Sixteenth Century - History of Economic Thought - Lecture Slides, Slides of Economics

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The Emergence of the Modern World View –

the Sixteenth Century

The emergence of the modern

world view

• The Renaissance
• The Reformation
• The rise of the European nation state
• Mercantilism
• Machiavelli
• The School of Salamanca
• England under the Tudors
• Conclusions

The Reformation

• Publication of Martin Luther’s 95 theses in

– Impact accelerated by

• the invention and spread of movable-type printing
• The rise of nation states

• Effect on economic thinking was minimal

• Greater impact on political thought

– Natural Law, rather than papal authority,

became the basis for political legitimacy

The rise of nation states

• England, France, Spain, and Portugal

• Attention focused on how national power could

be enhanced

• To protect access to new trade routes that developed

as a result of the Spanish and Portuguese

geographical discoveries

• To do the work that had hitherto been done by the

Catholic church

• Introduction of the Poor Laws in England by Elizabeth I in 1597 – 1601
• Emergence of a new school of economic thought,

Mercantilism

Mercantilism—main themes

• The main themes of Mercantilism are as follows:
  • The ultimate objective of economic policy is the political power, both internal and external, of the state.
  • The power gained by one state means power lost by another state. - Therefore, the interests of nation states are perpetually in conflict.
  • A nation’s power is measured by its population and its stock of precious metals such as the gold and silver that are embodied in the money in use at the time. - A high population could supply soldiers. - Money (in the government’s treasury) could pay for large armies and navies.
  • Continued on next slide

Mercantilism—main themes

• The main themes of Mercantilism are as follows:
  • Continued from last slide
  • Population growth and a rich treasury could only come from prosperous industry and trade.
  • This prosperity could be brought about if the economy’s stock of money (i.e., gold and silver coins) is large.
  • Assuming a state does not have gold and silver mines, the only way it would increase its stock of those metals is if it exports more than it imports. As a result, ensuring a trade surplus for oneself and a trade deficit for one’s rivals is the primary objective of economic policy.
  • Tariffs and other import restrictions can be effective in reducing imports. Subsidies and regulation can be effective in increasing exports.

Mercantilism—the lasting

contributions

• In 1588 Giovanni Botero published a theory of population that was essentially the same as the theory of population for which the Classical economist Thomas Malthus gained fame. Population tends to grow without limit. Food, however, is limited. Therefore, population growth would ultimately be slowed by celibacy or through war, famine and epidemics.
• Also in 1588, Bernardo Davanzati stated that people work in order to be happy and not for some other motive, a form of the principle of utility maximization. - Marginalist economists would later develop the idea into a full-fledged theory of demand.
• In 1696 Gregory King discussed the now widely used concept of the price elasticity of demand and even used data on prices and sales of wheat to calculate an estimate of the price elasticity of wheat.

Mercantilism—the lasting

contributions

• Building on the commonplace idea that countries trade

because not all countries can grow everything,

mercantilists built a theory of international trade that

came close to a statement of the principle of

comparative advantage for which the classical economist

David Ricardo is famous.

• In 1663, Samuel Fortrey explained that we should produce and export what foreigners want if that would allow us to import more of what we need than we could produce at home.

Mercantilism—assessment

• While the main ideas of the mercantilists caused a lot of

harm and are now discredited, the economists of that

period came up with many ideas that lasted and created

the foundation of the Classical school.

• The problem was that the good ideas of the mercantilists

had not yet won the debate, which is why they simply

coexisted with all the other bad ideas.

• As the classical era progressed, the good ideas of the

mercantilists were filtered out, recognized as good ideas

and incorporated into the classical canon.

Niccolo Machiavelli (1469 – 1527)

• The Prince , 1513
• The interests of the state were seen as unrelated to

religion

• A distinction was drawn between the science of how

politics works and the ethics of how it ought to work

• Both inductive and deductive analysis were used
• It was assumed that people would behave

unscrupulously, in a self-interested manner

• Machiavelli understood that in some cases men may behave morally, but felt that his analysis would make better predictions if self-interested behavior was assumed
• This has become the standard assumption in economic analysis

The School of Salamanca–

Navarrus (1491 – 1586)

• As in the case of any other trade, money-

changing was okay as long as it earned

moderate wealth for the changer

• The price of a currency depended on availability,

need, uncertainty about the possibility of

debasement or even repudiation

• It was okay for a money changer to buy a

currency when it is cheap and to sell it when it is

expensive

The School of Salamanca–

Navarrus (1491 – 1586)

• He provided a unified theory of supply and

demand to explain the prices of all commodities,

including money

• ‘all merchandise becomes dearer when it is in great

demand and short supply, and that money … is

merchandise and therefore becomes dearer when it is

in great demand and short supply.’

• This theory was used to explain the inflation in

Spain after the inflow of gold and silver from its

American colonies

• Navarrus and Jean Bodin (1530 – 1596) provide

the first statements of the crucial idea that

increases in the quantity of money lead to higher

prices

England under the Tudors

• Sir Thomas Smith (1513 – 77)

• Explained the distinction between nominal and real

(inflation-adjusted) income

• especially the fact that people on fixed income are affected by inflation, but not traders
• Noted that prices were rising even when goods were

plentiful and assigned currency debasement as the

reason for rising prices

• This highlights the idea that the supply and demand for goods affects their relative prices, whereas the supply and demand for money affects nominal prices
• Smith was a mercantilist in his views on trade policy
• But he had a clear understanding of how markets

worked and how prices were determined

Conclusions

• Lawyers, officials, and other non-priests

were beginning to write on economic

issues

• As a result, the focus shifted from moral

issues to how economies actually worked

• Besides, the economies were becoming

more complex entities

• These factors led to progress in economic

thought