Mercantilism

Jean Bodin

One-breath summary: The price revolution happened because American gold and silver flooded in — more money chasing the same goods pushes prices up proportionally; this is the first recognizable quantity theory of money.

The mechanism:

1. The price revolution is not caused by debased coinage or scarce goods.

2. It is caused by the extraordinary growth in precious metals in circulation.

3. With more money chasing the same quantity of goods, prices rise — and they rise in proportion to the money, given the speed of circulation and the volume of transactions.

Key term to know: Quantity theory of money — the idea that a change in the amount of money passes through to prices proportionally, holding the speed of circulation and the volume of trade fixed.

Thomas Mun

One-breath summary: A nation's wealth comes not from the metal it already holds but from a continuous trade surplus, which sets off virtuous real effects — more production, employment, income, liquidity, and investment. Foreign trade as a demand multiplier, two centuries before Keyn

1. An active balance of trade brings in precious metals. (each year, sell more to foreigners than the nation consumes of theirs.)

2. But the surplus also triggers real effects: exports stimulate manufacturing, employment, and national income.

3. The surplus raises the system's liquidity, lowers the cost of credit, and encourages further investment.

4. He casts foreign trade as a multiplier of aggregate demand — a Keynesian-style mechanism more than two centuries early.

William Petty

One-breath summary: A transitional figure who invented "political arithmetic" (quantitative economics) and supplied the three ingredients Brems later formalized: a notion of how much money an economy needs, a consumption tax that spurs labor, and exports as a direct stimulus to production.

The mechanism — three contributions:

1. "Necessary money": there is an optimal quantity of money proportional to the volume of real transactions; money beyond that is useless and has no real effect.

2. Consumption tax: a moderate tax on consumption does not depress demand — it encourages labor, because workers must work more to keep their living standard.

3. Exports and growth: a trade surplus is not just a source of metals but a direct stimulus to production and employment.

David Hume

One-breath summary: Through the price-specie flow mechanism, a trade surplus brings in metals that raise domestic prices, erode competitiveness, shrink exports, and push the metals back out — so no advantage is permanent; but because prices adjust slowly, real effects appear in the short run, which is the source of the "mercantilist illusion."

The mechanism (price-specie flow):

1. Your country runs a trade surplus → foreign gold and silver flow in

2. More metal means a bigger money supply at home

SHORT RUN:

1. The new money enters through specific doors — it lands first in the hands of merchants, entrepreneurs, and manufacturers (the people doing the exporting)

2. For a while, these people are simply richer — they have more cash before prices have risen

3. So what do they do? They spend it: they hire more workers, order more materials, expand production

4. At this early stage, the new money shows up as more activity, more jobs, more output — NOT as higher prices

5. output rises with effective real money balances — when money grows but prices haven't yet adjusted, real balances temporarily swell, the first recipients spend, and labor demand and activity climb.

Long Run:

1. Prices rise only later, gradually, as the money slowly ripples outward from those first recipients to the rest of the economy

1. Now, A bigger money supply slowly pushes domestic prices up

2. Higher prices make your goods too expensive → foreigners buy less → your surplus shrinks

3. Eventually the gold starts flowing back out → the system returns to balance

The only lasting change is a permanently higher price level

: the stickier prices are, the bigger and longer the temporary real boost. But either way, the boom always ends — output returns to normal, prices stay high.

The bullionist model (money and prices)

The setup: It builds on the quantity relation of money. The velocity of circulation (how fast money changes hands) and real output (the volume of goods) are treated as given — payment habits don't shift instantly, and the volume of transactions is held constant when comparing states with different amounts of money.

The mechanism: Given the speed of circulation and the level of real activity, an increase in the money stock — whether from American metals or from a trade surplus — is reflected proportionally in the price level, with no effect on real output.

MODEL NOTE — The Brems multiplier (mature mercantilism)

One-breath summary: Net exports raise real output on two fronts — directly through a demand multiplier and indirectly by lowering interest and lifting investment — and this model treats the real boost as permanent.

Tag for memory: "Two engines: demand plus cheap credit."

The school: → Brems (1986) formalizes the ideas of Mun and Petty.

The setup: Prices are fixed in the short run; there is a proportional tax on consumption; households consume a fixed fraction of their disposable income.

The mechanism — two channels:

1. Direct (demand multiplier): net exports are an autonomous component of demand. An increase in them raises output more than proportionally, because the extra spending circulates and re-stimulates production. The consumption tax shrinks the multiplier somewhat (taxed consumption leaks out of the spending chain).

2. Indirect (money-credit channel): net exports bring in metals → the money supply rises → the interest rate falls → investment rises. This extra investment is added to the autonomous demand that the multiplier then acts upon.

3. Policy conclusion: Pro-export policies — tariffs, manufacturing subsidies, Navigation Acts of the kind Mun and Petty favored — produce positive and (in this view) permanent real effects.