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Roger E. Backhouse: The Ordinary Business of LifeChapter 3 The Emergence of the Modern World View – the Sixteenth Century
Udayan RoyECO54 History of Economic Thought
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The emergence of the modern world view
The RenaissanceThe ReformationThe rise of the European nation stateMercantilismMachiavelliThe School of SalamancaEngland under the TudorsConclusions
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The Renaissance
The end of the 15thcentury marks the beginning of the modern world viewSignificant events include:The Great Voyages of DiscoveryRediscovery of Greek and Latin classics.
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The Renaissance
The Great Voyages of DiscoveryColumbus reaches the Americas in 1492Vasco da Gama explores the African coast and reaches India in 1498These discoveries led toexpanded trade anda broader view of humanity
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The Renaissance
Rediscovery of Greek and Latin classics.This led to a huge explosionin the creative arts, especially in Italy, andin science, especially in astronomyDiscovery of the physical laws of gravity that explained the movements of planets as well as simple objects led to speculation that there exists general laws that determine social and economic life
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The Reformation
Began with the publication of Martin Luther’s 95 theses in 1517Its impact was accelerated bythe invention and spread of movable-type printing, andthe rise of nation statesEffect on economic thinking was minimalimpact on political thought was greaterNatural Law, rather than papal authority, became the basis for political legitimacy
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The rise of nation states
England, France, Spain, and Portugal emerged as independent nation statesAttention focused on how national power could be enhancedTo protect access to new trade routes that developed as a result of the Spanish and Portuguese geographical discoveriesTo do the work that had hitherto been done by the Catholic churchIntroduction of the Poor Laws in England by Elizabeth I in 1597 – 1601Emergence of a new school of economic thought,Mercantilism
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Mercantilism (1500-1776)
This school of economic thought arose in England during the 16th through the 18th centuries, and then spread to France, Holland, and other countries.Many of the contributors to this literature were merchants or members of the mercantile class, hence the name.
Mercantilism—main themes
The main themes of Mercantilism are as follows:The ultimate objective of economic policy is the political power, both internal and external, of the state.The power gained by one state means power lost by another state.Therefore, the interests of nation states are perpetually in conflict.A nation’s power is measured by its population and its stock of precious metals such as the gold and silver that are embodied in the money in use at the time.A high population could supply soldiers.Money (in the government’s treasury) could pay for large armies and navies.Continued on next slide
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Mercantilism—main themes
The main themes of Mercantilism are as follows:Continued from last slidePopulation growth and a rich treasury could only come from prosperous industry and trade.This prosperity could be brought about if the economy’s stock of money (i.e., gold and silver coins) is large.Assuming a state does not have gold and silver mines, the only way it would increase its stock of those metals is if it exports more than it imports.As a result, ensuring a trade surplus for oneself and a trade deficit for one’s rivals is the primary objective of economic policy.Tariffs and other import restrictions can be effective in reducing imports.Subsidies and regulation can be effective in increasing exports.
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Mercantilism—the lasting contributions
All this was pretty illogical stuff and the mercantilist literature lost its luster as soon as the Classical school emerged in the 18thcentury.However, even the casual thinking of the mercantilists made some lasting contributions.The mercantilists understood thatan increase in the quantity of money increased output and employment, while a decrease in the quantity of money decreased output and employment.This idea is now widely accepted except that the effect of money on output and employment is now seen as temporary, a point that the mercantilists were not clear on.
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Mercantilism—the lasting contributions
In 1588Giovanni Boteropublished atheory of populationthat was essentially the same as the theory of population for which the Classical economist Thomas Malthus gained fame.Population tends to grow without limit.Food, however, is limited.Therefore, population growth would ultimately be slowed by celibacy or through war, famine and epidemics.
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Mercantilism—the lasting contributions
Also in 1588,Bernardo Davanzatistated that people work in order to be happy and not for some other motive, a form of the principle ofutility maximization.Marginalist economists would later develop the idea into a full-fledged theory of demand.In 1696Gregory Kingdiscussed the now widely used concept of theprice elasticity of demandand even used data on prices and sales of wheat tocalculate an estimate of the price elasticityof wheat.
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Mercantilism—the lasting contributions
Building on the commonplace idea that countries trade because not all countries can grow everything, mercantilists built atheory of international tradethat came close to a statement of the principle of comparative advantage for which the classical economist David Ricardo is famous.In 1663,Samuel Fortreyexplained that we should produce and export what foreigners want if that would allow us to import more of what we need than we could produce at home.
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Mercantilism—the lasting contributions
Pierre le Pesant, Seigneur de Boisguilbert(1646-1714) made two important points.First, he pointed out that taxes reduce the productivity of the economy and that more tax revenues for the government did not necessarily mean less after-tax income for taxpayers.If the tax system is designed in a way that takes care to reduce the negative effects of taxes on productivity, the government could earn more tax revenues without reducing the after-tax incomes of the citizens.This idea is nowadays championed by a group of economists called supply-siders.Second, Boisguilbert also said that left to itself the economy settles down to a stable outcome instead of becoming chaotic.
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Mercantilism—assessment
While the main ideas of the mercantilists caused a lot of harm and are now discredited, the economists of that period came up with many ideas that lasted and created the foundation of the Classical school.The problem was that the good ideas of the mercantilists had not yet won the debate, which is why they simply coexisted with all the other bad ideas.As the classical era progressed, the good ideas of the mercantilists were filtered out, recognized as good ideas and incorporated into the classical canon.
Niccolo Machiavelli (1469 – 1527)
The Prince, 1513The interests of the state were seen as unrelated to religionA distinction was drawn between the science of how politics works and the ethics of how it ought to workBoth inductive and deductive analysis were usedIt was assumed that people would behave unscrupulously, in a self-interested mannerMachiavelli understood that in some cases men may behave morally, but felt that his analysis would make better predictions if self-interested behavior was assumedThis has become the standard assumption in economic analysis
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TheSchool of Salamanca
These writers in Spain continued developing the ideas of the scholastics and made innovations in monetary economicsVideo:http://www.mruniversity.com/courses/great-economists-classical-economics-and-its-forerunners/school-salamanca
The School of Salamanca – Navarrus (1491 – 1586)
As in the case of any other trade, money-changing was okay as long as it earned moderate wealth for the changerThe price of a currency depended on availability, need, uncertainty about the possibility of debasement or even repudiationIt was okay for a money changer to buy a currency when it is cheap and to sell it when it is expensive
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The School of Salamanca– Navarrus (1491 – 1586)
He provided a unified theory of supply and demand to explain the prices of all commodities, including money‘all merchandise becomes dearer when it is in great demand and short supply, and that money… is merchandise and therefore becomes dearerwhen it is in great demand and short supply.’This theory was used to explain the inflation in Spain after the inflow of gold and silver from its American colonies
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The School of Salamanca– Navarrus (1491 – 1586)
Navarrus andJeanBodin(1530 – 1596) provided the first statements of the crucial idea thatincreases in the quantity of money lead to higher prices
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The School of Salamanca–money
Thomas de Mercado(? – 1585) explained why the gold and silver in Spain eventually leaked out to other countriesThe inflow of gold and silver from the American colonies led to higher prices in Spain.So, the Spanish people used the gold and silver to buy foreign goods.This outflow would continue till prices were equal in Spain and elsewhereLaws prohibiting the export of metals would fail
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The School of Salamanca–money
The idea that scarcity makes goods expensive (and plenty makes them cheap) was known in ancient timesTherefore, it is not surprising thatJean Bodin(1530 – 96), a French economist, also detected the link between the availability of precious metals and inflation.
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England under the Tudors
Sir Thomas Smith (1513 – 77)Explained the distinction between nominal and real (inflation-adjusted) incomeespecially the fact that people on fixed income are affected by inflation, but not tradersNoted that prices were rising even when goods were plentiful and assigned currency debasement as the reason for rising pricesThis highlights the idea that the supply and demand for goods affects their relative prices, whereas the supply and demand for money affects nominal pricesSmith was a mercantilist in his views on trade policyBut he had a clear understanding of how markets worked and how prices were determined
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Conclusions
Lawyers, officials, and other non-priests were beginning to write on economic issuesAs a result, the focus shifted from moral issues to how economies actually workedBesides, the economies were becoming more complex entitiesThese factors led to progress in economic thought

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_-Roger E. Backhouse_ The Ordinary Business of Life Chapter ...