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Lecture notes, cheat sheets
History of economic thought. The first economic schools (lecture notes)
Directory / Lecture notes, cheat sheets Table of contents (expand) LECTURE 2. THE FIRST ECONOMIC SCHOOLS 1. Mercantilism - theory and practice Prior to the era of development of capitalism, economic research was fragmentary, mainly concerned with the analysis of economic practical activity, occasionally illuminated by brilliant conjectures regarding the underlying laws of the flow of economic processes. Economic research was not of an independent nature, but acted as an integral part of the work devoted to the study of general problems of the functioning of society, in particular religious, political, and moral ones. And this is not accidental, since the economy was predominantly natural in nature with minor elements of commodity-money relations. The situation changes dramatically with the beginning of the development of capitalist economic relations. This happens in Europe in the 15th-16th centuries of our era in an era that has been called the "age of great geographical discoveries", as well as the "era of primitive accumulation of capital." It is known that both historically and logically originally capital appears in the form of merchant and money capital. The discovery of new territories and the capture of colonies greatly accelerated the process of formation of national trade and money capital, which in turn drew attention to the study of patterns in the sphere of trade and money circulation. The first school in the history of economic thought arose, later called mercantilism. What are the distinctive features of this school? Naturally, being representatives of the interests of merchant capital, representatives of this school cannot help but regard money as the absolute form of wealth. Identifying their interests with the interests of the state, representatives of mercantilism argue that a nation is richer the more gold and silver it has. The accumulation of wealth (naturally, in monetary form) occurs in the process of foreign trade or during the extraction of precious metals. This implies the statement that only labor engaged in the extraction of precious metals is productive. However, purely theoretical studies are of little interest to representatives of the mercantilist school. The main focus of their research is on economic policy issues and lies in the area of recommendations for increasing the flow of gold and silver into the country. The words attributed to H. Columbus that “gold is an amazing thing that opens the way to heaven for souls” became the banner of this period of development of bourgeois society. Within the framework of the "epoch of mercantilism", early and late mercantilism are distinguished. Representatives of early mercantilism rely on administrative measures to keep precious metals in the country. In particular, foreign merchants, under pain of severe penalties, are forbidden to export gold and silver from the country, and the proceeds from the sale of goods are ordered to be spent on the territory of this country. Such harsh measures could not but impede the development of foreign trade relations, which led to the transition to the policy of the so-called late mercantilism. The essence of this policy is the following: ensuring an increase in precious metals in the country not by administrative, but by economic means. These include all means that contribute to achieving a trade surplus, that is, an excess of exports over imports of goods, since the positive difference in the form of precious metals will remain in the country. These means were described in detail by T. Mann (1571-1641), an influential English merchant and the most famous representative of late mercantilism. T. Mann wrote that there are no other ways to get money except trade, and when the cost of exported goods exceeds the cost of annual imports of goods, the country's monetary fund will increase. To increase this fund, T. Mann proposed, among other things, to cultivate land for crops that would help get rid of the import of certain goods (in particular, hemp, flax, tobacco), and also recommended abandoning excessive consumption of foreign goods in food and clothing by introducing laws on the consumption of goods of own production. Mann also notes that domestic goods should not be burdened with too many duties, so as not to make them too expensive for foreigners and thereby prevent their sales. The focus on boosting the export of national products is clearly expressed here. The economic policy proposed by T. Mann was later called the policy of protectionism, or the policy of protecting the national market. In general, this policy boils down to limiting imports and promoting exports, and measures aimed at achieving this result remain unchanged to this day. These include: protectionist tariffs on imported goods, quotas, export subsidies and tax breaks for exporters, etc. Of course, these measures cannot be implemented without state support, which is why representatives of both early and late mercantilism take for granted active government intervention in economic processes. To sum up the distinctive features of mercantilism as an economic school, then they should include: ▪ exceptional attention to the area of circulation ▪ consideration of money as an absolute form of wealth ▪ classification as productive labor only for the extraction of gold and silver ▪ justification of the economic role of the state ▪ the belief that the excess of exports over imports is an indicator of the country's economic well-being. Critics of mercantilism have pointed out that the desire to achieve a trade surplus has only a fleeting effect, since the influx of precious metals into the country raises domestic prices and the doctrine of "sell high, buy low" turns against the country itself. The French economist R. Cantillon and the English philosopher D. Hume described in general terms the so-called “mechanism of gold-money flows,” which automatically leads to the natural distribution of precious metals between countries and the establishment of such levels of domestic prices at which the exports of each country become equal to its imports. The essence of this mechanism is as follows: an additional amount of gold in a particular country will increase the level of domestic prices relative to other countries, this, in turn, will weaken the competitiveness of goods in foreign markets, reduce the volume of exports and increase the volume of imports, and the difference in the excess of imports over exports will be be paid for by the outflow of gold. The process will continue until a new equilibrium between exports and imports is established in all trading countries, corresponding to a higher supply of gold. And since foreign trade and gold are like water in two communicating vessels, which constantly strives to be at the same level, the policy of pursuing a trade surplus cancels itself. It should be noted that representatives of mercantilism, in particular T. Mann, were aware that the influx of gold into the country raised domestic prices. And perhaps their recommendations in the field of economic policy in the light of the above are difficult to understand if one does not take into account one of the main beliefs of the era of mercantilism. State power was the main goal for representatives of mercantilism, and this goal could be achieved, in their opinion, by weakening the economic power of neighboring states to the same extent as by strengthening their own. Based on the premise that the economic interests of nations are mutually antagonistic, since there is a fixed amount of resources in the world that one country can acquire only at the expense of another, mercantilists did not hesitate to defend the policy of “beggar thy neighbor” and advocate the reduction of domestic consumption as a goal of national policy. In the figurative expression of F. Engels, “...nations stood against each other like misers, clasping their dear money bag with both hands, looking around at their neighbors with envy and suspicion.” By the way, the understanding of economic activity as a zero-sum game (the gain of one person or country is the loss of another) was characteristic of economic views until the end of the 18th century. As another argument in favor of protectionism, in particular import restrictions, mercantilists put forward labor balance arguments. It was generally accepted that imports should consist of capital-intensive raw materials and semi-finished products, while exports should consist of labor-intensive final products so as to support domestic employment. T. Mann, who has already been mentioned by us, writes, “... it would be a correct policy and beneficial for the state to allow goods made from foreign raw materials to be exported duty-free. These industries will give work to many poor people and will greatly increase the annual export of such goods abroad, thanks to which will increase the import of foreign raw materials, which will improve the receipt of state duties...". To this widespread and now protectionist argument were added arguments of a military-strategic nature, as well as arguments in defense of fledgling industry. The desire for an influx of precious metals was due not least to the belief that money is the "muscular force of war" and the implicitly present thesis that defense is more important than wealth. However, the motives of ensuring welfare are still present among mercantilists. They believe that money stimulates trade: an increase in the supply of money is accompanied by an increase in the demand for goods, and therefore it is the volume of trade, not prices, that is directly affected by the influx of gold. The latter increases the spending of the rich on luxury goods, and until the end of the eighteenth century the prevailing idea was that it was “luxury living” that formed needs and generated monetary incentives. Moreover, the authors of the 17th and 18th centuries were characterized by the idea that it is better to spend money on luxury than to give it away, since in the first case industry is stimulated, and in the second case the money remains idle. From a modern standpoint, it is very strange to believe that it is the upper classes of society who are responsible for providing jobs, spending money on expensive indulgences and maintaining a magnificent retinue of servants. This paradox was noticed by B. Mandeville, a man without specific occupations, a philosopher by vocation, and, as A.V. Anikin writes, a lover of revelry in a cheerful company, who lived in London at the beginning of the eighteenth century. Mandeville owes his fame to one work called “The Fable of the Bees, or Private Vices - Public Benefits.” Mandeville's main paradox is contained in the phrase “private vices - public benefits,” which clearly conveys the idea that the poor have jobs only because the rich love comfort and luxury and spend a lot of money on things, the need for which is often caused only by fashion and vanity. Rich slackers are necessary in a given society, since their needs generate demand for all kinds of goods and services, pushing hard work and ingenuity. As Mandeville writes, "...envy and vanity themselves served industriousness, and their generation - inconstancy in food, decoration and clothing, this strange and funny vice - became the most important engine of trade." However, the mercantilists did not hide this. One of the representatives of this school writes that “... extravagance is a vice that harms a person, but not trade... Greed is a vice that is harmful both to a person and to trade.” And the other argued that if everyone spent more, then everyone would receive greater income and could live in greater prosperity. This shows how deeply rooted was the belief in the usefulness of luxury and the harm of frugality. But back to The Fable of the Bees. In the second part, Mandeville describes an economic system where all vices disappear. Waste is replaced by thrift. Luxury disappears, the consumption of everything that goes beyond simple physiological needs stops. But this is precisely what brings ruin and destruction to society. Mandeville describes it this way: Compare the hive with what it was: // Trade was destroyed by honesty. // Luxury has disappeared, arrogance has gone, // Things are not going that way at all. // Not only the spendthrift is gone, // Who spent money without counting // Where will all the poor go, // Who sold him their labor? // Everywhere now there is one answer: // There is no sales and there is no work!.. // All construction has stopped at once, // Handicraftsmen have no more orders. // Artist, carpenter, stone cutter - // All without work and without funds Looking ahead, it should be said that the idea of the economic necessity of the unproductive classes (landowners, priests, officials, etc.) was picked up at the end of the eighteenth century by T. Malthus, and the idea of the harmfulness of excessive frugality and the need for unproductive expenses that increase demand and providing employment to the population, was resurrected and elevated to the rank of an immutable truth in the twentieth century by J. Keynes. By the way, Keynes positively assessed the contribution of mercantilists to the development of economic theory, moreover, he formulated a number of provisions that make him similar to the mercantilists. Firstly, this is the provision about lack of money as the cause of unemployment. As we will see later, Keynes defended the idea that increasing the supply of money through bank credit expansion could be the most important weapon in the fight against unemployment. Secondly, this is the provision for high prices as a factor in the expansion of trade and production. As you know, Keynes is one of the founders of the modern concepts of “moderate inflation” as a means of maintaining economic activity. Thirdly, Keynes believed that the mercantilists, through increasing the money supply, sought to reduce interest rates and encourage investment. In Chapter 23, entitled "Notes on Mercantilism..." of his work The General Theory of Employment, Interest and Money, he stated that the mercantilists' concern with the flow of precious metals into the country was the result of an intuitive feeling of the connection between the abundance of money and low interest rates. And this is one of the key ideas of Keynes himself. Indeed, in most of the works of the later mercantilists there is the idea that an increase in the amount of money in circulation can have a significant impact on the growth of production, "... trade increases only when there is an abundance of money and goods rise in price due to demand." Perhaps the most prominent representative of the doctrine of “money stimulates trade” is the Scot J. Law (1671-1729), who believed that the key to economic prosperity was the abundance of money in the country. It’s not that he considered money itself to be wealth, he understood perfectly well that true wealth is goods, enterprises, trade. But the abundance of money, in his opinion, ensures the full use of land, labor, and entrepreneurial talents. “No laws,” writes J. Law, “can give people jobs if there is not enough money in circulation to pay wages to more people.” It is the increase in money, drawing in the now idle people, that ensures the full use of labor and other factors of production. It was the mercantilists who pioneered the idea of a lack of money as the cause of unemployment, which classical economists later rejected as absurd. A striking example is the debate about the lack of money that took place in the English House of Commons in 1621. It was pointed out that farmers and artisans were almost universally experiencing hardship as "...looms lay idle and peasants were forced to cancel their contracts." And all this is due to lack of money! In view of the current situation, it was even decided to undertake a detailed investigation into where the money, the lack of which was so acutely felt, could have gone. As we see, the state authorities had no other generally accepted means of counteracting unemployment within the country, except for the struggle to increase the export of goods and import of monetary metal at the expense of neighbors. But back to J. Lo. In his opinion, an increase in the money supply will lower the interest rate and give an impetus to the growth of production, since it creates the possibility of increasing profits due to lower production costs, and the income of the previously unemployed will give a new impetus to consumer demand. The main difference between J.Lo and the classical mercantilists is that he believed that money should not be metallic, but credit, created by the bank in accordance with the needs of the national economy. It is not difficult to assume that Law envisaged a policy of credit expansion for banks, that is, the provision of loans many times greater than the stock of metallic money stored in the bank. This is the so-called fractional reserve principle, which underlies all modern banking. Thanks to this principle, banks are able to expand loans elastically and replenish the channels of money circulation. But this same principle poses a danger to the stability of the banking system and the stability of the development of the national economy as a whole. What will happen if the bank has to expand the issuance of its banknotes not to meet the needs of the national economy, but to cover the deficit in the state budget? And the fact that this danger is real is shown to us by the entire economic history of the twentieth century, and we are well aware of its consequences - inflation. And although the word "inflation" has not yet been introduced into the economic vocabulary, it was she who threatened the country where J. Lo was able to implement his ideas. At the beginning of the eighteenth century, J. Law's attempt to practically realize his ideas about the principles of the functioning of the banking system in France ended in failure. Nevertheless, the main provisions of his economic theory found their embodiment in the twentieth century, being an integral part of the economic policy of Keynesianism. Concluding the consideration of this economic school, it should be noted that the policy of mercantilism, i.e., the policy of accumulating money in the form of precious metals, protectionism and state regulation of the economy was carried out in the 15-18 centuries. throughout Europe and, apparently, it could not be different in the period of the formation of absolutist states, the creation of national economies. Accelerated capitalist development was possible only within the national framework and largely depended on state power, which promoted the accumulation of capital, and thus economic growth. With their views, the mercantilists expressed the true patterns and needs of economic development. It is important to note that mercantilism breaks with the traditions of medieval economic thought, its search for a fair price, the condemnation of usury, the justification of the regulation of economic life, and moralizing dogmas. Representatives of mercantilism allow the free movement of interest on loans, condemn the accumulation of treasures and focus on trade as a source of capitalist profit. 2. Physiocrats An interesting school of economics, standing somewhat apart in the history of economic thought, is the school of the Physiocrats in France. However, "Physiocrats" - the name that they received later, they called themselves "Economists". The name given to this school by later researchers is by no means accidental, since it accurately reflects the essence of their economic views. The word "physiocrats" comes from two Latin words - "physios" (nature) and "kratos" (power). Indeed, the Physiocrats saw the source of the wealth and prosperity of the nation exclusively in the development of agriculture. By the way, the influence of ancient Greek thinkers, in particular Xenophon, who wrote that agriculture is the mother and nurse of all professions, can be clearly seen here. Xenophon praises agriculture as yielding fruits suitable even for sacrifices, physically training citizens, making them excellent warriors, pushing people on the path of mutual assistance, and providing everything necessary. In the traditions of his time, considering economic and ethical problems in unity, Xenophon notes that the earth also teaches justice, for it gives more to those who work harder. But let's return to the physiocrats. The founder and head of this school was F. Quesnay (1694-1774), court physician of Louis XV. He not only formulated the basic theoretical principles, but also the economic and political program of physiocratism. It must be said that, to a certain extent, physiocratism was a reaction to the mercantilist policy of Colbert during the reign of Louis XIV, the policy of encouraging and developing manufactures while completely neglecting agriculture. The physiocrats declared agriculture to be the only industry that creates the country's wealth. They insisted that it was the ever-reproducing wealth of agriculture that provided the basis for all other forms of wealth, supported the employment of all kinds of professions, promoted the welfare of the population, set in motion industry and supported the prosperity of the nation. Quesnay criticized the mercantilists' thesis that wealth is generated by exchange and emphasized that "...purchases are balanced on both sides, their effect is reduced to the exchange of value for equal value and exchange actually produces nothing." Moreover, Quesnay interpreted money as useless wealth, declaring it only an intermediary in exchange, thereby denying the fundamental thesis of the mercantilists. Only in agriculture, according to Quesnay, is new wealth created, and the greater productivity of agricultural labor is due to nature itself. Substantiating this thesis, the physiocrats developed in detail the doctrine of the “pure product”. By net product they understood the excess of production obtained in agriculture over production costs. “The net product,” wrote Quesnay, “is the wealth created annually, which forms the income of the nation, and represents the product extracted from land holdings after the removal of all costs.” Thus, the physiocrats believed that a pure product arises only in agriculture. And obviousness was on their side, because nowhere is the increase in production demonstrated as clearly as in the field of livestock and crop production But what is the role of industry in increasing the wealth of a nation? The Physiocrats argued that in industry there is only consumption, industry was declared a "barren industry" due to the fact that the form of the product given by nature was only transformed there. Since, according to the Physiocrats, pure (or surplus product) is created exclusively in agriculture, land rent turns out to be the only form of pure product for them. In industry, however, because of its "sterility", no surplus product is created, and the income of the entrepreneur and the wages of the worker are the costs of production. The physiocrats' concept of productive and unproductive labor is closely connected with the doctrine of the pure product. For the first time in the history of economic thought, they referred to productive labor only labor that creates a pure product. Accordingly, according to their views, only labor employed in the sphere of agriculture is productive, and labor in other spheres of the national economy is unproductive or "fruitless". This criterion (participation in the creation of a pure product) was the basis for the classification of society in the analysis of the process of social reproduction, given by Quesnay in his famous work The Economic Table (1758), which entered the history of economic thought as the first attempt at macroeconomic analysis. This work was an attempt to answer the question of how the gross and net product created in agriculture is circulated in natural and monetary form. In the "Economic Table" society is considered as a single organism, uniting three main classes: ▪ productive class (all persons employed in agriculture), ▪ sterile class (all persons employed in industry), ▪ class of owners (all persons receiving the net product created in agriculture, i.e. rent). And although the division of society into farmers, property owners and industrialists actually corresponded to the division of society in the Middle Ages (peasants, nobles, townspeople), it is important to note that Quesnay was one of the first who divided society into classes on an economic basis, based on the relationship of each class to production and appropriation of surplus product. As regards the analysis of the reproduction process given by Quesnay in the Table of Economics, here the starting point was the annual harvest, the movement of which between classes in kind and in money is considered by Quesnay. And again, for the first time in the history of economic thought, Quesnay showed the main ways of realizing the social product by combining numerous acts of exchange into a mass movement of money and goods. And although Quesnay excluded the accumulation process from the analysis and considered simple reproduction, it can be said with good reason that the "Economic Table" anticipated modern schemes for the reproduction of the social product. Of considerable interest are the view of the physiocrats on the problem of taxation, which is directly related to their view of the nature of the "pure product". Based on their doctrine of net income (monetary expression of the net product), the Physiocrats demanded that land rent should also be the only source of taxation. The logic is simple. Since all taxes are paid out of net income, then theoretically all existing taxes can be replaced by one: a tax on the net product as the only true economic "surplus". This single and direct tax is determined on the basis of the cadastre and is commensurate with labor productivity. According to Quesnay, this tax should reach 2/7 of the land income. Its sphere of action always covers only landowners, since the incomes of all other classes consist of "necessary" costs of production. Thus, the demand of the Physiocrats to introduce a single tax was aimed at minimizing the costs of collecting taxes by directly taxing those incomes that ultimately bore the tax burden. If we formalize the main provisions of the tax views of the physiocrats, then they boil down to three principles: ▪ firstly, taxation should be based directly on the source of income itself, ▪ secondly, it must be in a certain constant relationship with these incomes, ▪ Thirdly, it should not be overly burdened with collection costs. Here we can clearly see the similarity with the well-known principles of taxation formulated by A. Smith. But the similarity lies not only in this. The physiocrats, putting forward the demand for a single land tax, unanimously advocated proportional taxation. And the belief in the fairness of taxes proportional to income has been firmly established in economics since the time of A. Smith. The economic views of the physiocrats, in particular, the doctrine of productive labor, the denial of the role of foreign trade as a source of increasing the wealth of the nation and the idea of a “natural” pattern of social life based on the principles of “natural law”, characteristic of the physiocrats, allowed A. Smith to say that the physiocratic system is " the best approximation to the truth that has hitherto been published on the subject of political economy." Author: Agapova I. I. << Back: At the origins of economic thought (Economic thought of ancient Greece and ancient Rome. Economic thought of the Middle Ages) >> Forward: Classical political economy (Classical economic theory - origins. Economic views of W. Petty. The formation of political economy as a science. Economic views of A. Smith. Economic views of D. Ricardo)
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