Economic Thought, Lecture 4

Mercantilism: How the State Controls the Economic System

Mises and Rothbard on Population

• Last time, we were discussing Rothbard’s criticism of Botero on the law of population. Botero anticipated Malthus

• Rothbard rejected the theory that population grows faster than food supply. He said this assumes that two interdependent variables are independent.

• Danny Sanchez pointed out that Mises accepted part of Malthus’ doctrine. The existence on a optimum population follows from the Law of Returns.

Population Continued

• Are Mises and Rothbard in conflict? It doesn’t follow from the existence of an optimum population that population grows faster than food supply. You could believe that there is an optimum population without accepting the claim Rothbard questions.

• One difference between Mises and Rothbard is that Mises believed that, in fact, many societies have a greater than optimum population; and Rothbard didn’t.

Mercantilism

• Why is Rothbard talking about mercantilism? Although he rejects the “standard” narrative that economics began with Adam Smith, he agrees that economic theory needs to oppose mercantilism.

• Economic theory developed in part in opposition to mercantilism.

Mercantilism Continued

• Mercantilism wasn’t itself a theory. It was an assortments of justifications for the absolute state and for privileges for particular groups.

• “As the economic aspect of state absolutism, mercantilism was of necessity a system of state-building, of Big Government, of heavy royal expenditure, of high taxes, of (especially after the late seventeenth century) inflation and deficit finance, of war, imperialism, and the aggrandizing of the nation-state.”

Significance of Accumulating Bullion

• Rothbard makes an extremely important point about the mercantilist policy of accumulating gold and silver bullion.

• From the point of view of economic theory, this doesn’t make much sense.

• But it does make sense from the standpoint of the rulers of the state. An accumulation of gold and silver helps them stay in power.

Monopoly Privileges

• Besides accumulating gold and silver, mercantilism was characterized by grants of monopoly privileges.

• It was in essence a way particular groups could advance their own interests.

• Rothbard’s interpretation of mercantilism follows the classic work of Eli Heckscher, Mercantilism.

Rothbard on Mercantilism

• “They were, as Schumpeter called them, 'consultant administrators and pamphleteers, to which should be added lobbyists. Their 'theories' were any propaganda arguments, however faulty or contradictory, that could win them a slice of boodle from the state apparatus.”

Mercantilism in Spain

• We are going to be concentrating on mercantilism in France, but first we’ll give a general survey of mercantilism in Europe.

• Spain was the most powerful country in the world in the 16th century, but mercantilism helped to destroy the economy.

Spain Continued

• Extensive regulations ruined the Spanish textile and silk industry.

• As if this weren’t enough, more regulations hurt grain farmers to help the Mesta, a powerful association of sheep holders.

• Spanish prosperity dried up after the influx of gold and silver lessened.

Mercantilism in France

• Rothbard’s discussion of mercantilism in France leads him to another vital point.

• One way mercantilist monopolies are defended is that “quality standards”, e.g, in cloth manufacturing have to be preserved. This drives prices up and keeps goods out of the hands of the poor.

• The aristocracy doesn’t care about this because they benefit from the luxury goods.

France Continued

• Mercantilist regulations aren’t self-enforcing. They require an extensive state apparatus. In France, the leading officials were called intendants.

• They used spies to discover violations of the regulations. People could be executed for wearing forbidden clothing.

Effect of Mercantilism in France

• “As a result of all these factors, even though the population of France was six times that of England during the sixteenth century, and its early industrial development had seemed promising, French absolutism and strictly enforced mercantilism managed to put that country out of the running as a leading nation in industrial or economic growth.”

Mercantilism in England

• England under the Tudors and Stuarts also had a lot of mercantilist regulations. E.g., the Statute of Artificers (1563) greatly strengthened the power of the guilds.

• Rothbard stresses that mercantilism was based on forced labor. Idleness by the lower classes wasn’t tolerated.

• The regulations weren’t as effective as in France. This helped English economic development later.

Mercantilism In Eastern Europe

• The forced labor feature of mercantilism was even more evident in Prussia, Lithuania, and Poland.

• In these countries, the peasants were made serfs again. They were no longer free to leave the land and had to engage in forced labor.

Mercantilism and Inflation

• Kings needed money in order to finance their wars. E.g., “The key to English history in the seventeenth and eighteenth centuries is the perpetual wars in which the English state was continually engaged”

• In 1694, William Paterson introduced a new method of enabling the government to obtain money. In return for the government’s granting the Bank of England the power to issue bank notes, the bank bought vast amounts of government debt.

The Bank of England

• The government in 1696 gave the Bank of England the power to suspend convertibility. In other words, the bank didn’t have to meet its contractual obligations. In the wars with France after the French Revolution, it did so for two decades.

The Bank Concluded

• “Thus, by the end of the seventeenth century, the states of western Europe,particularly England and France, had discovered a grand new route towards the aggrandizement of state power: revenue through inflationary creation of paper money, either by government or, more subtly, by a privileged, monopolistic, central bank.”

Laffemas

• The French mercantilist writers were of very poor quality. E.g., Barthélemy de Laffemas (1545-1612) favored a policy of self-sufficiency.

• France should try to produce as much as possible internally. This violates a basic principle of economics, benefits from trade and the division of labor. Laffemas’ argument depended on the Montaigne fallacy. His ideas led to a harebrained scheme to grow mulberry trees and silk worms.

Laffemas Continued

• Laffemas realized that the best way for the state to accumulate bullion was not to prohibit the export of gold and silver.

• Instead, the state should allow free trade in bullion, and the regulate trade so that bullion in the country would keep increasing.

French Absolutism

• Rothbard has a very negative view of the French state in the 17th century.

• He says, e.g., that Cardinal Richelieu, the Chief Minister of Louis XIII, regarded the French people as animals. Taxes shouldn’t be so high that people are discouraged from working.

• But they shouldn’t be too low, either.

Richelieu on Taxes

• “For if the people were too comfortable and complacent, it would be impossible to 'contain them in the rules of their duty'. Richelieu added the revealing comment that 'It is necessary to compare them [the people] to mules, who, being accustomed to burdens, are spoiled by a long rest more than by work' .”

Colbert

• Colbert, who was in in charge of the economic program of Louis XIV, had a contemptuous attitude toward the people.

• He thought that merchants were small people who didn’t understand the national interest.

• Trade was based on war and conquest. Once again, the Montaigne fallacy dominated

Colbert Continued

• Colbert tried to coordinate the artists and intellectuals to glorify the king.

• Colbert strengthened the French Academy and established other academies for painting and sculpture and architecture. (The Academy was established by Richelieu.)

• Enormous sums were spent on palaces for the king.

Louis XIV

• Louis XIV (1638-1714) is one of Rothbard’s main aversions.

• Louis thought that he owned all the land in the country. Everyone else was merely a tenant.

• He viewed himself as a god-like figure.• Bishop Bossuet was the chief ideologist of French

absolutism. He compared the king to god.• Rothbard concludes, “Catholic political thought

had come a long way from the Spanish scholastics.”