17th-Century England: Science, Politics, and Trade - Era of Economic Discovery and Turmoil, Slides of Economics

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Science, Politics and Trade in Seventeenth- Century England

Seventeenth-Century England

• The Royal Society
• Political ferment
• Dutch commercial power
• Balance-of-trade doctrine
• The rate of interest and the case for free trade
• Recoinage crisis
• Conclusions

Science

• Francis Bacon (1561 – 1626): induction from facts and experiment
• Rene Descartes (1596 – 1650): deduction from simple, self-evident truths
• Both believed in measurement
  • Either as a source of ideas (generalizations)
  • Or as a test of intuition
• Both rejected authority as a source of knowledge
• These ideas were profoundly influential

William Petty (1623 – 87)

• Political Arithmetic
  • ―instead of using only comparative and superlative words, and intellectual arguments, I have taken the course … to express my self in terms of number, weight or measure; to use only arguments of sense, and to consider only such causes, as have visible foundations in nature.‖

William Petty

• Mercantilist, on the need for precious metals and tariffs
• Argued that increases in the quantity of money led to decreases in interest rates - This is part of the modern view of monetary policy
• Petty‘s work on measurements was continued by: - John Graunt (1620 – 74) and - Gregory King (1648 – 1712)

Political Arithmetic

• Adam Smith and other eighteenth and nineteenth century economists were skeptical about the value of quantitative measurements
• It was only in the twentieth century that the ideas pioneered by Petty and his followers were revived and became important

Thomas Hobbes‘ Leviathan

• In Leviathan (1651), Hobbes, possibly influenced by civil war in England and Germany, argued that the pursuit of self interest was such a strong motivator of people that society could be held together only if the people chose a sovereign who would become both the lawgiver and the law enforcer
• Hobbes was not only addressing a fundamental question in social science—how would society be held together—but reached his conclusions by working out the social implications of rational behavior of individuals - In this way, Hobbes went farther than Machiavelli
• Hobbes‘s methodology became hugely influential in economic thinking
• His top-down conception of society would, however, yield in time to a more benign view of the social consequences of self-interested behavior

Balance-of-trade doctrine

• From 1620 to 1624, England faced declining sales of cloth to Europe. England was losing precious metals to other countries. It was a crisis.
• Gerard Malynes (1586 – 1641) argued that currency traders were artificially keeping the exchange value of English coins below the value suggested by metal content. This made English coins more valuable as metal in foreign lands.
• Malynes suggested government regulation to increase the exchange value of English coins. That way, more gold and silver would be received for exports and less would be paid for imports.
• Edward Misselden (1608 – 54) and Thomas Mun (1571 – 1641) argued that the exchange rate should be reduced even further. The cheaper it was to buy English coins, the cheaper it would be to buy English goods. This would boost England‘s net exports and reverse the outflow of precious metals.
• Malynes is correct if exports and imports are unresponsive to prices, and Misselden and Mun are correct if exports and imports are responsive to prices.

Interest rates

• Josiah Child (1630 – 99) argued that the government-set interest rate should be lowered, because lower interest rates lead to greater output
• John Locke (1632 – 1704) argued that a lower interest rate would reduce the availability of loanable funds.
• Locke also argued that each country had a ‗natural‘ interest rate determined by the supply and demand for money.
• The latter would depend on total output and the ‗quickness of circulation‘ of money. - Today‘s textbooks call this the velocity of money.

Trade and welfare

• Dudley North (1641 – 91) broke with the prevailing ideas that favored protectionism
• Trade is caused by differences between the endowments of people
• This idea also explains trade in capital (lending and borrowing) and in land (renting)
• North saw rent and interest as essentially the same thing
• Also, availability of land (capital) determines rent (interest), not the other way around
• Legislative control of interest rates would be fruitless
• Having lots of precious metals was not crucial. If you had land or capital, you could produce things and sell them for precious metals