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Mod-01 Lec-14 The debate over mercantilism: Hume and Cantillon

September 11, 2019

The mercantilists came under considerable
fire by economists from the middle of 18thcentury onwards, in a sense this was because the whole
focus of European economy had changed dramatically by 1750s. Partly also this was because the focus of
the European intellectual, focus of European thinker also had changed dramatically by this
time, most importantly by 1750s, Europe was not dominated by merchants anymore. Europe was dominated by merchants who were
turned into manufacturers, so from 1750s onwards its a manufacturer process of industrialization
these things took the focus of peoples attention, but one thing another -yes.The whole political
character of European governments had changed, so the world in Europe was very different
from 1750s and afterwards as it was an in compared to was to what it was in 1550s and
afterwards.As a result there was considerable harsh and healthy critic,the man calledhumecontemporary
of Adam Smith and a good friend of Adam Smith. Who fired a major salvo against mercantilists,
what home said was using the specie flow argument, you bring in more money into the country the
m and mv increases, which means supply of money increases. Initially the prices did not respond and transactions
take even more time to respond, you hike the price it follows in the minds of most people
that supply of good will increase, butthere is a big lack between the time and supply
of what goods can be increased and the time when money comes inthats when all the new
money gets converted into manufactured goods and that takes time. So, what happens immediately which is whathumeperceived
is that instead of in pqor py or pt whatever you have that before the number of transactions
increased dramatically, it is price which is going to increase dramatically because
money supply increased, no. So, home said if money supply increases the
prices then domestic prices all around increase, then if your exporting x percent of this domestic
output, then it simply followsthat your exports are going to be costlier. So, you lose the advantage of being a great
exporter if for if you find that your exports are costlier than losing their competitive
advantage and your back to square number one no more trade surplus. So, the whole process according tohumewas
self defeating, on the one hand you create a trade surplus through conscious policy it
brings in money and as soon as the money comes in prices start shooting up and therefore,
it exports which wereeither too competitive are no longer competitive they have lost the
competitive edge, as a result the whole advantage which you had through trade surplus has vanished
back to square number one. So,humesays this whole thing is a big illusion
that money supply can increase a nations welfare says no, it can lead to a short term spert
in outputin market supplies businessmen can supply you something out of stock which they
have in the warehouse they can release it and give it to you because money supply has
comebut in the long run whats going to happen is that you will be back to square number
one loose all advantage. So, that you will have major benefitsin the
economy out of trade surplus and then the bullions coming in and in other words say
in one shot he was tiring to demolish the entire mercantilist argument, he said this
is purely illusionary there is no gain to be made out of this strong argument. How did the mercantilists count on us? It is true that the students of home, the
students of Adam Smith and all those who followed them later thought thathumehad virtually destroyed
mercantilist argument but mercantilists were assisted these arguments of Cantilun was an
Irish men, who lived in Paris and London a banker. What Cantilun said was had said long before
thisHomes argument had come, he had anticipated this price increase thing.So, he said sure
when money comes in the most natural thing would be for the prices to go up so he saysok
but if prices go up its good because our export earnings will rise. So, it is good for us our trade surplus willgrow so whats the problem that was cantiluns argument. So, the question is whether you accepted homes
argument that price increase is harmful and you lose competitive advantage or you acceptedCantiluns
argument that price increase actually fetches more export earning and therefore, it improves
your trade surplus even more, the question is which of these arguments you accept and
there is a little catch. If we know something about elasticity’s
price elasticity’s you can answer the question about who is going to be right whose going
to be wrong whathas price elasticity’sgot to do with this tell me? I think you can say it a lot more clear in
what you said I do not know
Of course you know No I
If the demand for a particular good is moreis very isquite more elasticthere is a increasein
its price then people will actually substitute I mean will actually switch to that Right rightrightright. So,what does it tell you about the debate
between these two guys as a mercantilist you are saying Cantiluns argument and the others
using Homes argument. Yes
If the demand for the exports is inelastic so in spitewhen you increase the pricesin
order to exports would not change much so which means you will generate more in surplusbut
if demand for export is elastic then as your price increases then your exports will fall
absolutely, my God you must once again remark on the quality of your lunch but surely I
mean it cannot happen again and again, so there must have been something in that you
know Popeye’sspinach. He opens a little box swallows it and he smashes
up the enemy don’t smash me upbut keep up the good done good lunch and so forth great
lovely. So, you got it absolutely right the whole
thing depends upon what assumptions you makeabout the elasticity’s of demand for exports and
imports priceelasticties. If you assume that demand is elastic thenhumeis
right, if you assume demand is inelastic then Cantilun is right. So, eventually since elasticity itself was
something which they couldn’t measure in those days the debate ended as supposition
was as earned as supposition. So, much for homes criticismbut homes criticism
became immensely popular not because as I said people knew something about elasticity’s
but homes criticism became very popular because there were other reasons why the mercantilists
case was dismantled you know when the setidilof your enemy is falling then a little mouse
can go through a knaw little piece of wood somewhere and the whole thing falls to pieces. Inthe same way the setidil of the mercantilists
was brought down by other arguments which we shall see shortly and therefore, they had
no casebut as I said this argument ofhumeon spessi flow or quantity theory and the reply
which mercantilists produced from cantiluns argument which is right eventually, which
has greater weight is something which depends upon what one assumes aboutprice elasticities
of demand for exports and imports no. So, the answer is conditional on that but
a bigger criticism came as I said the citadel of the mercantilists was broken by other reasons
for instance pyschiocrats, who are the pyschiocrats do you something about them?Are they something
like autocrats? Why are they called pyshiocrats? Do have you heard of them ever you will hear
of them next week anyways. So,well get to them pyshiocrats were a group
of economists who were popular in France between 1750s and 1770s across Europe actually for
what they said. We look at the pyschiocratic argument in detail
next weekbut for the time being it’s enough for us to know that the pyschiocrats said. Who told you that trading surplus is the basis
of a nations prosperity they asked this question, because as you know the mercantilists were
all the time trying to emphasize the trading surplus part right which is why the political
economy of the mercantilists was big. So, they said who told you that say trading
surplus is something which can build the nation bring wealth into the nationso if people ask
physciocratsthen what else can pyschiocrats saidwhere is everything happening in an economy
during those days France and most of Europe was still largely agricultural. So, they said of course,in the fields in the
farms that is where everything happens so where is the surplus coming from which will
build the nation from the farms from the hands of the farmer,so physicocrats said what is
this all about trading business in fact the pyschiocrats called the merchants and traders
as the sterile class because they were unproductive in their eyes. So, they said lay class sterile this lay class
sterile is this the one going which is going to be leading to the wealth of nations no
so straightaway the physchiocrats dismissed mercantilists argument. They said this is hitting them in the foundations,
so lot better than using quantity theory and telling them it is like this like that. No,straightaway telling them who are these
traders are you swearing by them where is the theory behind you saying traders are the
source of surplus traders make profit by converting one purchase into purchaseprofitable sale
into another hands but that’s sterile activity according to the physchiocrats. So, they said the merchantsbusinessmen are
like class sterile there is no question of their leading to prosperity of the nation
straightway so this was a pyschiocratic critic do you have some questions on the physchiocrats
at this point in time?Yes. This is beautiful my god say that again. Was this argument incorporated by team
Which argument They are the source of surplus
Absolutely you say that again because you have made a very strong point I would like
youcarry the day if you can. Not so much by the farm laborerbut the criticism
that trading and merchant capital is not the source of surplus that is what Marxsaid right
you are right. So, Marx was very critical of the saying at
a particular point about the development of the capitalism merchant class was significant
when the commercial revolution was going on through Europe, butthis was just a sequelthis
was just something which preceded industrial and agricultural revolution which were the
major revolutions in Europe. So, you cannot say that the merchant in Europe
brought prosperity to Europe it was a manufacturer who brought prosperity its the intelligent
farmer who brought prosperity true. More importantly Marx was not so much concerned
about prosperitybut he said where does the surplus output come from in this system, so
Marx said nowhere did it come from the traders would you like me to expand on that point
a little bit, you see in the development of capitalism where the initial stock of capital
falls starting industries comes from that is the question once the capitalist industrial
base comes into existence then it isa kind of self reproduces and grows. Where does the first stock of investment come
from Marxcalled this primitiveaccumulation your familiar with this term where did you
study Marx before this? And you read Marx in the original too. Fantastic you are blessed I have not read
much at least at your age. Ihave not read Marx in the original and that
is fantastic. So,then what is primitive accumulation who
can tell me? The initial stock of capital for investment
through which capitalism grows. So, they were two sources of growth of this
primitive accumulation according to Marx.A large part of it came from traders who traded
with the colonies and who traded with the African and Asiancountries who later became
colonies, and brought in huge quantities of surplus from trade for investment. So, part of the investment in Englishindustrialization
for instance came from English trading profits, so lot of later day joint stock companies
and theshare holders were big time traders one, second the English agriculture itself
had gone through a revolution. There were farmers in England by the middle
ofeighteen century, who were known as gentlemen farmers have you heard of this? Do you know where the word gentlemen came
from? Take a shot, we use it all the time no, probably
we do not use it much but thirty years ago people were to were fond of talking about
ladies and gentlemen, nowe will leave aside gentlemen now you see when feudalism declined
the power of the feudal lords in rural England were slowly taken over by the middle class
farmer, who is a big experimenter, who was a big pioneer of new seeds, new varieties,
new technologies etc most of these gentlemen were tenants they held land as tenants of
the aristocracy but they were the ones who really the dynamos of Brutish agriculture;
they did a lot of things including the enclosure moment about which talked day before yesterday. Did I enclosure yes I did now these gentlemen
farmers they were called gentlemen farmers because they were very prosperous and they
were the ones who were really making profits in agriculture, they were the ones who were
earning money from agriculture. The aristocrats were intend on spending that
money as fastas possible to gentlemen farmer who had that money, who wanted to do something
with this money according to Marx the profits from agriculture from the EnglishAgrarian
revolutionin the hands of the gentlemen farmers was the second source of primitive accumulation. So,that is where the primitive accumulation
came from and therefore, Marx had the strong criticism sayingit provided the primitive
accumulation for English industrialization and the development of British capitalism
but capitalism itself it was not the merchant capital which was important but it was the
manufacturing capital which became important which was the reason, why England became a
powerhouse of the world was not because of the merchant who did their bit but because
of the manufacturer in Englandso that takes care of Marx. So you have any other question? I like that interjection about Marx because
it was good it was time being.So, trading was not productive according to physchiocrats
its farming which was productive, then came the critic from John Lock, John Lock himself
a very strong mercantilist sympathize basicallybut John Lock was known even better as a libertarian. Who is a libertarian? Libertarian is a nice word but libertine is
not a good word to describe somebody yes so tell me Samsomething about John Lock also
great thinker no. State incidents more of absolute liberty of
law security and the it is like the traditional So, I thinkthe difference lies inconsumption
of freedom itself as negative liberty or positive libertyso for the libertarian’s law and
state is a form of a negative liberty in fact they create which is the rules within which
it suppose to function and for them.Stay round the track.So, what they I cannot.No,you are
doing fine. Yes. Its basically John Lock talked about the sovereignty
in his treat for the government he plays sovereignty within the community, and this community was
independent from the state like whatever the community taught was good for the overall
nations but with the community it is the domal sovereignty the domal sovereignty be with
the people and the actual sovereignty with the state, actual sovereignty in the sense
in terms of rule making and basically rules which do not imp inch upon three natural laws
of properties like the liberty and in case if status is not able to carry out this duty
thesovereignty of the people can come into force come into play and they can actually
they can today sense what the government is all about then they can actually like tellask
for a change in the sovereign from the authority itself. Ever revolution. Right beautiful lovely now am bringing in
lock into this scenario in a slightly less important way. Lock was talking about land and property and
Lock’s argument for land and propertywas something like labor theory of value the whole
idea of the property evolves from Lock’s idea of the natural liberty of a manwhich
enables him to do whatever he wants with his labor. So, he says property is a is an outcome of
such laborfrom person exercise of the right to use his labor whichever way he wants and
in so exercising he acquires property, so Lock is fine as for property goesbut then
he asks a question how do inequalities come about in society and they says inequalities
come about because not of land and property which comes through use ofthe right to dispose
of one’s labor but it comes because of money. He says people get money, it does two things
one it makes them greedy to get more money and secondly it gives them an avenue to accumulate. So, it is the accumulation of money a part
of which results itself into more land and property, which is a source of inequality. So, according to Lock the mercantilists phenomenal
of rapidly growing income through trade might well end up simply producing more inequalityin
the society. This is basically violative of the society’s
character. So, locks criticism comes in a very oblique
in a very indirect fashion, Lock does not deny that trading produces profits, Lock does
not deny that these profits are usefulbut he says what it leads too is eventually possibly
considerable amount of inequality in society and inequality by itself comes in the way
of the exercise of liberty unequal people cannot be equally enjoying liberty thats the
argument. Then came another major argument ofhumewhich
was much more significant than the quantity theory for the spessi flow mechanism, this
is Hume’s argument that trading between countries does not have to be predatory, you
see after all the world view which a mercantilist had was a very predatory world view, what
is predation? Sir, there is a pre and a predator like assumption speaker and a stronger bar and the stronger bar overcomes them. See the mercantilists well used that the nation
must be strong, so that it becomes the strongest nation in order to do this it must indulge
in predatory activities basically, consuming gold and bullion from some other country through
trade surplus right and do you use sometimes the power of your economy power of your arm
forces to ensure that the other one does not respond to your tariffs as and how you impose
them in other words from your tariff leading to his counter tariff his counter tariff leadingto
your counter, counter tariff it is a tariff war So, what prevents tariff war your from occurring
in a mercantilist world it prevents it from occurring ,what prevents it from occurring
is the military might of one of the nations one of the nations is just too strong for
the other one to respond in other words therefore, the picture that the mercantilist painted
of the world around is a predatory world and they justified it by saying the strong nations
will rule, they have to rule because they are strong and the job is to make your nation
strong through whatever means now Hume says it is a very negative view of the world. Hume says there is enough space in the world
around where everybody can trade to their profit and grow; there is no reason why predation
should be the policy for the growth of any nations. So, the assumption that the world is finite
and limited benefits to be attained from this world are finite and limited, I ask these
questions Hume he says the benefits from trade are immense and many and therefore, every
nation can participate in free trade and grow there is no reason, why you should have these
restricted trade practices like anybody should grow. So, Hume’s argument was that there is enough
space in the world for everybody to grow through free trade. There is no need to have a predatory policy,
so Hume’s idea closely followed or simultaneously. Yes, you have a question?Simultaneously followed
by Smith’s theory of free trade, Smith says whoever has an advantage in having more productivity
labor in a particular industry will have an absolute advantage in the manufacture and
export of that commodity. So, the whole thing is based on efficiency
the whole thing is based on quality of labor the whole thing is based on therefore, how
you can have processesee which are continuously enhance labor quality and he says this is
possible only through division of labor. Division of labor is nothingbut dividing a
production process into many sub processesees, so that each builds more specialization each
builds more skill, so that the overall productivity in the manufacturing industry will grow. So, Smith says this is the secret of it all. Division of labor creates productivity skill
and therefore, superior output it is nothing to do with trading; it is nothing to do with
trading profits. So, Smith’s argument about the free trade
andthe gains to be made by all nations of the world. In free trade supported homes argument that
the world is a much bigger place than mercantilists gave scope for and gave rise to a completely
different idea of trade in the world, growth of commerce growth, of business across the
world the whole thing changed with the ideas of Hume and Smith. In a matter of 30-40 years, the world became
a place where free trade was celebrated and any kind of restriction in trade was viewed
upon as a retrograde strength. So, more than anything else the theoretical
proof which Smith gave to the gains from free trade and the logic of the arguments, which
Hume made that the world is a much bigger place permitting lot of free competition and
growth for everybody both these arguments really put paid to a lot of mercantilists.Now
free trade by the 1950s free trade is a maxim of a whole group of economists from the US,
who believe free trade had alone its good for the world market, any restriction on trade
is one which leads to growing power of the state and this power of the state is something
bad as communism is and. So, since the 1950s economic research, economic
ideas and economists class room teaching continuously emphasis the advantage of free trade and alluniversities
were teaching theories of trade, which were only different ways in which theoretical justification
for free trade was given. By 1960’s people started finding other interesting
things which were happening. They found that not only across international
tradebut within the country also capitalism was misunderstood by most people. Capitalism had been understood by people to
think of a world where there were entrepreneurs were maximizing profits and therefore, following
all those nice calculus in microeconomics and then eventually getting to maximize profits
and therefore, maximize the welfare of the whole society. It was found by 1960 actually, the early literature
started coming, there was a man called George Bean professor in Howard. Who started looking at American business trying
to find out, what is American business really doing? What is the corporate world really doing? And he wrote a lovely book called Entry Barriers
in the US economy. He found most businesses across Europe across
US were not trying to maximize profit. What were they trying to do? They were trying to make sure that others
did not enter the business patent intellectual property is a classic case of Entry Barriers
you acquire in intellectual property precisely because others cannot produce these commodities,
all science and technology research is of this type then you deliberately create a scale
of investment. A size of physical capital outlay which will
be prohibitive for most people they cannot invest that money petrochemical industries
for instance whether petrochemical industries do depend upon this big highly expensive technology
or whether there are smaller technologies available it is a difficult thing to saybut
certainly petrochemical industry in the middle of19th century was not this capital intensive,
as it was in the middle of the 20th century. So, the argument was that you deliberately
create technologies, which involve very high sunk cost sunk cost in other words very heavy
capital outlay. Fixed capital, so that nobody else can take
that risk and sink so much money and get into the business. There are many other reasons why George being
found that American business was mainly trying to prevent entry into different industries
creating barriers to entry, rather than making more profits. Now this was extended to international trade
there were economists, who said that this is what is happening across the world different
countries are trying to preventcompetition from other countries in the areas where they
are specializing. They do not want other countries to become
competitors to them in the world market. So, it was suddenly seen that existing theories
of free trade were great if you accepted that free trade existedbut otherwise as explanations
of wide trade occurred there were better explanations including the explanation of entry barriers,
reason I am saying all this is once you accept entry barriers as a possible strategy in the
global market you are back to mercantilism with vengeance aint you? So, the argument of third world countries,
today is that while the arguments by the developed out of the
world in the international economic Hudaare for liberalization of trade or for non interference
of government in trade removal of tax barriers tariff barriers all these things in the world
economic forum are said to be good healthy policies and under economic reforms the government
itself minimizes its hand in the economy.Lets the economy go free on the one hand this is
the argument, on the other hand the world is becoming more and more and more predatory
in actual fact. Technology intellectual property are very
preditarians. So, at this point in time I can only say that
while at the time ofhumeand Adam Smith the mercantilists looked rather ridiculous against
the power of the argument of the smithian economics couple of hundred days down the
line the mercantilists are not looking on that foolish is what it appears it seems that
the world definitely has a streak of predatoriness about it just as it has an element of competitiveness
too. The world is not a hundred percent competitive
place, the world is not also a hundred percent predatory place it is all there sometimes
this dominates, sometimes that dominates. So, in the final analysis what do we say about
Smithian and Hume’s argument about the possibility of predatoriness. We can only say that there are different historical
epox in the world economy where predatoriness into dominate, there were other epox where
freedom of trade competitiveness seem to have dominated certainly from around the second
or third decade of 19th century till the 1st world war the world economy was definitely
a lot free at place there was a lot of open market competition this sort of a thing happened
but the argument is that it happened only because England had already become very powerful
it could afford to compete the argument is made that India by 1781 was the largest exporter
of the world. Indian textiles was the largest textile industry
in the world, it was a direct competition to Manchester as Manchester industry was growing
in British industrialization. It was totally mercantilist protectionist
policies of the British government which converted India according to Indian economy historians
from 1830, when India was the largest exporter of textiles to 1830. When India was net imported of textiles this
a process which Indian economy historians described as a process of the industrialization
of India and it was done according to them as a matter of deliberate policy, so that
Indian textile is no longer a competition to Manchester which was refusing to grow in
the phase of Indian competition. Indian tally course was all the duties paid,
with all the insurance paid, with all the shipping costs were still cheaper in London
than Manchester textiles which was made in Manchester. This was because of the quality and technological
advantage which Indian handicrafts had that time which could be priced that low. So, it is argued that British could become
patrons of free trade after they had enjoyed the benefits of protection. So, in the long run looking at mercantilists
in a historical perspective we can only say that specific policies seem to be justified
at specific times, when specific class interests are served. When the merchants and businessmen were dominant
in Europe and they had the help of the monarch mercantilism became very popular just as you
have the enormous corporate power today in modern world, where corporate power swashed
decision makingpower of the government. So, that policy is very much pro corporate
it is not the 1990s and onwards that I am talking about. Even in the 1960s for instance in India the
licensing policy they say the government encouraged the licenserajin those daysbut thelicenseraj
existed because it suited the Indian economists the big four five companies in India would
always grab the licenses first, so that others dint grab the license while entry barrier
no andthrough the 60s, the number of these licenses would be grabbed by these corporate
simply not to use it but to make sure that others dint use it. So this was an ebocs economy, where India
was a brand economy where some kind of socialist objective was minimizing inequality in the
economy through a whole lot of processeseebut that brand economy served the interests of
the corporates in India. So, we go back it is not a question of which
is imprincible better, whether predation is better or free trade is better the question
is there are ebocs in human history where sometimes predation appears to take hold sometimes
free trade seems to take holdbut there is really nothing permanent about either of these
is the conclusion that emerges today. Now, quite aside from all of this that we
have talked about mercantilism there is yet another new chapter which unfolded in the
1930s. When after nearly two hundred years academia
in economics started looking at mercantilists with considerably more favor this was because
the economics of Smith and Ricardo which dominated economics subsequently and then their own
off shoots in the writings of Jevons and Marshal and Waldron and so on and so forth. Money became totally discounted as a powerful
thing in economics from the time of Smith, it was fashionable to argue it is a real sector
of the economy which matters how much is somebody producing, how much is somebody manufacturing
and how are they trading in other words the supply of goods and services becomes central
to the argument of economy. What about money?Well money is fine but money
cannot make you grow was Smith’s argument as a critic of mercantilists but it was a
major part of Smith’s argument and then it was taken off by all his disciples laterand modern economists to the neo classical economists. So, right up to the time of the 1930s up to
the time of canes it had become fashionable to argue that money is really nothing fundamentally
money is neutral in other words you inject money into the system, it cannot help you
produce more goods and services money might simply produce an increase in prices and might
increase the nominal value of goods but it does not change the real rates which goods
exchange amongst with each otherin other words the system of relative prices, commodity prices
in relative terms rather than nominal prices became the desideratum up to the time of Canes.So,
Canes came and found the world he found that a great depression was happening,what is a
depression?I thought you had say we are going to losefine so slowly down on the economy
Right, so the economy goes on a downward vertex less demand, less production, less employment,
less demand again less production in spiral no. And Canes was asking what do you do about
this spidel? How do you get of this spidel? So, Cane says you have to generate demand
and how do we generate demand on money into the economy exactly mercantilism. Right so Canes said, let the government bring
hundred crores of rupees and pay everybody to dig a hole on the road give them ten rupees
every time he dug a hole next day give him ten rupees to fill it up, it is called public
works right that is what they are doing in Chennai all the time they are digging holes
not filling them up fully very equally efficiently monsoons are coming, so lot of people are
going to fall into holes and vanish full of water. So, anyways so Cane says public works how
do you find money for public works? Very simple the government has a surplus budget
or a deficit budget what could it have?The government would spend more than it earns
no it is a deficit. So, the government simply spends more and
where does it come from? From the budget from the money bags of the
government. So, the samply the government simply pumps
money into the economy and the money is used to dig holes and fill them up and what happens
that these fellows who have dug holes and filled them up they go to their shop that
evening and spend the money. I want rice; I want kerosene; I want cooking
oil; I want vegetables; I want tamarind and so on and so forth. So, the next day there is not only a demand
for the stock of tamarind and this that the money which is spent in the shops goes back
to the workers who will come into employment. So, those guys say now I have got my job back
in my rice mill,I have gotmy job back in the tamarind crushing factory, I got my job back
in the cloths making textile industry. So, they come to the market and say I want
more rice; I want more vegetables; I want more oil. In other words there are several successive
rounds of spending that starts from the first round of spending and what does Canes call
it absolutely and the money supplier is totally monetarily created right. So, Canes said what’s wrong with money? What’s wrong with money? I mean good you spend money it will trade
your demand and that is what the mercantilists isn’t it all the money is needed why because
it will trigger demand. When it triggers demand the economy will grow
production will grow prosperity will come, so canes was being mercantilists with the
vengeance not only that when Canes was writing about mercantilists. It was the first time somebody was being sympathetic
to the mercantilists after nearly two hundred years of mercantilists beingthought of just
bad stupid boys.So, this is something to which has to be kept in mind so do we then say that
Canes proved indirectly that there was more to mercantilistswere simply than simply business
of bullionism, because the fundamental argument of mercantilists is pretty is pretty much
like Canes, they dint talk about multiplierbut it is very clear they had something like that
in mind you have one million dollars worth of gold flowing in that and that creates waves
of spending. Why not? So, the big question about mercantilists is
today whether they were all that foolish or whether the critics of mercantilism were all
that smart. Certainly, we know that there has been a considerable
revival in the interest of mercantilistpolicies particularly after Cane showed theoretically
that spending money to revive demand and ineconomy is as good as doing something else physically
you know. So, this distinction between monetary and
real factors in the economy which the classical and the neo classical economies had been emphazing
from the time of Adam Smith showed that this distinction is really not a valid distinction
at all. Secondly, as opposed to the classical assumption
that money was just neutral, it did really nothing Canes showed that money was a very
powerful agent and monetary policy is a major agent of transforming an economy is a major
agent of generating employmenteven till pushing the economy to a full employment stage. So, looking back in time in retrospect what
does one say about the mercantilists? We can only say that the critic against mercantilists
at the time when it happened did make them look foolishbut then this was only in an epoc
when everybody was talking about free trade but in another epoc when anybody stops talking
about free trade mercantilists do not look on that position. So, once again we come back to the question
a particular economic policy takes on roots and becomes appealing depending upon what
context it is in. What historical context it is in? So, there was a historical context in which
the mercantilists became immensely popular. There was a historical context in which free
trade became immensely popular and mercantilists started looking so stupid, andthere isanother
historical context a couple of hundred years down the line now, when people are much wiser
they realize that the distinctions which Adam Smith made between real and monetary, the
distinctions withAdam Smith and his disciples made betweenreal factors of the economy, and
the neutrality of money all these distinctions have to be reexamined in different contexts
that is the lesson we have learnt.Have a lovely weekend.

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