Lecture notes: Mercantilism

Intro

The rise of the state

from the 15th century — increased power of the prince
“sovereign” — no feudal lords below — no emperors/popes above
dominate society — impose taxes
build up bureaucracy — states that are able to control society — impose policies
international politics as a system of states

a world system

states acting and interacting with each other
decentralized, anarchic, system
constant warfare — major reason for taxation

rise of the state:

the state as the most important political unit – from the 15^th century
‘sovereignty’ ― new rulers as ‘sovereign’ no rival power above or below no popes or emperors no feudal lords — peasant communities
state as a ‘machinery’ international system of states one state’s sovereignty is only limited by the sovereignty of other states
the result was war war making becomes the main activity of the state

Golden age of political economy

no separation — economic and political spheres — cf. Polanyi

the economy serving political goals
making the country as rich as possible — making the king as rich as possible — i.e. as successful in war as possible

mercantilism as ‘the way to enrich the nation’

geographers enlisted to draw up maps of the country — find new mines, inventories of all existing and potential resources
encourage industry — new enterprises — especially those beneficial to national defense
keep records of births/death – manpower required for an army
education — academies — set to increase the wealth of the nation

but — mercantilist thought

not one body of theory
not associated with any big thinkers
often contradictory — has to be “reconstructed”
a set of inter-related ideas — from the 16th century onwards — united around the “enrichment of the country/king”

manipulating the economy for political ends

more than anything a matter of warfare
the state as a machinery that discovers and mobilizes dormant resources
and uses them for the purpose of warfare

Subsequent relevance:

necessary background for ideas regarding free trade
contemporary ideas of “neo-mercantilism”
but also for the development of the welfare state, in Germany, Sweden, etc

Not a school or a theory, more something like a set of taken-for-granted principles

Philipp von Hörnigk, 9 principles from 1684

To inspect the country’s soil with the greatest care, and not to leave the agricultural possibilities of a single corner or clod of earth unconsidered…
All commodities found in a country, which cannot be used in their natural state, should be worked up within the country…
Attention should be given to the population, that it may be as large as the country can support…
gold and silver once in the country are under no circumstances to be taken out for any purpose…
The inhabitants should make every effort to get along with their domestic products…
[Foreign commodities] should be obtained not for gold or silver, but in exchange for other domestic wares…
…and should be imported in unfinished form, and worked up within the country…
Opportunities should be sought night and day for selling the country’s superfluous goods to these foreigners in manufactured form…
No importation should be allowed under any circumstances of which there is a sufficient supply of suitable quality at home.

Aspects:

domestic — how to organize the state — also known as “Cameralism” — an early modern version of political science
international — more famous perhaps — how to organize international trade to benefit the state

Domestic aspect

‘The well-ordered police state’

Polizeiwissenschaft — ‘political science’ as the key ‘social science’

17^th century — the science of government would “deliver the goods” like the science of economics is supposed to deliver the goods today
cf. Polizeiwissenschaft or Cameralism

etymologically speaking …

polis – the political community in ancient Greece
policy – denoting the activities of the state
police – denoting control of activities of subjects/citizens

as an analytical point

care and control as different names for the same thing
social disciplining — social administration
the “police-ing” function as a precondition for “policy-making”

cf. Foucault – power/knowledge:

a state that knows everything about you has control over you
especially if it is about to plan your life based on this information

Public administration

administrative ethos — combines two functions:

care for the well-being of the people
supervise the people under its jurisdiction

chief administrative task:

reduce the insecurity of people’s lives — social planning — rational & efficient execution of plans — ‘grasp the future through the plan’
the plan and its application — society rational, well-organized and harmonious
replace the multitude of incoherent preferences with one single well-intentioned and enlightened will

in order to plan properly you need information

every little detail in life

reintroduction of Roman law

rationalistic – i.e. deduced from basic principles
into the Germanic realm – replace customary law
not the case in England … much more empirical, case-based, path of administrative development

Germany & Austria

many, many small principalities at the time
Landesordnungen – Polizeiordnungen
regulations and prescriptions for how to run a society – from the 1530s onward

For example …

regulation of religious matters – to assure peace and harmony within the realm
regulation of family matters – infidelity – illegitimate children — domestic servants – family property
lifestyle of subjects – consumption, clothes, prevent waste & moral dangers – regulation of the consumption of coffee
regulation of beggars and paupers – workhouses
fight against disease – small pox – improve sanitation and public health – dispose of waste – regulation of chimneys – training of midwives
regulation of economic activity

Machine metaphor

cf. the contemporary fascinating with clockworks dominate society

‘interest’ rather than ‘passion’

make all parts work smoothly together – according to rules rather than the whims of the sovereign
‘enlightened despotism’ – keeping the clock working smoothly new policy science as the science of the clock-maker

feed-back loop

impose taxes
build up bureaucracy
army restore the peace army raise taxes to make a stronger army to raise more taxes

Commercialization of agriculture

England: enclosure movement — commons were enclosed and used for private use notably sheep — wool production from the 15^th century ‑
population increase: people move to new land ‘agricultural revolution’ 1450-1560 enclosure of the commons move from self-sufficiency to profit-gaining agriculture more productive people move to cities but still a limited phenomenon above all in England/ Holland money wages only with industrialisation in the 19^th century do we all become wage earners
conclusions: growing markets – increased use of money benefits market forces – prices as set through supply and demand resources much more efficiently used

social effects

new social mobility money as eroding the social structure just what traditional medieval elites had been afraid of point made by Georg Simmel ― the liberating/alienating effects of money people became upwardly mobile for the first time make a career for yourself new poverty
commercialisation of agriculture creates new losers land taken up by sheep rather than food production
Thomas More, Utopia: ‘your sheep, that were wont to be so meek and tame, and so small eaters, now, as I hear say, have become so great devourers, and so wild, that they eat up and swallow down the very men themselves’

Domestic trade

domestic restrictions on free trade — monopolies or patents

granted to the highest bidder
selling of monopolies as a source of income for the Crown — good way: receive the money up-front

and

profitable for the buyer
exclusive rights to sell or manufacture something — set your own prices

Local monopolies

associated with guilds

associations of craftsmen or merchants
restrictions on who could join
restrictions on who could make/sell what
prices and qualities strictly regulated

ways to avoid

going to the country-side
Adam Smith: things made outside of guild-control much cheaper and better

National monopolies

granted by the king

he had an interest in policing the monopoly — in order to keep the price up
more difficult to avoid

e.g. in foreign trade

East India Company
South Sea company
the first companies – received a charter by the king

Assessment

great idea for king and merchant/manufacturer

bad idea for society

‘rent-seeking’

restricting the operations of the market to your own benefit
monopoly
restricting supply — trade unions
bad for the economy – but that mattered less – the imperatives of the state came first

Slightly alternative views

the argument in favor of patents — still applies

we still have them!
allows producers to develop a product
the under-developed markets
patents allowed markets to form where none previously existed

guilds

similar argument could be made
they were market-creating
empirical assessment of the guilds …

nowhere near as detrimental to economic growth as later theorists have argued

important form of social protection at a time of rapid social change

Rent-seeking

“Rent-seeking refers to the practice of individuals, corporations, or institutions attempting to gain economic benefits through manipulation of the social or political environment rather than through trade and production of goods and services. The term is often used in the context of critiquing how entities may seek to obtain economic gains without reciprocating any benefits to society through wealth creation.”

many individual merchants pleaded for more freedom

inefficient allocation of resources
black markets

Labor and wages

keep wages low and the population growing

“utility of poverty”
“optimal level of frustration”

only threat of poverty will instill discipline

Mercantilism as an economic process

rent-seeking

seeking monopolies from the monarch
cartels

England

Elizabethan legislation — Statute of Artificers etc

Local economic regulation

many producers moved to the countryside in order to escape restrictions

much more difficult to do in France

mercantilism vanes in the 18th century

International trade

Reconstructed doctrine

enriching the nation by gathering as much wealth in the country as possible
restrict foreign trade — gather as much as possible from abroad — give them as little as possible

import raw material and sell manufactured goods

sell to foreigners who buy in gold
in some cases: outlaw foreign trade completely

land

use all land as productively as possible
get more land through war
foreign colonization
occupy valuable land

population

encourage as large a population as possible
good tax base — lot’s of soldiers

A predatory system

international politics as

quest for resources
precious metals — especially gold

gold

from Africa – Gold Coast – Ghana
quest for Eldorado in the Americas

silver

Potosí — mountain of silver
forced labor — mines very remote — impossible to get people to go there voluntarily

trade with East Asia

there was very much that the Europeans wanted from them — but next to nothing they wanted from Europe
the Chinese felt sorry for the Europeans — no reason to travel — ‘everything is available in China itself’
people in East Asia didn’t need wool cloths

instead

silver — much of the silver barely arrived in Europe before it was shipped off to East Asia
some shipped directly to the East

Rise of international trade

general point

Europe very diverse — different regions have different comparative advantages
makes a lot of sense to buy and sell

the obvious success of the traders

the north Italians
the Hanse

their success was emulated by people not on the fringes

southern Germany
Low Countries — Bruge, Antwerp
England — London
Holland — Amsterdam and other cities

transcontinental trade

‘the Great Discoveries’ — discoveries of new sea routes
increasing trade with East Asia — China, Spice islands, Japan
goods bought
fine cottons, silk, carpets, porcelain, spices, indigo, slaves, pearls,
great profits
great risks
trade and robbery from the Americas

rise of new commercial empires

political and military imperatives ― the trade routes require political backing and protections
but occupation followed later and more reluctantly

Bullionism

do as a group work …

easy to make fun of but …

developed concepts such as “balance of trade”

mistaken belief that bullion could be accumulated indefinitely — and the country get richer and richer

David Hume rebuts this argument in a famous essay
how gold flows out again when prices increase

Quantity theory of money

increases in money supply lead to increases in price

The search for Eldorado

gold was a great cargo — high value per weight
limited market in spices as compared to gold
could flood the market in spices ― problem if two spice ships came into the same harbour at the same time! ― not in gold

from Africa

Ghana — but limited

the Caribbean period

1494-1525
destroyed the population
found some among the Aztecs in Mexico
the land of the Incas in Peru and Bolivia

Potosi

mountain of silver
the main source of silver
Braudel — ‘4000 metres up in the High Andes — a colossal mining camp and an urban eyesore where more than 100,000 human beings huddled together’
forced labour
mines very remote — impossible to get people to go there voluntarily
the cost of living was extremely high
only merchants made money — not the miners and not the mine owners

trade with the Orient and China

problem
there was very much that the Europeans wanted from them — but next to nothing they wanted from Europe
the Chinese felt sorry for the Europeans — no reason to travel — ‘everything is available in China itself’
people in East Asia didn’t need eg woolly jumpers

instead

silver — much of the silver barely arrived in Europe before it was shipped off to East Asia
some shipped directly to the East across the Pacific

Symbolic power of gold

Columbus on gold

mentions it repeatedly through his diaries
constantly obsessed with finding gold
symbol of success — to prove to people back home that the efforts were worth it

alchemists on gold

the Renaissance — great interest in alchemy
all famous ‘scientists’ of the period were really alchemists — Copernicus, Kepler, Galilei — even Newton
gold making not as a way to make money, but for philosophical reasons

symbol of man’s power over nature

makes man similar to god — man too can be a creator — man as a ‘star demon’ (Pico della Mirandola)
man the alchemist can rival god

Columbus’ letter to the King and Queen of Spain, 1494

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Columbus – 1870 – Columbus’ letter to the King and Queen of Spain, 1

Financial innovation

Bank of Amsterdam, Wisselbank, 1609

one of the first public banks – the most important in early modern Europe:
not in the hands of one family – not with its origins in commercial activities
main purpose:
provide people with validated money instead of the existing assortment of coins with uncertain value

issuing coins —

daaler — for trade in Baltic
taler — Joachimsthal, a mining valley in what now is Czech republic — dollar, tollar
dukaat — for trade with Orient

activities

take deposits
transfer between accounts
forcing others to open accounts — giro

money creation through bank deposits

increases in the money supply

advantages

trustworthy
safe
this is crucial for trade ― in particular international trade

Bills of exchange

do as a group work …

role of first banks
act as a clearing house for bills — buy and sell these pieces of paper

new techniques

assign
to use as payment to others
endorse
to improve the reliability of by signing on the back
discount
to buy before maturity at a lower price

great for Dutch traders

but also for others
universal credit instrument drawn on the Wisselbank

avoiding ban on usury

banking is difficult if you can’t charge interest
include as a part of the exchange rate

also

calling interest a penalty for delay in repayment

Risk

Middle Ages

life had been nasty, brutish and above all — short
people were defeatist — forced to accept whatever came their way
from this time onward

not just suffer the effects, but calculate probabilities

outcomes are not determined — but more or less probable
science of probabilities
first developed in gambling

once risks were discovered, the could be dealt with

and institutions were developed that helped in this respect
selling them
pooling them
calculating them more carefully

Insurance

marine insurance first were developed — the greatest risks

the first example recorded in an ordinance issued in 1435 by the magistrates at Barcelona.
the earliest Italian law on the subject marine insurance is dated from 1523.
In the 16^th century, insurance was introduced by the Lombards in London, and in the 17^th century
ship owners and financiers began meeting at Edward Lloyd’s coffee shop near the Tower — soon risks were bought and sold just as any other commodity.

Holland — 1598

Chamber of Maritime Insurance
for at least one hundred years the international centre of insurance

annuities

pay a large sum to the government — receive yearly payments until death
based on calculations of life left to live
cheaper for the Dutch state — reduce the cost of servicing state loan — proof that science of statistics can save money

Corporate form

self-insurance through division of ownership

pooling profits but also risks
the origin of the corporation — joint-stock company — say more about tomorrow
started in the most risky sectors

international trade — buying only part of a cargo

part of a ship
part of a company

stock markets

Amsterdam Beurs, 1611
together with the Wisselbank nearby — one-stop-shop

trade commodities financial commodities

shares, bonds, sea insurance,
arrange for freight,
get foreign exchange

future’s markets

speculative markets — speculating in future price changes
setting for the Tulipmania of 1636-37
future trading in shares
say more about on Monday

The Dutch East India Company

VOC — Verenigde Oostindische Compagni
the most famous example
perhaps the first multinational company
started out as individual expeditions
grew into a corporate form

limited liability

unique to encourage investment
plc

established headquarter in Batavia, western Java, present-day Indonesia

took two years to get a reply to a question to Holland — the person in charge here had a lot of independence
inter-Asiatic trade — an important source of income

Mun, “The Means to Enrich the Kingdom, and to Encrease the Treasure,” 1664

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