Mercantilism in Seventeenth-Century England

 

Backhouse, Chp 4

 

Readings: 

 

Edward Misselden, “Of Exchanges in Generall,” from The Circle of Commerce

 

Thomas Mun, England’s Treasure by Forraign Exchange, Chps 2-4

 

Charles Wilson, “Treasure and Trade Balances:  The Mercantilist Problem,” EHR 2.2, 1949:  152-157

 

 

 

Mercantilism as Rent-Seeking Society

 

Ever since Adam Smith, economists have criticized the excessive involvement of government in economic affairs.  The views of Smith and his followers focused on government interference in the market.  In fact, historians understand things a bit differently.  They recognize that during the 16th and 17th centuries the extent of external control of economic activity by government and the church was falling.  Liberalism – in the classical sense of liberty or freedom – was making headway.  However, the government was still heavily involved in the economy, from a modern point of view.

 

Why were governments still involved in the economy?  Many writers, Smith included, saw government involvement as an attempt to control the economy for political purposes.  On this view, the king and/or the parliament are the culprits.  Another, relatively recent view, sees it not as an issue of government control per se but as a way of coping with a persistent problem faced by nearly all European governments.

 

Citizens of modern developed countries can scarcely fathom the problems experienced by governments attempting to raise revenue in earlier centuries.  Modern governments know much more about their citizens than did governments in earlier centuries.  Most people were illiterate, so record-keeping was poor, and the number of officials in the employ of government was quite small by modern standards.  Governments taxed what they could measure or observe:  imports and (often) exports passing through major ports; land; houses; basic commodities that were produced in only a few locations.  These sources of revenue kept most governments going in ordinary times but proved insufficient in times of war or domestic difficulty.

 

To make up for the lack of tax revenue, governments frequently sold production rights for certain goods.  By licensing the production of products in high demand, such as salt or bricks, the government created monopolies (or at least local monopolies).  The theory of monopoly tells us that monopolists typically earn extraordinary profits, well above the competitive rate of return. Thus, there were economic rents – payments in excess of opportunity cost – to be earned from obtaining a monopoly license.  Prospective producers would bid against one another to obtain these rights, and governments would share the monopoly profits by selling licenses to the highest bidders.

 

Robert Ekelund, Robert Tollison, and some co-authors have set forth a theory of mercantilism as a rent-seeking society.  They use this theory to explain the rise and decline of mercantilist economies.  The conventional theory of mercantilism focused on ideologies:  traditionalism vs. the rise of liberalism.  And no doubt, ideological factors played some role in the decline of mercantilism.  Once the idea of freedom begins to make headway, many people rally around it.  However, liberal ideas arose in a variety of places at about the same time, while mercantilist policies waned in one place and not in another.  What explains the difference?

 

On the rent-seeking view, the difference lay in the different forms of government across countries.  Compare England and France.  The French government was highly centralized.  The king ruled with real authority in France.  The central government was a single monolithic source of legal authority.  In contrast, the English government became relatively fragmented by the 18th century.  Parliament and king often opposed one another, and the English parliament had powers that its French counterpart could only dream of.  Additionally, two court systems existed in England:  the common law courts, which were aligned with Parliament and another court system aligned with the crown.  The two branches of government, backed by their respective courts, undermined one another’s authority.  If, say, the king granted a monopoly to one of his favorites, a prospective competitor to the monopolist might sue in the common law courts to have the monopoly declared illegal.  Often such suits were successful. 

 

The threat of losing a monopoly one had paid a large sum of money to obtain tended to reduce the demand for such monopolies, thereby reducing the amount potential monopolists were willing to pay to obtain state licenses.  If producers didn’t wan to purchase licenses, governments could hardly sell them, so the mercantilist system began to crumble in England – long before it crumbled in France.

 

Economic Conditions in England in the Early 1620s

 

The English economy performed very well in the last decades of the 16th century and first two decades of the 17th.  But in the early 1620s, it suffered a severe commercial crisis.  The cause of the crisis was unknown, and a variety of opinions were offered.  One point of general agreement was that the country was suffering from a shortage of money.

 

Gerard de Malynes argued the traditional view, that the value of English coin in exchange for foreign coin should be determined by the intrinsic value of the metal contained in the coins being exchanged.  Malynes argued that English traders were foolishly giving up too much English coin in exchange, thereby depriving England of the money needed to fuel the economy.  His solution was to force all exchange transactions to go through the Royal Exchange Office, which would see that the “proper” amount of foreign money was received in exchange for English coin.

 

Other writers took a more modern view, arguing that economic conditions determined the exchange rate and that the key to ending the economic crisis was to control the economic forces that drained England of its money.

 

Edward Misselden

 

The passage we’re considering begins by differentiating between the intrinsic and extrinsic values of money. 

 

Q      What is the “extrinsic” value of money?  How is it determined?

 

Q      What is Misselden’s attitude toward controlling the value of the exchange rate?  Does he favor “exchange controls” or oppose them?

 

Q      Is he concerned with how much money England brings in, relative to what he sends out?

 

Misselden’s major contribution to economics is his development of the concept of the balance of trade.  No doubt others understood the concept (including, probably, Mun), but Misselden was the first to put it in print.

 

Q      Why is the concept of the balance of trade important?

 

Q      What does Misselden propose to remedy England’s difficulties?

 

 

Thomas Mun

 

Q      What rule does Mun propound in Chapter II to enable a country to become wealthy?

 

Q      So how does Mun define wealth?

 

Q      In Chapter III, Mun lists a number of ways in which a nation might increase its exports.  Let’s examine some of them.  First, what modern name is given to the suggestion he makes in point 1?  How would it (supposedly) make England better off?

 

Q      What does point 2 amount to?

 

Q      What modern economic concept emerges about halfway through point 3?

 

Q      How does England gain from using its own ships (point 4)?

 

Q      What’s the argument of point 5?

 

Q      Is that plausible?

 

Q      What does Mun advocate in point 7?

 

Q      What is Mun driving at, in point 12, when he says that “we know that our own natural wares doe not yield us to much profit as our industry”?

 

Q      Going back to point 9:  After arguing repeatedly that a proper trade policy brings in money, why does Mun argue that traders should be allowed to export money?

 

Q      In Chapter 4, point 3, fourth paragraph, Mun states that “all men do consent that plenty of mony in a Kingdom doth make the native commodities dearer, which … is directly against the benefit of the Publique in the quantity of the trade; for as plenty of mony makes wares dearer, so dear wares decline their use and consumption.”  How can this be squared with his advocacy of persistent positive trade balances?  Wouldn’t his policy be self-defeating?

 

Q      Why would Mun overlook this in his argument?  Or is there some way to short-circuit this process?

 

So we have a possible solution to the apparent conundrum.  Thomas Mun appears to have understood the threat to exports of higher prices resulting from inflows of bullion.  He also understood that a high price of English cloth would almost certainly reduce the demand for it on the continent.  But he chose not to complete the circle because he believed that the inflow of bullion need not necessarily raise prices.

 

J.D. Gould (JEH 15.2, 1955:  121-33) argues that Mun argued as he did because the PSFM flew in the face of the Dutch experience.  Why didn’t prices rise in the Netherlands?  Because the Dutch did utilize their huge inflow of bullion as liquid capital with which they financed a larger volume of trade.  That is, the Dutch followed a policy that avoided the self-regulating consequences of free trade.  It’s worth noting that Mun’s view of money – as a medium of exchange – represented a shift of opinion from the older view held by Malynes – that money is primarily a measure of value.  Mun’s focus was on money as an active agent moving goods.  If most imported bullion were sent out again rapidly, as part of national policy, the domestic economy could be well supplied with money, while the volume of international trade could continually increase.

 

A final note on the cause of the high price of English cloth:  It appears that currency debasements in Poland and several German states during the course of the Thirty Years War did raise the price of English cloth to some European buyers.  The exchange rate between the pound and the European currencies adjusted immediately, while domestic prices rose gradually.  Thus the relative price of English cloth leapt upward.  When the European states restored their currencies, the process was reversed.