Transcript Mercantilism and Early Classical Thought

Mercantilism and Early Classical
Thought
c. 1500 - c. 1790
Mercantilism
• The Term “Mercantilism” was coined by
Adam Smith
• It was a system prevalent in:
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France
Spain
England
Holland
Main Policies of Mercantilism
• A country’s wealth is measured by its
holdings of precious metals (specie)
• International trade is a zero sum game
• A country should maintain a positive trade
balance (that is, export more than it
imports)
9 points by Phillip Wilhelm von
Hornick (1864)
• 1 That every inch of a country’s soil be
utilized for agriculture, mining, or
manufacturing
• 2 That all raw materials found in a country
be used for domestic manufacturing, since
finished goods have a higher value than raw
materials
Von Hornick’s blueprint
• 3 That a large, working population be
encouraged
• 4 That all exports of gold and silver be
prohibited and all domestic money be kept
in circulation
• 5 That all imports of foreign goods be
discouraged as much as possible
Von Hornick’s blueprint
• 6 That were certain imports are
indispensable they be obtained at first hand,
in exchange for other domestic goods
instead of gold and silver
• 7 That as much as possible, imports be
confined to raw materials that can be
finished at home
Von Hornick’s blueprint
• 8 That opportunities be constantly sought
for selling a country’s surplus manufactures
to foreigners, so far as necessary, for gold
and silver
• 9 That no importation be allowed if such
goods are sufficiently and suitably supplied
at home
Main Policies of Mercantilism
• A country’s wealth is measured by its
holdings of precious metals (specie)
• International trade is a zero sum game
• A country should maintain a positive trade
balance (that is, export more than it
imports)
Colonies
• Are important
because:
– provide raw materials
– are forbidden from
purchasing
manufactured goods
unless they come from
the “mother” country
– can provide workers
The Seas
• NEED to be protected
since they are the
lifeline to commerce
– In England: Sir Walter
Raleigh
– In Spain the Pirate
Raleigh
The Paradox of Mercantilism
To be “rich” a country needed to have a lot of
poor people!
Hume’s Challenge: the PriceSpecie Flow Mechanism
• Hume (mid-18th century): maintaining a
trade surplus forever is impossible
• Trade surplus  inflow of specie
• inflow of specie  increased Ms
• increased Ms  higher wages
• higher wages  lower exports and higher
imports
Smith’s Challenge: The Principle
of Absolute Advantage
• Smith believed trade to be a positive-sum
game
• Countries should export those goods which
they can produce efficiently, and import
those which they cannot
• If countries trade according to this principle,
all will gain from trade (trade will be
mutually beneficial)
Absolute Advantage: An
Example
Corn
U.S.
Blankets
1 hour/bu 6 hrs/bl
Mexico 3 hrs/bu
5 hrs/bl
Autarky Price
Ratios (APRs)
1B = 6C,
1C = 1/6B
1B = 5/3C,
1C = 3/5B
Limits to Smith’s Thinking
• If one country has an absolute advantage in
the production of both (or all) goods, Smith
would say that that country cannot gain
from trade.
Absolute Advantage: The Limits
to Smith’s Thinking
Corn
U.S.
Blankets
1 hour/bu 5 hrs/bl
Mexico 3 hrs/bu
6 hrs/bl
Autarky Price
Ratios (APRs)
1B = 5C,
1C = 1/5B
1B = 2C,
1C = 1/2B
Limits to Smith’s Thinking
• If one country has an absolute advantage in
the production of both (or all) goods, Smith
would say that that country cannot gain
from trade.
• But David Ricardo’s Principle of
Comparative Advantage (1817) took
Smith’s work farther: even in the above
example, trade can be mutually beneficial!