wealth.
Whom did the physiocratic School benefit or seek to benefit?
- The peasants (farmers) would gain, because onerous obligations to the landowners would end.
- The capitalistic farms employing wage labor and advanced techniques were favored. Big producers having
surpluses for sale would be helped because of the free internal trade.
, Several of the ideas of the physiocrats clearly were incorrect. First, the school was wrong to consider industry and
trade as sterile; the more industry and trade developed in France, the more inaccurate the physiocratic analysis
became. They also were wrong about agriculture being the most important in the economy, because that became
industry. Lastly, the small peasant farmer rather than the large farm entrepreneur became typical in France.
Which tenets of the physiocratic school became lasting contributions?
- By examining society as a whole and analysing the laws that governed the circulation of wealth and goods,
they founded economics as a social science.
- The law of diminishing returns
- The physiocrats originated the analysis of tax shifting and incidence that today is an important part of
applied microeconomics.
- By advocating laissez-faire, the physiocrats turned the attention of economists to the question of the proper
role of government in the economy.
Physiocracy – contrast with Mercantilism
Mercantilism Physiocrats
Value theory Wealth of nation is equal to the amount of All value arises from agriculture (land), so that
gold and silver in an economy (bullionism) is the source of wealth.
Consequence Wealth is fixes, trade is zero-sum game Wealth accumulates and is created by nature
Policy - Focus on trade surplus - No intervention (laissez-faire)
prescriptions - Only import raw materials to be used - Tax only the source of wealth directly
for exportation surplus (landowners)
- Hard-working and poor population as - Free trade
to keep prices low
Chapter 4; the classical school (1776 – 1871) – forerunners
How did the classical school differ from previous schools of economic thought?
- Unlike mercantilists; the limited role of the state. The autonomy of market forces
- Unlike physiocrats; the focus on industrial economy, rather than agriculture (although the classics
inherited the idea of laissez-faire)
Historical background of the Classical School;
The scientific revolution;
- scientist relied on experimental evidence.
- the universe is governed by natural law that would guide the economic system and the actions of people.
- space, time and matter are independent of each other. Nothing changes over time; the motion
and relationships in the universe continue in endless repetition.
! Newtonian thinking provided an ideology that justified property incomes. Rent, interest and profits are just
rewards for the ownership and productive use of wealth.
The industrial revolution; England gained supremacy in commerce and industry over France and Holland.
Major tenets of the classical school;
- Minimal government involvement; the forces of the free, competitive market would guide production,
exchange and distribution. The economy was held to be self-adjusting and tending toward full employment
without government intervention.
- Self-interested economic behavior; people should act in self-interest
- Harmony of interest; by pursuing their own individual interest, people served the best interest of society
(invisible hand).
- Importance of all economic resources and activities; all economic resources (land, labor, capital,
entrepreneurship, agriculture, commerce, production and international exchange) contribute to a nation’s
wealth
- Focus on supply, not demand
- Economic laws; such as law of comparative advantage, law of diminishing returns, Malthusian theory of
population, law of markets (say’s law), Ricardian theory of rent, quantity theory of money and labor theory
of value.
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