A dominant set of economic theories and attitudes
from the 16th-century to the mid-18th century, mercantilism held that the
global supply available for trade is a constant, and therefore,
nation-states should maintain a positive balance of trade through
protectionist policies that encourage the sale of exports, while
discouraging loss of revenue through the buying of imports. This included
various national policies such as monopolies, tariffs on foreign goods,
price ceilings, market quotas, rents on transported goods, and the
stockpiling of gold bullion. There was no one school called
"mercantilism." Rather, later economists labeled polices like
those of Robert Walpole in England and Jean-Baptiste
Colbert in France "mercantilist" in retrospect. These
policies occurred both during the settlement and colonization of the
Americas and the rise of modern nation-states, and thus represented a time
of greatly expanding foreign markets and empire building.
In the eighteenth-century, critics of mercantilism
began to arise, such as David Hume, the physiocrats of France, and
finally the classical economists Adam Smith and David Ricardo. Hume drew
attention to the fact that as bullion accumulates in a nation, its value
decreases relative to other goods, while as bullion is exported, the value
rises relative to other goods. The physiocrats argued that a
nation's wealth lies in agricultural production (that is productive work)
rather than governmental wealth. Quesnay, for example, held that
agriculture, rather than commerce and industry, were the true sources of
wealth. Turgot stressed the importance of self-interest in an economy and
how trade barriers undercut this. However, the physiocrats did not
look to other sources of productive work outside agriculture.
Adam Smith's Wealth of Nations, still
represents the most influential work in economic theory. Smith, while
accepting the physiocratic stress on an end to market regulation
and the importance of productive labor, rejected agriculture as the sole
source of this wealth. Labor of all kinds is more valuable than land. In
Smith's understanding, a free market has a natural regulatory
a product shortage occurs, for instance, its price rises, creating a
profit margin that creates an incentive for others to enter
production, eventually curing the shortage.
too many producers enter the market, the increased competition among
manufacturers and increased supply would lower the price of the
product to its production cost, the "natural price."
as profits are zeroed out at the "natural price," there
would be incentives to produce goods and services, as all costs of
production, including compensation for the owner's labor, are also
built into the price of the goods.
prices dip below a zero profit, producers would drop out of the
market; if they were above a zero profit, producers would enter the
(taken from Wikipedia)
a result, Smith opposed mercantilist regulations of markets, though he
held that governments should do things to assist the economy, such as
maintain a system of national roads and promote national defense. Later
theorists, Thomas Malthus and David Ricardo, expanded Smith's market
understanding, though Smith's own views may better explain modern markets
in some ways. Rev. Malthus formulated the principle of overpopulation
which held that uncontrolled population growth occurs geometrically, while
food production increases only arithmetically:
The power of population is so superior to
the power of the earth to produce subsistence for man, that premature
death must in some shape or other visit the human race. The vices of
mankind are active and able ministers of depopulation. They are the
precursors in the great army of destruction, and often finish the
dreadful work themselves. But should they fail in this war of
extermination, sickly seasons, epidemics, pestilence, and plague advance
in terrific array, and sweep off their thousands and tens of thousands.
Should success be still incomplete, gigantic inevitable famine stalks in
the rear, and with one mighty blow levels the population with the food
of the world.
As a result, demographics became an element in
economic thinking. Ricardo, building on this line of reasoning, proposed a
number of important ideas, including:
- Comparative advantage: a country which
can produce a good more efficiently can gain a market advantage by
specializing in this good's production.
- Theory of rents: Rent is charged only
when various grades of land are available; rent is charged
progressively higher on the higher grades.
- Natural price: Overtime, prices reflect
the cost of production because this includes the cost of supporting
the laborer. As real wages increase, real profits decrease since the
cost of production must be spilt between profits and wages.
Therefore, wages naturally tend toward a subsistence level since
profits must be maximized.
Addison, "The Royal Exchange"
Why does Addison see trade in the
exchange as a form of economic ambassadorship?
How does he idealize the process of
trade and exchange?
How does he believe that England
has profited over time and continues to profit from trade? How does
this counter the older mercantile viewpoint?
Franklin, "Industry and the Way of
the World" (ER 483-490)
What economic value does Franklin
assign the habits of frugality and industry?
- Describe Franklin's plan for a moral calculus of
self-examination. What does he learn while trying to follow this
- How does Father Abraham see idleness, pride, and
folly as taxes?
- What values does he assign to industry?