II. Toward the classical economy

Presentación del tema: "II. Toward the classical economy"— Transcripción de la presentación:

1 II. Toward the classical economy
Mercantilism or the “Nation” as an economic doctrine. Ideas in transition: Petty, Boisguilbert Mandeville, Cantillon and Hume. Physiocracy or the agriculture as the source of wealth.

2 1. Mercantilism 1.1. Historical context
The rise of national states Militar and economic power to position in the international system. Enlightment and trust in reason to unveil the natural laws  mechanical visión of the world . Colonies and bullion Global commerce

3 1. Mercantilism 1.2. General ideas
Not really a school but a way of approaching and devising solutions for the economic problems and for the empowering of the nation. The more important authors were themselves merchants ant its writings and pamphlets aimed to favour their trading companies. Justice and personal salvation gives its way to powerful and wealthy states Two periods: from bullion to foreign trade

4 1. Mercantilism 1.3. Bullionism
Gold and silver were the substance and the definition of both private and national wealth. Relevance of the “good money” and rejection of the debasements because “bad money expels good” (Gresham’s law) Credibility of national currency Balance of payment  the government must favour the sale of raw materials (inflow of bullion) Discourage the imports Authors  Thomas Gresham and John Hales

5 1.4. Thomas Mun and the balance of trade
1. Mercantilism 1.4. Thomas Mun and the balance of trade «England’s Treasure by forraign Trade» (1664) Wealth, considering both a stock of foreign currency and a quantity of products. The main source of the increase in national wealth is a surplus trade balance  favour the exports of manufactured commodities* (instead of raw materials) Favour the importation of raw materials at low costs: the lower price of imports, the higher the trade surplus. Cheap inputs lower the cost structure and make national commodities more competitive. Money wages must be kept low in order to favour the competitiveness via moderate prices and prevention of workers laziness. * ‘It is not therefore said that then we should add our money there unto to fetch in the more money immediately, but rather first to enlarge our trade by enabling us to bring in more foreign wares, which being sent out again will in due time much increase our Treasure’ (Mun, 1623, p. 15).

6 1.5. The mercantilist manifest of Philipp von Hörnigk (1684)
1. Mercantilism 1.5. The mercantilist manifest of Philipp von Hörnigk (1684) To inspect the country's soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered... All commodities found in a country, which cannot be used in their natural state, should be worked up within the country... Attention should be given to the population, that it may be as large as the country can support... gold and silver once in the country are under no circumstances to be taken out for any purpose... The inhabitants should make every effort to get along with their domestic products...

7 1.5. The mercantilist manifest, Philipp von Hörnigk (1684)
1. Mercantilism 1.5. The mercantilist manifest, Philipp von Hörnigk (1684) [Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares... ...and should be imported in unfinished form, and worked up within the country... Opportunities should be sought night and day for selling the country's superfluous goods to these foreigners in manufactured form... No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home."

8 1. Mercantilism 1.6. Summary Money constitues the essence of wealth (individual/country) (*) and it is given/constant. Inner wars, for instance, not disminish the wealth Commerce as zero-sum game. (*) Main purpose Empowering the nation and Increase wealth Positive balance of trade (*); (relevance of statistics to elaborate balance of trade) Militarism and Colonialism. Mutual interest among governants and merchants to favour protectionism of own industries and commerce. High population and low salaries. (*) (*) Gerard de Malynes (1622), Lex Mercatoria, o la antigua ley del comercio: “La abundancia de dinero encarece generalmente todas las cosas, y su escasez generalmente las abarata, mientras que las mercancías son caras o baratas por sí solas, de acuerdo con su abundancia o escasez y con el uso que se haga de ellas. El dinero entonces (como la sangre en el cuerpo) impulsa al alma que infunde la vida, pues si el dinero escasea, el tráfico decrece, aunque las mercancías sean abundantes y baratas; por el contrario, si hay abundancia de dinero, aumenta el comercio, aunque las mercancías escaseen y su precio sea, por esta razón, superior”. (**) Michel de Montaigne (1580): “El beneficio de un hombre supone la desgracia de otro [...] Nadie prospera sino mediante la ruina de otros” (***) Mun (1630), El tesoro de Inglaterra mediante el comercio exterior: “Aunque un Reino puede aumentar su riqueza gracias a donaciones recibidas o por conquistas realizadas a costa de otros países, esto es algo que se produce raramente y que, cuando sucede, tiene poca importancia. Por tanto, la forma normal de incrementar nuestra riqueza y el Tesoro es el comercio exterior, en el que debemos siempre observar la regla siguiente: que el valor de lo que vendemos a los extranjeros sea superior al de lo que les compramos. Una vez cubiertas las necesidades nacionales de vestidos, plomo, estaño, hierro, pescado y demás mercancías nacionales, exportamos cada año el resto a países extranjeros, por valor de dos millones doscientas mil libras; de esta forma podemos comprar, allende los mares y traer a nuestro país para su uso y consumo, artículos extranjeros por valor de dos millones doscientas mil libras. Si seguimos esta regla como principio ordenador de nuestro comercio, podemos estar seguros de que el Reino podrá enriquecerse cada año por un total de dos millones doscientas mil libras, que recibiremos en calidad de ingresos para el Tesoro, pues la parte de nuestras mercancías vendidas que no tiene contrapartida de mercancías debe sernos compensada con una contrapartida de riquezas atesorables”. (****) Young (1771): “Cualquiera, excepto un idiota, sabe que las clases inferiores deben mantenerse pobres o nunca serán laboriosas”. -“En una nación libre donde no está permitida la esclavitud, la prosperidad más segura procede de la existencia de una multitud de laboriosos pobres [...] Como su preocupación principal es tratar de sobrevivir, debe procurarse que no reciban nada que merezca la pena ahorrase [...] Es de gran interés para las naciones ricas que la mayor parte de los pobres no esté en momento alguno ociosa y que además gasten continuamente lo que obtienen [...] Los pobres deben mantenerse exclusivamente para el trabajo, y por ello la prudencia aconseja aliviar sus necesidades, pero sería una insensatez remediarlas [...] Para que la sociedad sea feliz y el pueblo sea dócil en las peores circunstancias, es preciso que la mayoría sea ignorante además de ser pobre” - William Temple (1770), Ensayo sobre el comercio: “Cuando estos niños tengan cuatro años, serán enviados a una hacienda rural, donde se les enseñará a leer dos horas al día, empleando el resto de su tiempo en las tareas de la explotación que sean más apropiadas a su edad, fuerza y capacidad. Si se nos objeta que a tan temprana edad no pueden ser útiles, responderemos que existen ocupaciones en las cuales los niños pueden ganarse la vida desde los cuatro años; pero, además, el hecho de que estén trabajando, de un modo u otro, tiene al menos un aspecto importante, se ganen o no la vida con ello: de este modo, podemos confiar en que la joven generación estará tan habituada a trabajar ininterrumpidamente que a la larga les resultará agradable y entretenido”.

9 1. Mercantilism 1.7. Early Critics
Dudley North: “Discourses Upon Trade”; Free trade benefits to all exchanging parties and government can’t succeed in limit the strong market rules. Gerard de Malynes and Misselden should we prevent any export of bullion or allow imports of raw materials?. Not directly opposed to free trade and discourage regulatory rules

10 1.7. John Locke and the revision of Mercantilism
“Some considerations on the Consequences of the Lowering of Interest, and Raising the Value of the Money” (1691) Differentiation between value in use and value in exchange (*); The exchange ratio between two commodities depends on abundance and scarcity of a good relatively to the demand for it; Labour as the foundations of property rights Cuantitavism (similar to Hume): Inflow of gold increase of prices national goods more expensive lose of competitiviness decrease of exports increase of imports interest cannot be fixed by law, because it depends on the quantity of money in circulation, as well as on the overall amount of trade in the kingdom, that is, the level of economic activity.(**) “The being of any good, and useful quantity in any thing, neither increases its price, nor indeed makes it have any price at all. … What more useful or necessary things are there to being, or well-being of men, than air and water? and yet these have generally no price at all”. (Locke, 1691, p. 41) “the natural value of money, as it is apt to yield such a yearly income by interest, depends on the whole quantity of the then passing money of the kingdom, in proportion to the whole trade of the kingdom.” (Ibid., p. 46)

11 1. Mercantilism 1.8. Legacy (+) Mechanical and causal “vision” o the universe/world  It is possible to analyze the economy and unveil its general laws (similar to natural laws). (+) Relevance of statistics to grasp the economic reality (+) Evolution toward less radical positions regarding the balance of trade: mutually beneficial trade, advantages of the division of labor… which anticipates some ideas of classical liberalism. (-) Populist economic and political thinking which consider that the economy is a zero-sum game; that the trade barriers will improve the economy; and, that the constant inflow of bullion will not affect the price level and competitiveness.

12 2. Ideas in transition 2.1. Sir William Petty
«Political Arithmetic» (1690) Policy proposals more than systematic analysis. Knowledge based on cuantitativism and empirism is preferred to subjectivism and Aristotelian logic. Moral (aims) is distinctively different from science (means) Metaphor of society resembling a human body  division of labor. Producers: of necessaries, food and clothing; of exports; and of luxury goods Non producers: the governors, the learned professions and the traders.

13 2. Ideas in transition 2.1. Sir William Petty
Technical division of labor allows increase productivity (*) Exchange value of commodities depends on permanent or long run forces (conditions of production) and temporary causes (oscillations from the actions of sellers and buyers) Land an labour as the ultimate determinant of value  a production process vertically integrated (**) Capital not only as a financial magnitude but also as an input in the production. National wealth more linked to the organization of production rather than trade… … Nevertheless, sometimes bullionists views (*) “for as Cloth must be cheaper made, when one Cards, another Spins, another Weaves, another Draws, another Dresses, another Presses and Packs; than when all the Operations above-mentioned, were clumsy performed by the same hand”. (Petty, 1676, p. 260) (**) the exchange value of commodities depends on the costs incurred in paying for the subsistence of the workers and for the use of natural resources over the entire production cycle

14 2.2. Pierre le Pesant Sieur de Boisguilbert
2. Ideas in transition 2.2. Pierre le Pesant Sieur de Boisguilbert «Dissertation of the Nature of Wealth, Money and Taxation» (1704) Crucial role of agriculture in a society organised on the principle of division of labour (*) Foreign trade benefits all trading countries. An orderly circulation is essential for prosperity Exchange must take place at appropriate prices (the gain should be shared in a fair way between buyer/seller) Prices need to be in proportion to the expenses incurred. Risk economic crisis: Excessive taxation in agriculture Excessive gains at the expense of his trading partners Excessive expenditure on luxuries could undermine the rest of the economic activities (*) luxury goods can be produced and sold only because ‘the excess supply over necessaries enables us to obtain what is not strictly necessary’

15 2. Ideas en transición 2.3. Bernard Mandeville «The fable of bees»
Private Vices (self-interest) leads to Public Benefits (common good) (*) «Vast Numbers thronged the fruitful Hive; Yet those vast Numbers made 'em thrive Millions endeavouring to supply Each other's Lust and Vanity… …Thus every Part was full of Vice,  Yet the whole Mass a Paradice «Grandes multitudes pululaban en el fructífero panal y ese gran concurso les permitía medrar atropellándose para satisfacerse mutuamente a lujuria y la vanidad …. Así pues cada parte estaba llena de vicios pero todo el conjunto era un paraíso.(...)»

16 2. Ideas en transición 2.4. Richard Cantillon
«Essai sur la nature du commerce» (1755) Synthesis on economic discipline. 1680?-1734 Envision economic like Newton el Cosmos  Mechanism in continuous movement of adjustment depending on the Law of the self-interest (Gravitational Law). Economist in transition: Partly mercantilist.- Ideas about international trade Partly physiocrat.- Relevance of agriculture Partly Classic.- Interdependence among economic sectors

17 2. Ideas en transición 2.4. Richard Cantillon
Increase of population as a part of the economics process. Explanation about the geographical location of populations and industries. Differentiation between the market price and the intrinsic value (balanced price) Changes in the speed and quantity of money are similar. Influx mechanism of the currency over prices. Mechanism of price adjustment in international market. Analyse of flows on income between economics sectors.

18 2. Ideas en transición 2.4. Richard Cantillon 1. Market system
System of interconnected and interdependent agents (consumers and producers) which automatically adjust itself (without State’s intervention) following the law of the self-interest of the entrepreneurs. Intrinsic value  quantity and quality of land and incorporate work in a product. That of the market can be superior due to demand reasons and lack of coordination between producers-consumers. Prices  signalling mechanism, which coordinates the desires of the buyers and the sellers on the market of the goods and products.

19 2. Ideas en transición 2.4. Richard Cantillon
2. The role of the entrepreneur Competition as rivalry between entrepreneurs. Agents who takes risks (they buy to a certain price and sell to an uncertain one) and they make the circulation and the exchange of goods.. 3. Money, prices and production He links the production level either with the quantity of money required or with velocity. Distinction between relatives’ prices and the general price level Depends on the class who is receiving the income: consumers or savers. He links interests with offer/demand of money Metallic money can be lent (low interest) or spent (rise of the demand and production).

20 2. Ideas en transición 2.5 David Hume
Proto-utilitarismo.- Moral principles could be found attending the utility promoted by then. Not from the perspective of merely adding utilities… … but considering if they favor our personal interests those of our close people. Empathy.- The capacity to put onself in another’s persons position. About dinero Mechanism of flow of money impossibility of the mercantilist goal of a permanent surplus balance. Gold standard, inflation and lost competitiveness. Benefits of short-term inflation  The time lag between money and prices increase, increases real money supply to CP and stimulates the economy..

21 3. Physiocracy 3.1. Introducción Physiocracy .- Government of nature
First school of thought? Vision of a systematic economic reality Medieval concept of natural law and protection of individual rights. Support of absolute power (absolutism), self-interest and free trade. IT could be considered the economic aspect of enlightenment.

22 3. Physiocracy 3.2. Authors heterogeneous current limited to France and the period around the economic salon talks of Mirabeau The main autor is François Quesnay and its work«Le Tablau Economique» (1758) Marques de Mirabeau.- Merciere de la Riviére.- «L'ordre naturel et essentiel des sociétés politiques» (1767) Dupont de Nemours Nicolas Baudeau Guillaume-François Le Trosne

23 3. Physiocracy 3.3. The natural order
There is a natural economic order that determines the development of a society  public intervention may accelerate that development (England) or block (France) Support the economic freedom (free trade, private property and self-interest) but ... «Laissez faire, laissez passer, le monde va de lui même» (Vincent de Gournay) ... They praise absolutism, while criticizing the arbitrary power against which it should be opposed a greater power: the laws of nature.

24 3. Physiocracy 3.4. The concept of wealth
Product o net surplus.- Difference between inputs (Advances of capital, land and wages) and outputs.. The increase in net product, increases welfare Agriculture  only productive sector. Other sectors "transform" but do not generate more output of the input they consume. Capital accumulation increases productivity.

25 3. Physiocracy 3.5. The economic circuit
Economy  Interdependent relationships of income and expenses among all the sectors. Depicted in the Tableau Economique (Quesnay) Organicism.- If a sector is altered affects the rest.

26 3. Physiocracy 3.6. The concept of society
The economic system tends to reproduce subsistence goods and the class structure in a circular process. Landowners (aristocracy and church) or "parasitic class". They appropriating net income and spend on luxury items. "Industrial" (craft) or "sterile class" workers: includes merchants. Farmers or "productive class".

27 3. Physiocracy 3.7. Policy implications
Taxes should tax income and not capital  reduces the landowner consumption  increases capital and agricultural productivity  increases income (and also taxes) Free trade (with restrictions) .- It allows France export agricultural products  capital flows to the agricultural sector  It increases the circular flow of income according to the "laws of nature"

28 3. Physiocracy 3.8. Legacy Critics
Agriculture as the only productive sector and source of wealth? contributions Adam Smith.- direct influence on systematic and comprehensive approach to economics Net surplus concept.- Ii is a cornerstone in Classical Economics and Marx Circular economy.- Influence on the reproduction scheme of Marx, Walras general equilibrium, and the prices Multiplier in Keynes and Sraffa system.