History of Economics Samenvatting
Mercantilism
This was the first school of economic thought. It was not really an academic school. It comes
from the word ‘merchant’ and it is their ideology. It appeared in Europe in 1500-1800. It was
characterised by the amazing growth of trade. Before that, there hardly was any trade. People
were self-sustaining before that period. The growth of trade led to the attempts to understand
it. Also, there was an emergence of nation states and the struggles between them. The states
were al colonial powers. Trade was between them, and between them and colonies.
Two important questions were being asked. 1) What is the source of wealth for the state? The
answer they gave was very childish: gold and silver make your rich. They gave the most
primitive answer. We know that this is not the full answer. 2) What should the state do to
become wealthier and stronger? This is a policy question. The answer they gave was trade.
This was the magic formula. The king should limit foreign exports by taxes. Exports to
foreign countries should be supported. And there was a preference for exporting
manufactured goods over raw materials, because when it is manufactured they cost more.
The existence of large and hard-working population should be promoted to reduce the costs.
Then you will get increased competitiveness of domestic goods. They were striving for an
active/positive balance of trade. That means more exports than imports.
We could say this is very naïve. Inflation happened. However, there was some truth in
mercantilism. The economic growth was very big. Trade is an important vehicle for that, and
money is important as well. Other than that, the social status of merchants was reconsidered
and became more important. You can still see mercantilism in protectionism today.
Mercantilists say international trade is a zero sum game. The profit of one is being eliminated
by the profit of another. Hume said international trade is a positive sum game. He said that
prices react to the amount of money available. That is natural law thinking. When the
economy changes, it will be absorbed by something so that it gets to an equilibrium. Note
that Hume is a critic of mercantilism. He was a classical economist.
So, where does value come from according to mercantilists? Gold and silver out of trade.
Physiocrats
This school was a reaction on Mercantilism. They said there are rules of nature. All activities
should be made in harmony with that. They were searching for rules that apply to the whole
universe.
Laissez-faire was important (Vincent de Gournay). The government influence should be as
little as possible. They should only facilitate things like protection of property and
maintaining the possibility of keeping someone to a contract.
They were big supporters of agriculture because it was the only thing that created wealth
according to them. Therefore, only landowners were taxed. Nature produces value because it
is self-reproducing. It has the ability to produce a surplus beyond the costs. A seed becomes
twenty seeds. You can feed the labourers with it, ánd you get a surplus. The beneficials go to
the landowner. We call this rent.
They also looked at the interrelatedness of the economy: the three classes of workers,
landowners and capitalists.
So, where does value come from? From production, more specifically land/agriculture.
1
Mercantilism
This was the first school of economic thought. It was not really an academic school. It comes
from the word ‘merchant’ and it is their ideology. It appeared in Europe in 1500-1800. It was
characterised by the amazing growth of trade. Before that, there hardly was any trade. People
were self-sustaining before that period. The growth of trade led to the attempts to understand
it. Also, there was an emergence of nation states and the struggles between them. The states
were al colonial powers. Trade was between them, and between them and colonies.
Two important questions were being asked. 1) What is the source of wealth for the state? The
answer they gave was very childish: gold and silver make your rich. They gave the most
primitive answer. We know that this is not the full answer. 2) What should the state do to
become wealthier and stronger? This is a policy question. The answer they gave was trade.
This was the magic formula. The king should limit foreign exports by taxes. Exports to
foreign countries should be supported. And there was a preference for exporting
manufactured goods over raw materials, because when it is manufactured they cost more.
The existence of large and hard-working population should be promoted to reduce the costs.
Then you will get increased competitiveness of domestic goods. They were striving for an
active/positive balance of trade. That means more exports than imports.
We could say this is very naïve. Inflation happened. However, there was some truth in
mercantilism. The economic growth was very big. Trade is an important vehicle for that, and
money is important as well. Other than that, the social status of merchants was reconsidered
and became more important. You can still see mercantilism in protectionism today.
Mercantilists say international trade is a zero sum game. The profit of one is being eliminated
by the profit of another. Hume said international trade is a positive sum game. He said that
prices react to the amount of money available. That is natural law thinking. When the
economy changes, it will be absorbed by something so that it gets to an equilibrium. Note
that Hume is a critic of mercantilism. He was a classical economist.
So, where does value come from according to mercantilists? Gold and silver out of trade.
Physiocrats
This school was a reaction on Mercantilism. They said there are rules of nature. All activities
should be made in harmony with that. They were searching for rules that apply to the whole
universe.
Laissez-faire was important (Vincent de Gournay). The government influence should be as
little as possible. They should only facilitate things like protection of property and
maintaining the possibility of keeping someone to a contract.
They were big supporters of agriculture because it was the only thing that created wealth
according to them. Therefore, only landowners were taxed. Nature produces value because it
is self-reproducing. It has the ability to produce a surplus beyond the costs. A seed becomes
twenty seeds. You can feed the labourers with it, ánd you get a surplus. The beneficials go to
the landowner. We call this rent.
They also looked at the interrelatedness of the economy: the three classes of workers,
landowners and capitalists.
So, where does value come from? From production, more specifically land/agriculture.
1
