Term Paper on "History of Economic Thought Mercantilist School"

Term Paper 8 pages (2556 words) Sources: 8 Style: MLA

[EXCERPT] . . . .

History Of Economic Thought

Mercantilist School a) the mercantilist trend was focused on a simple thought: the wealth and status of a nation depends directly on the accumulation of bullion (gold, silver and other precious metals). This led to the formation of a protectionist policy where exports were increased as much as possible and imports were reduced to a minimum. Furthermore, investments were reduced and all revenues went into savings. The mercantilists offered significant power to the government and state authorities, which became increasingly active in the commercial and trade operations.

A b) the ideas promoted by the mercantilist school can be linked to the history of the era. The geographical discoveries and the development of the European countries meant more trade opportunities. They represented more destinations to which products could be sold and as such, more sources of further revenues. But they also represented that new products could be brought in from these regions, imports which would lead to decreased sales of the local products - ergo, the mercantilist policies in regard to the limitation of imports and the subsidizing of exports.

Jean Baptiste Colbert was France's most renowned mercantilist and his main policies regarded a governance based on economizing and the enrichment of the country through trade. "France slowly built up a well-rounded mercantilist tradition that reached full development only after 1661, when attention was paid to industry, commerce, and colonies." However the finance minister emphasized on a multitude of policies in support of mercantilism, he never got full support from King Louis XIV, who was more concerned about the growth of the national industry and the wars France was involved in; the direct effect was that France was deprived from real growth.

A d) Boisguilbert was a French economist who opposed the mercantilist ideas of Colbert. He even wrote a book (Le Detail de la France; la cause de la diminution de ses biens, et la facilite du remede) in which he observed the misery that was facing the French population. His main arguments were that a country's wealth is not given by its economies and bullions, but by the living standards of the population, by how much the country produces and sells. Similar thought were promoted by the Physiocrat economists. The primary characteristics of their belief, unlike Boisguilbert who believed in trade, the Physiocrats stated that the wealth of a nation is given by its capability to properly work and develop the land. This immediately led to the conclusion that only land activities and landowners should be subjected to taxes.

2. The Physiocrats a) the Physiocrats based their doctrine on the idea that the land was the sole value which generated the wealth of a nation. Therefore, since it is the only factor generating profits and revenues, it should be the only one subjected to taxes. The people working the land, or the labour force, were only the means to achieving wealth, but the land was the basis of wealth, therefore the people working the land should not be taxed, but only the landowners. "After satisfying the claims of farmers and labourers, the surplus product is at the disposition of the landowners, and that their mode of consuming this surplus will determine the nature of national production." b) the Physiocrats understood the agricultural surplus as the remaining goods after the extraction of those necessary for the payment of the land workers. And their primary belief was that the surplus was the net product, which in the end offered wealth. In other words, they saw this surplus not only as a circulating capital, but as a source of further production. "The Physiocrats themselves transferred the investigation into the origin of surplus values from the sphere of circulation into the sphere of direct production, and thereby laid the foundation for the analysis of capitalist production."

The Physiocrats divide the population into three categories, based on the activities they engaged in: the productive, the proprietors and the barren. The barren are not involved with agricultural activities; the productive work the land and pay rent to the landowner and the proprietors, or the landowners, are those who receive the rent and to whom the agricultural surplus goes.

A d) the American economist Henry George promoted a similar policy as the Physiocrats. The core of his doctrine was the Single Tax, which stated that authorities should eliminate all other taxes, and finance all activities solely on the taxes from land. The difference between Henry George and the Physiocrats is that the first desired to impose the tax on the unimproved value of the land, rather than the agricultural products retrieved from it. "This single tax would be on the unimproved value of land -- the value that the land would have if it were in its natural state with no buildings, no landscaping, etc."

3. Adam Smith a) Adam Smith was a Scottish philosopher but he is most commonly known for his works and contributions to the economic doctrines. He highly disagreed with the ideas forwarded by his promoters, the mercantilists and the physiocrats which militated for a great intervention and rights of the government and enclosed economies due to numerous protectionist regulations. From his stand point, the role of the government in the economic region should be rather limited. He severely criticized the government's intervention as well as the numerous taxes and tariffs it had implemented.

In the mind of Scottish thinker, the government should step aside and let the market run itself based on economics principles, such as demand and offer and by the personal interests of all participants. But the role of the government is not to be completely eliminated and nor are so the taxes imposed. As such, Smith forwarded the idea of an income tax. "The subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state. The expense of government to the individuals of a great nation is like the expense of management to the joint tenants of a great estate, who are all obliged to contribute in proportion to their respective interests in the estate. In the observation or neglect of this maxim consists what is called the equality or inequality of taxation."

Other roles of the government as promoted by Adam Smith include the building of local and unprofitable sites, such as roads and bridges. Then, he also thought it would be advisable for the state authorities to "enforce contracts and grant patents and copyrights to encourage inventions and new ideas." b) Robert Heilbroner is an American economist who looked greatly into the works of early thinkers. He frequently commented on the ideas promoted by Adam Smith and blamed them for encouraging monopoly. From his stand point, a total lack of government interference would allow the actors on the market to only act in their own best interest, for the overall detriment of the nation's wealth. "The great enemy to Adam Smith's system is not so much government per se as monopoly in any form. The trouble with such goings-on is not so much that they are morally reprehensible in themselves -- they are, after all, only the inevitable consequence of man's self-interest -- as that they impede the fluid working of the market. Whatever interferes with the market does so only at the expense of the true wealth of the nation."

The same opinion is shared by John Berdell, who goes even further to state the negative impacts of a monopoly based on the reduction of governmental interference. "The balance of trade (although unobservable) would be thought to deteriorate. The political pressure behind protection of the home market would increase, as would the clamor in favour of a belligerent scramble for monopoly markets abroad. The result would be heightened international animosity, resentment, and warfare. A war-induced increase in national debt would then complete the cycle."

5. David Ricardo a) David Ricardo's Theory of Comparative Costs is based on Adam Smith's ideas, according to which one country should only trade with other states which hold an absolute advantage. Smith's theory had however as a main shortage the fact that it eliminated a large number of countries from the list of possible international trade partners. The theory developed by David Ricardo is based on the advantage concept in the international trade context, but it widens it in the meaning that it makes the advantage comparative, rather than absolute. In other words, a country would not have to detain an absolute advantage in the production of a certain type of goods, but would have to possess a comparative advantage relative to the importing country or other available alternatives. The theory was clearly explained and exemplified by Ricardo in 1817 in the work on the Principles of Political Economy and Taxation.

The main advantage of Ricardo's theory is that is widens the possibilities of international trade and… READ MORE

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