Introduction to Political Economics : PEPF 101

Lecture Two
Dr. Hebatallah Ghoneim

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 Lecture Content

• Central Focus of Modern Economic Thought

• Mercantilism:
1- The Rise of Mercantilism
2- Main Views of Mercantilism
3- Mercantilist Thinkers
4- Criticism of Mercantilism

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 Central Focus of Modern
Economic Thought

• Economics is a social science

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 Central Focus of Modern
Economic Thought

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 Central Focus of Modern
Economic Thought

Brute Force Tradition

Societal Market
Mechanism Mechanism

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 Central Focus of Modern
Economic Thought

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 Mercantilism

- Mercantilism is the name

given to the economic Mercantilism
literature and practice of the
period 1500 and 1750.

- The economic theory of

mercantilism was the work
of merchant business men.

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 Mercantilism
Before Mercantilism:
Feudalism Unfair distribution
between serfs and
Mechanical power KING lords
from water and
LOYALTY AND LAND
wind SERVICE Materialism
Manufacturing represent
began Happiness
POWERFUL
NOBLES
LOYALTY AND LAND AND
MILITARY SERVICE PROTECTION
Inheritance of
Markets Grew and poverty
Merchants
LESSER NOBLES
accumulated (KNIGHTS)
wealth
LABOR PROTECTION
Need to break
customs and build
SERFS AND FREEMEN institutions
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 The Rise of Mercantilism

Factors responsible for the rise of mercantilism:

•Feudal •Merchants
Culture

Economic

Political
•Reformation
and economy looked for a
Protestantism. strong central
•Mechanic authority to
Power and protect them
•Renaissance
Trade against their
played
explanation rivals.
significant role

•Expansion of •Nation State

•Materialistic
basics of the commerce and
human creation of •Need for
happiness merchant colonies

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 Main Views of Mercantilism
Power and Wealth

• The mercantilists tried to determine the best policies for

promoting the power and wealth of the nation
• The total wealth of the world was fixed
• Trade is a zero sum game
• The goal of economic activity, according to most
mercantilists, was production—not consumption
• Increasing the nation’s wealth by simultaneously encouraging
production, increasing exports, and holding down domestic
consumption
• Positive Balance of Payment is the key for wealth
accumulation
• Low wages in order to give the domestic economy
competitive advantages in international trade

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 Main Views of Mercantilism
Balance of Trade

• A favorable balance of trade is guarantee a flow of precious

metals into the domestic economy
• Need Government interference to increase production;
provide cheaper raw material
• Expand export and decrease Imports
• Means of tariffs, quotas, subsidies, taxes, and the like, in
order to achieve a so-called favorable balance of trade.

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 Main Views of Mercantilism

Money and Mercantilism

• An adequate supply of money is particularly

essential to the growth of trade, both domestic and
international
• In1569 by the Frenchman Jean Bodin explained
that one of the reasons for the rise in prices in
Western Europe during the sixteenth century, was
increase in the quantity of gold and silver there
resulting from the discovery of the New World.

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 Main Views of Mercantilism
In Short
• The mercantilists were “rent-seekers.” They were driven by
profit motives to use government to gain economic privilege
for themselves.

• Many mercantilists saw a highly mechanical causality in the

economy and believed that if one understood the rules of this
causality, one could control the economy. They opened area
to study economics as social science.

• Mercantilists highlighted that government interference must

not be haphazard or complicate basic economic truths.

• Promoted nationalism

• Increased the role of chartered trading companies

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 Mercantilist Thinkers
William Petty (1623-1687)
• Self-made man, Latin scholar at age 12
• Made a fortune by buying land from soldiers leaving Ireland
• Petty apparently was the first to explicitly advocate the use of
what we would call statistical techniques to measure social
phenomena.
• He tried to measure population, national income, exports,
imports, and the capital stock of a nation.
• His economic writings the result of his practical interests in
matters such as taxation, politics, money, and measurement.

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 Mercantilist Thinkers

David Hume (1711-1776)

• Hume could be called a liberal mercantilist
• Hume pointed out that it would be impossible for
an economy to maintain a favorable balance of
trade continuously.
• There is self-correction of the trade balances
• Hume maintained that the growth of economic
freedom went hand in hand with the growth of
political freedom.

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 Criticism of Mercantilism

• The mercantilists failed to realize that money was merely a

medium of exchange for securing the real capital.
• They emphasized that imports were bad but exports were
good. It is difficult to understand how all the nations could be
exporters.
• Their aim was to confer special privilege and subsidy on
favored groups; since subsidy and privilege can only be
conferred by government at the expense of the remainder of
its citizens.
• The goal of economic activity is defined in terms of national
output and not in-terms of citizen’s welfare.

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• Readings: Landreth and Colander, selected parts of
Ch1,2 &3

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