Transcript Lecture Two Economic Thought from Mercantilists to Adam Smith Recap • Feudal ideology significantly anti-capitalist, antifinancier.

Lecture Two
Economic Thought from
Mercantilists to Adam Smith
Recap
• Feudal ideology significantly anti-capitalist, antifinancier. But
– Merchants essential
• “Exotic” commodities from other lands
• Trade between different fiefs/kingdoms
– Finance essential
• Merchant activity
• Wars
– Merchants tolerated (but controlled, taxed)
– Usury laws circumvented:
Medieval fiction to circumvent anti-usury laws
Lends at no interest
B fails to repay A
• Effectively, a
“different set of
books” to disguise
breaching the
laws against usury
Medieval Breakdown
• Feudal system imposed many imposts upon
merchants/tradesmen/moneylenders; but social change
went against feudalism:
– Growth of specialist manufactures in towns: the guilds
– Growth of specialist traders between nations: the
Mercantilists
– Revolt against religious strictures against
merchants/lending, church hypocrisy
– Religious revolts: beginnings of Protestantism bound up
with growth of merchants/financiers
• A new ideology/analysis struggled for dominance:
Mercantilism
4
Mercantilism
• Justice out the window: the aim is gain
– Buy cheap and sell dear; sell lots and buy little
– “suppose Pepper to be worth here two Shillings the
pound constantly, if then it be brought from the
Dutch at Amsterdam, the Merchant may give there
twenty pence the pound, and gain well by the bargain;
but if he fetch this Pepper from the East-Indies, he
must not give above three pence the pound at the
most, which is a mighty advantage…” [Mun, OREF 18]
5
Mercantilism
• Focus is international trade, rather than internal
commerce
– Nationalism essential: promote nation by gain from
trade
– Trade imbalance the object: export more than import
• Self-sufficiency the domestic object
• Pro-commerce and finance, but many contradictions
– Promoted exports, restricted imports, no attention to
system of production. A trader, rather than producer,
perspective
6
Mercantilism
– “It is needful also not to charge the native
commodities with too great customes, lest by indearing
them to the strangers use, it hinder their vent. And
especially forraign wares brought in to be transported
again should be favoured, for otherwise that manner
of trading ... cannot prosper nor subsist. But the
Consumption of such forraign wares in the Realm may
be the more charged, which will turn to the profit of
the kingdom in the Ballance of the Trade, and ... enable
the King to lay up the more Treasure…” [Mun OREF]
Mercantilism
• Leading intellect: Petty (1623-1687)
– Strong advocate of quantitative analysis
– Considered production (unlike many Mercantilists)
– Had cost-based theory of value (rather than utilitybased)
– Did not believe that economy would automatically
reach full employment (unlike later Smith, Say,
Ricardo)
• Advocated public works to reduce unemployment
– Had concept of surplus, though no systematic analysis
– Regarded by Marx as “father of political economy
(over 100 years before Smith)
8
Mercantilism
• Foreign trade as the source of surplus
• No analysis of production
• In practice
– Added to feudal imposts on commerce
– Created government-sanctioned monopolies
– ostensibly to increase national wealth; but
– often in practice enriched favoured individuals
• Point of criticism and departure for later Physiocrats &
Classical Economists, with emphasis upon “laisser-faire,
laisser-passer”
9
Pre-Classicals: Conclusion
• Pre-classical economists’ views on free exchange
hampered by non-capitalist nature of production during
their epochs
• Two concepts muddled:
– That fairness in exchange meant commodities should
exchange on the basis of the effort they embodied
– That fairness in exchange should reflect the buyer’s
need for the product
• Concept of surplus barely appreciated (except for Petty)
• First systematic analysis of production undertaken by
Physiocrats
10
Early Classicism
• The Physiocrats
– Developed in pre-capitalist, agricultural France
• Smith, Ricardo, Malthus and Say
– Development dominated by capitalist, Industrial
Revolution England
The Environment of Physiocracy
• Feudal system (like England) but
– All-powerful king (vs. Magna Carta)
• Feudal lords concentrated at Versailles: absentee
landlords, no interest in farming
– Taxes used to extract surplus for consumption by
lords/King
– Rural sector dominated by small peasant-owner farms
(unlike rural estate England)
– Few capitalist farmers, investment discouraged by
taxes; many feudal/mercantilist imposts on trade (like
England)
• Stagnant agriculture, vs England which had been
transformed into capitalist farming system
Physiocracy
• Precursors Petty, Cantillon (see OREF)
• Founder Quesnay, doctor to Royal Court
• Underlying concepts of:
– “flows”, as in blood in human body
– surplus
• Economy must produce a surplus for discretionary
consumption & growth
• Sought to promote capitalist farmers to increase output
and available surplus
• First systematic analysis of economy
• Laid down in tabular form of flows from one sector to
another:
The “Tableau Economique”
PRODUCT IVE
EXPENDIT URE OFT HE
EXPENDITURE
relative to
agriculture, etc.
REVENUE
after deduction of taxes, is divided
between productive expenditure
STERILE
EXPENDITURE
relative to
industry, etc.
and sterile expenditure
Annual advances
required to produce a
revenue 0f 600l are 600l
Annual
revenue
Annual advances
for the works of sterile
expenditure are
• Explaining
this…
The “Tableau Economique”
Previous harvest
Rent to
landlord
Farmer buys
tools to grow
wheat
Artisans
buy wheat
Period Farmer
0
600.00
1
300.00
2
150.00
3
75.00
4
37.50
5
18.75
6
9.38
7
4.69
8
2.34
9
1.17
10
0.59
11
0.29
12
0.15
13
0.07
14
0.04
15
0.02
F/A Ratio
Net Productivity
A/F Ratio
0.50
1.00
0.50
Landlord
600.00
300.00
150.00
75.00
37.50
18.75
9.38
4.69
2.34
1.17
0.59
0.29
0.15
0.07
0.04
0.02
599.98
Artisan
300.00
300.00
150.00
75.00
37.50
18.75
9.38
4.69
2.34
1.17
0.59
0.29
0.15
0.07
0.04
0.02
Landlord buys
wheat and
“carriages”
Surplus
product goes
to landlord
as rent
Recoups initial
surplus
The “Tableau Economique”
2M
to King
Initial
2M
5M
produced
"Productive"
Agriculture
1M spent
on "carriages"
"Sterile"
Manufact
uring
King
&
Court
1M spent
on food
Payment
1M inputs
Basic Features of Physiocracy
• Focus on production; trade as component of production
• Key aspect of production: the generation of a net surplus
(“produit net”)
• Agriculture the only source of surplus; farmers “the
productive class”
• Manufacturing simply transforms agricultural surplus into
different forms; workers “the sterile class”
• Feudal lords/clerics sustained by share of surplus: “the
proprietor class”
• Outputs of manufactures needed to generate rural net
product: interdependence (multiplier, input-output
concepts)
Basic Propositions of Physiocracy
• Agriculture only source of new value:
– Land pre-dates man
– For man to survive, food must exist first
– Therefore land is the source of value
• Agriculture generates a surplus
– 1 unit of output requires < 1 unit of input
– Sew 1 kilo of wheat as seed, get 10 kilos of wheat as
crop
• Manufacturing simply converts form
– 1 unit of input, 1 unit of output (but in different form)
• Surplus key to wealth: Wealth can be increased if gap
between inputs and output in agriculture can be
increased.
Input-Output
• Example:
– System 1 with 100 hectares of land:
• 1 hectare land + 7/10 bushels wheat + 1/10 kilo steel
produces 1 bushel wheat
• 0 hectare land + 1/10 bushel wheat + 9/10 kilo steel
produces 1 kilo steel
– 70 wheat + 10 steel -> 100 wheat
– 10 wheat + 90 steel -> 100 steel
– Net output 20 bushels wheat, 0 kilos steel
Input-Output
• System 2 with 100 hectares of land:
– 1 hectare land + 6/10 bushels wheat + 1/10 kilo steel
produces 1 bushel wheat
– 0 hectare land + 1/10 bushel wheat + 9/10 kilo steel
produces 1 kilo steel
• 60 wheat + 10 steel -> 100 wheat
• 10 wheat + 90 steel -> 100 steel
• Net output 30 bushels wheat, 0 kilos steel
• Benefits of improved technology
– 16% reduction in necessary inputs
– 50% increase in net product
Physiocratic Policy
• Net produit of contemporary France limited by:
– Small landholdings, absentee landlords, primitive
techniques
– Heavy & arbitrary feudal taxation
– Mercantilist restrictions on trade in rural produce
• Physiocrats
– favoured commercial farmers,
– single tax on land rent
– High “corn” price, free movement of rural goods, no
manufacturing “monopolies”
– Object to encourage improved techniques in
agriculture, hence higher surplus
Strengths & Weaknesses of Physiocracy
• In many ways far ahead of their time:
– Concept of surplus
– Input-output concepts
• Major advance over previous economists;
• “Lost” until modern times (except for Marx)
– Aggregate level of output depended on re-investment
of net surplus: an investment-driven perspective
– Contraction of net surplus means contraction of
economy: an aggregate-demand perspective
• Belief that agriculture only source of surplus
• Development of input-output analysis hobbled by views on
value
• Politically unpalatable advice meant early downfall
From Physiocracy to Adam Smith
• Focus upon domestic production (unlike Mercantilists:
international trade focus)
• Cost of production explanation for prices
• Search for the source of value:
– Physiocrats nomination: land
– Smith: labour, and division of labour for its increase
• Beginnings of emphasis upon freedom of commerce
(unlike Mercantilists: government monopolies, duties on
imports, etc.)
• Input-output aspects lost (until Marx)
• Concern for aggregate demand lost to “Say’s Law”
(except for Malthus, Marx)
1776 & “The Wealth of Nations”
• Writing less than 10 years after Watt devised his steam
engine (1769); year first Watt engine installed (1776)
Agriculture already capitalist via “enclosure” movement
Crops for sale rather than consumption on feudal
estate
Serfs evicted from land
class of “landless labourers”
no rights to land (like serfs), no assets (like
guildsmen)
must work for a living: wage labour
Industry becoming capitalist: factories, labourers
displacing guilds, craftsmen
1776 & “The Wealth of Nations”
• Domestic production now much more important than
foreign trade
– Focus foremost on production, rather than exchange
• Early stage of capitalist development causes confusion:
– Role of machinery not yet pervasive
– Class structure capitalist, but not yet clear
Basic Propositions
• Labour, not land, is the primary source of value:
– “The annual labour of every nation is the fund which
originally supplies it with all the necessaries and
conveniences of life” [OREF] (Differs with Physiocrats)
•
Increase in value from specialisation & division of labour;
economies of scale essential part of his analysis
• Acknowledges role of machinery:
– “This great increase of the quantity of work ... is owing
to … the increase in the dexterity in every particular
workman; … the saving of time which is commonly lost in
passing from one species of work to another; ... the
invention of a great number of machines which
facilitate and abridge labour, and enable one man to do
the work of many.” [OREF]
Basic Propositions
• But subsumes this too under division of labour:
– “(T)he invention of all those machines ... seems to have
been originally owing to the division of labour. Men are
much more likely to discover easier and readier
methods of attaining any object, when the whole
attention of their minds is directed towards that
single object” [OREF]
• Clarifies ancient dispute over role of utility in
determining value/price:
– “The word VALUE ... has two different meanings, ... the
utility of some particular object, and ... the power of
purchasing other goods... The one may be called ‘value
in use’, the other, ‘value in exchange’”. [OREF]
Source of Value
•
•
•
•
•
No role for “value in use” in determining price
Commences with the “diamond/water paradox”
Water has great “value in use”, but very low price
Diamonds have little utility, but very high price:
“The things which have the greatest value in use have
frequently little or no value in exchange; and, on the
contrary, those which have the greatest value in
exchange have frequently little or no value in use.
Nothing is more useful than water: but it will purchase
scarce anything; scarce anything can be had in exchange
for it. A diamond, on the contrary, has scarce any value in
use; but a very great quantity of other goods may
frequently be had in exchange for it.” [OREF 85]
Source of Value
• Resolution of “paradox”:
– Price reflects relative difficulty of “manufacture”
– Abundant water involves little effort
– Scarce diamonds take much effort
– “Labour, therefore, is the real measure of the
exchangeable value of all commodities.” [OREF]
– “Effort determines value” perspective: “The real price
of everything, ..., is the toil and trouble of acquiring it”
[OREF]
• Price reflects labour embodied in commodity: “If among a
nation of hunters.., it usually costs twice the labour to kill
a beaver which it does to kill a deer, one beaver should
naturally exchange for or be worth two deer.” [OREF]
Value and Price Problems
• What about capital?
– “As soon as stock has accumulated in the hands of
particular persons, some of them will naturally employ it in
setting to work industrious people, ..., in order to make a
profit by the sale of … what their labour adds to the value
of the materials… something must be given for the profits
of the undertaker of the work who hazards his stock in this
adventure.” [OREF 90]
• So two determinants of price?:
– “The value which the workmen add to the materials,
therefore, resolves itself ... into two parts, of which the
one pays their wages, the other the profits of their
employer upon the whole stock of materials and wages
which he advanced.” [OREF 90]
Value and Price Problems
• What about land?
• “As soon as the land of any country has all become private
property, the landlords, like all other men, love to reap where
they never sowed, and demand a rent even for its natural
produce... (A)ll the natural fruits of the earth, which, when
land was in common, cost the labourer only the trouble of
gathering them, come, ..., to have an additional price fixed upon
them. He must then pay for the licence to gather them; and
must give up to the landlord a portion of what his labour either
collects or produces. ... (T)he price of this portion, constitutes
the rent of land, and in the price of the greater part of
commodities makes a third component part.” [OREF 91]
• “Adding up” “theory” of costs/price
Value and Price Problems
• What measure of labour?
• Labour embodied?:
– Hours of labour a commodity contains
– 40 hours to make a chair
• embodies 1 working week
• but price includes profit, rent, as well as wage
• Labor commanded?:
– Hours of labour a commodity can buy
– Chair costs workers 2 weeks wages
• Commands 80 hours of labour
• What is labour?: “Not only his labouring servants, but his
labouring cattle, are productive labourers.”
Smith’s Scorecard
• Gained (w.r.t. Physiocrats)
– Appreciation of labor/industrialisation
– Notions of capital, profit, rent
– Perceptive cynicism re landlords, merchants
– (?) Labour as source of value
• Lost
– Analysis of flows, input-output
– Notion of surplus
– Role of investment
– Analytic rigour
– “Macroeconomic” concerns: investment, aggregate demand,
employment
• Next week: Smith’s successors Ricardo & Marx