History of Economic Thought Chapter 3- Mercantilism

What is mercantilism?

An economic doctrine that puts national economic interests above individual interests and seeks national power through state-directed economic policy.

What major historical transition does mercantilism represent?

The transition between feudalism and economic liberalism/capitalism as centralized nation-states became more powerful.

What are the two approaches to studying mercantilism?

The doctrinal approach studies mercantilist ideas; the process approach studies the interests and institutions that produced mercantilist policies.

How does the doctrinal approach explain mercantilism?

As a loose system of economic ideas and policies designed to increase national wealth and power.

How does the process approach explain mercantilism?

As the result of self-interested groups using government regulation to gain wealth, monopoly privileges, and power.

What general principles did von Hornick's nine rules represent?

Maximize domestic production and population, restrict imports, encourage exports, and retain gold and silver.

How did mercantilist thought differ from medieval Scholastic thought?

Mercantilists focused more on secular wealth, power, and real economic conditions than morality, justice, and salvation.

How did mercantilists view national economic resources?

Resources should be directed toward making the nation as economically and politically powerful as possible.

Why were money and international trade central to mercantilism?

Bullion and trade surpluses were viewed as essential sources of national wealth and power.

What was the mercantilist favorable balance-of-trade policy?

Import low-value raw materials, export high-value finished goods, and create a net inflow of money or bullion.

How did many mercantilists view international trade?

As a zero-sum game in which one nation's gain came at another nation's expense.

Why did the zero-sum view support protectionism?

Restricting imports and promoting exports seemed to increase national wealth and power at foreign nations' expense.

What is bullionism?

The belief that national wealth and power depend heavily on accumulating gold and silver.

How did Malynes and Misselden differ on specie exports?

Malynes opposed specie exports; Misselden allowed them if the overall balance of trade produced net specie gains.

What important contribution did Edward Misselden make?

He developed a more sophisticated balance-of-trade concept including debits and credits and calculated England's trade balance.

What was a major flaw in mercantilist thinking about trade surpluses?

They often believed bullion and trade surpluses could continue indefinitely without changing domestic prices and trade flows.

What is David Hume's price-specie flow mechanism?

Bullion inflows raise the money supply and prices, reducing exports and increasing imports until the trade surplus corrects itself.

Why does Hume's price-specie flow mechanism undermine mercantilism?

It shows that continuous bullion accumulation through permanent trade surpluses is self-defeating.

What is the quantity theory of money?

An increase in the money supply tends to increase the general price level.

What is the basic quantity equation discussed in the chapter?

MV = Py: money supply × velocity equals price level × real transactions/output.

How did mercantilists generally view domestic economic freedom?

Many feared excessive freedom and relied on government planning, regulation, subsidies, taxes, and monopoly privileges.

What were mercantilist franchises and patents?

State-granted exclusive trading or production rights that created legal monopolies for favored merchants or companies.

What is rent seeking?

Using resources to obtain monopoly privileges or other government-created gains rather than creating new wealth.

What are economic rents in this chapter?

Profits attributable to monopoly privileges rather than competitive advantage.

Why was there ambiguity in mercantilist policy?

Mercantilists often supported strict foreign-trade controls while also arguing for greater freedom in domestic markets.

What did the 1549 Discourse on the Common Weal argue about markets?

Market forces and profit incentives could allocate resources more effectively than government regulation.

What was the mercantilist "utility of poverty" argument?

Keeping workers near subsistence was believed to make them industrious and prevent idleness and vice.

Why did mercantilists favor a large population and low wages?

A large low-wage workforce was believed to increase production, competitiveness, and national power.

What wage level did some mercantilist writers seek for workers?

A wage high enough to motivate work but low enough that desired luxuries remained out of reach.

What were the major theoretical weaknesses of mercantilist doctrine?

It failed to grasp cyclical international accounts and the relationship between money supply, prices, and trade.

What important methodological contribution did mercantilists make?

They emphasized empirical observation, economic statistics, and real-world experience rather than metaphysical speculation.

How does the process approach interpret mercantilism?

As rent seeking by individuals and groups attempting to use state power for private economic gain.

How can regulation be analyzed as an economic good?

Interest groups demand regulation for benefits while political authorities supply it when the benefits exceed their costs.

Why do organized interest groups often obtain favorable regulation?

Their concentrated benefits make organization worthwhile, while larger dispersed groups face higher coordination costs.

What is a cartel?

A group of firms acting together like a single monopolist to control prices, output, or market entry.

Why are private cartels often unstable?

Members have incentives to cheat, and private enforcement of cartel agreements is costly.

Why can government-supported cartels be more stable?

Government can enforce entry restrictions and cartel rules while shifting enforcement costs to taxpayers.

What is productive entrepreneurship?

Entrepreneurial activity that creates additional wealth and adds net value to society.

What is unproductive entrepreneurship?

Activity that redistributes existing wealth through privileges or rent seeking rather than creating new wealth.

What determines whether entrepreneurship becomes productive or unproductive?

Institutions and relative rewards determine whether entrepreneurs create wealth or pursue privileges and redistribution.

Why can insecure property rights discourage productive entrepreneurship?

People have less incentive to create wealth if rulers can confiscate the rewards from successful activity.

How did the Age of Exploration affect entrepreneurship?

New markets and resources expanded opportunities for productive commercial entrepreneurship while rent seeking continued.

How was English mercantilist regulation divided between local and national levels?

Local guilds regulated trades, prices, and wages; national regulation came from Parliament, royal mandates, and the Privy Council.

What was the Statute of Artificers?

An Elizabethan law attempting to create nationally uniform rules for industry, labor, wages, and welfare.

Why did towns support nationally uniform regulation?

They wanted state protection for local monopoly and guild privileges against outsiders and competing producers.

Why was local mercantilist regulation difficult to enforce?

Unpaid or low-paid officials had weak incentives, corruption was common, and firms could move outside regulated towns.

How did resource mobility weaken local mercantilist regulation?

Workers and firms could relocate to suburbs or the countryside and escape town regulations and guild monopolies.

What two factors ultimately weakened local mercantilist regulation?

Self-interested behavior by poorly paid enforcement officials and the ability of firms and workers to escape regulated areas.

Why were national monopolies initially more stable than local monopolies?

Leaving national jurisdiction was harder than moving outside a town, so regulated firms had fewer escape options.

What were England's three major common-law courts?

The Court of King's Bench, Court of Common Pleas, and Court of Exchequer.

How did judicial competition weaken national monopoly rights?

Competing courts created uncertainty over whether monopoly privileges would remain legally valid and enforceable.

Why does uncertainty reduce the value of monopoly privileges?

A monopoly is worth less when its owner cannot be confident that courts will continue to enforce it.

What did the 1624 Act Concerning Monopolies do?

It sharply restricted the king's ability to grant monopoly privileges and strengthened Parliament's control.

What was the underlying conflict between Parliament and the crown over monopolies?

The struggle concerned who would control the power to grant economic regulations and monopoly privileges.

Why did mercantilist regulation decline after Parliament gained power?

Multiparty decision-making made supplying and enforcing regulation more costly than under a single monarch.

How did colonization fit mercantilist policy?

Colonies supplied cheap raw materials, bought finished goods, and were regulated to serve the mother country's economic interests.

What was the purpose of the Navigation Acts?

To channel colonial trade through England and English ships for the benefit of English merchants and producers.

How did mercantilist restrictions affect the American colonies?

They limited trade and production choices, encouraged smuggling, and transferred economic benefits toward English interests.

What is the doctrinal explanation for the decline of mercantilism?

Its economic errors were increasingly exposed while liberal ideas gained intellectual credibility.

What is the process explanation for the decline of mercantilism?

Institutional changes raised the cost of rent seeking and regulation, making mercantilist controls harder to sustain.

What was Bernard Mandeville's major contribution to emerging liberal thought?

He argued that individual self-interest and private vices could unintentionally produce public benefits.

Why was Mandeville's thought important to later economic liberalism?

He anticipated the idea that self-interested individual behavior can generate beneficial social outcomes without central direction.

How did Mandeville's empiricism support liberalism?

He emphasized knowledge from experience and individual perception, supporting greater freedom over centralized rational planning.

How did mercantilism ultimately contribute to economic liberalism?

Its policies unintentionally expanded markets and commerce while its failures and institutional conflicts encouraged freer economic arrangements.

What distinguishes English from French mercantilism in the chapter?

French mercantilism was more centralized and efficiently enforced; English regulation was comparatively weaker and fragmented.

What is Colbertism?

The highly centralized form of French mercantilism associated with Louis XIV's finance minister Jean-Baptiste Colbert.