The Age of Merchant Capital: Economic thought in the service of the state and the emergent commercial bourgeoisie 1
1. Introduction Boğaziçi University Department of Economics The period that we will cover is between the very late 15 th Century to the end of 17 th Century. In doing so, we will focus on the period between the Renaissance and the eighteenth century Enlightenment (France and Scotland). The period of colonial trade. The most important aspect of this period is the dissolution of the feudal economy and the rising power of the Merchant Capital. Mercantilism, despite the fact that there are some objections with regards to validity of the term, describes the general orientation of the economic thought in this period. As the nation-state was emerging in Europe and the colonial territories were being quickly divided, the object of struggle would shift from between East and West to that of within the West over how to divide up the territories. 2
2. The decline of the hegemony of the Catholic Church RENAISSANCE A shift in the philosophical orientation from Aristotelian reflections on the morality of human action to a Platonic (or Neoplatonic) understanding of science as a representative activity. A shift from God as the centre of attention to humanity as the centre of attention A change in arts Leonardo da Vinci (1452-1519); Michelangelo (1475-1564); Raphael (1483-1520) In science, perhaps the most important shift is the Copernican Turn. Copernicus (1473-1543); Kepler (1571-1630); Galileo (1564-1642); Descartes (1596-1650); Isaac Newton (1642-1727). The universe is not seen to be kept in motion by God but as governed by mechanical laws. God qua divine clock-maker! 3
2. The decline of the hegemony of the Catholic Church (cont.) REFORMATION Martin Luther (1483-1546); Jean Calvin (1509-1564) State-Church relations began to change: (1) States position began to change (2) The disapperance of single authority; division of the Christian population into various sub-groups. Max Weber The Protestant Ethic and the Spirit of Capitalism (1904) 4
2. The decline of the hegemony of the Catholic Church (cont.) THE RISE OF THE NATION-STATE The monarchies began to gain further control, sometimes the break from the Catholic Church is pursued to gain autonomy: military power and political power. Question of unification. The shift from the hegemony of Mediterranean city-states (e.g., Venice, Genoa) to the nation-states of the North States. Machiavelli (1469-1527) The Prince (1513) Even though he was an advisor to the waning Italian city-states, he is a model of the new intellectual. The assumption of self-interested behavior was parsimonious to make for a ruler. These nascent nation-states were always short of money. How to support it? Colonial trade. 5
3. Dissolution of the feudal class structure a. The rapid development of a money economy. b. The expansion of market. c. The growing strength of the merchant capital. With the end of crusades, facilitated by the Italian trading cities, Venice and Genoa, the trade between the West and the East (Levantine trade) took-off. But the military advances of the Ottoman Empire led to a struggle as to who will control the trade line. Discoveries of the New World and the sea route to Indian Ocean and Far East, unleashed the colonial trade, which in turn brought enormous profits to Europe. A sizeable money capital is accumulated because colonial trade was a monopoly trade. 6
Only Spain can import the riches of America and only Spanish goods can be exported to America. (The definition of colonialism.) Portuguese did the same with India until the Dutch ousted them. The Dutch established a joint stock company in 1602 to organize the colonial trade: The Dutch East India Company (which is different from the English East India Company). As a consequence of the colonial trade, huge quantities of precious metals were shipped to European. Consider the case of Spain and the American Treasure. Due to its negative balance of trade the gold dispersed into Europe. 7
The price revolution in 16 th Century Europe. While the prices were rising wages were lagging behind. By the end of 17 th century real wages had fallen to approx. half of what they stood at at the start of the 16 th century. The rapid enrichment of commercial bourgeoisie should be contrasted with the drastic decline in the standard of living of the lower classes of the population. Why did this happen? 8
(1) The increasing demands of the feudal lords for money led to shift from in-kind to quickrent. Which also meant that the peasant serf became free tenant. The enclosures began in England at the end of the 15 th and the beginning of the 16 th century. Enclosures meant kicking the peasants from the communal lands for more profitable undertakings such as raising sheep for wool. 9
(2) Just as the feudal demesne was dissolving the guild handicrafts were also brought under the hegemony of the merchants. With the advance of the money economy, it became impossible for the manufacturers to remain regional. But who is going to sell the product in newer markets: the merchants. From formal subsumption to real subsumption to merchant capital: The independent craftsman becomes dependent handicraft worker and the merchant becomes a buyer upputter out. 10
(3) The state authorities actively promoted this transition whose increasing centralization ran parallel with the growing strength of the merchant capital. The emerging commercial bourgeoisie needed the support of the absolute monarchy, the nation-state, both in order to break down the feudal order and the pockets of resistance and in order to secure exclusive access to the colonies and extend its world market. 11
4. Mercantilist Policies Boğaziçi University Department of Economics What is today known as Mercantilist economic policies were the product of the close alliances of between the various state authorities and their national commercial bourgeoisies. When trade flourishes the income to the crown is augmented, lands and rents are improved, navigation increases and the poor people find work. Edward Misselden (1608-1654) Nevertheless, there are important contradictions among the merchants and the landowners. Especially, in terms of the level of interest rates. But the two classes were unified in their struggle with the working class. The legal limit placed upon wages on the whole was approved by both the commercial bourgeoisie and the landowners. 12
BULLIONISM (MONETARY BALANCE SYSTEM) Originated in the period where there was an acute shortage of gold and silver bullion. Bullionist policies were designed to attract a flow gold and silver into a country and to keep them there by prohibiting their export. Spain is a good example. The School of Salamanca: Navarrus (d. 1586) Dominican priest. Still committed to just price, yet conceded that it is OK to earn money from dealing money. How? Supply and Demand for money. Scarcity makes it dear, plenty makes it cheap. The American treasure caused inflation. Thomas de Mercado (d. 1585) criticized bullionism. Jean Bodin (1530-1596) argued that prices of goods and land rise because of the abundance of gold/silver and not because of scarcity or monopoly. 13
In a different trajectory, at the start of 16 th Century, England was still overwhelmingly agricultural and commercially underdeveloped. Exporting raw materials and importing manufactured goods. Trade was seen as a source of revenue for the State given its shortage of money capital. For instance, there was an embargo on the export of precious metals out of England. Early mercantilist policy was primarily fiscal policy in order to enrich the treasury. This is called monetary balance system. 1. Directly through duties 2. By increasing the quantity of precious metals in the country. a. Statutes of Employment: Forbidding foreigners from exporting currency b. Staple towns: Monitoring trading activity to see that (i) correct amount of duty is paid and (ii) correct amount of revenues are re-patriated. 14
The debasement of coinage. The Crown would issue new coins having the same face value as the old coins but containing smaller amount of metal. But since these new light coins were legally pegged at their value, it became profitable to send the old money out of the country, either to be reminted or exchanged for foreign coin. The fact that bad money drives out good from domestic circulation and forces it abroad was noted by Thomas Gresham (1519-1579). 15
A Compendious or Briefe Examination of Certayne Ordinary Complaints, of Divers of Our Country Men in These Our Days by William Stafford (1581) or by John Hales (1549). The work is written in the form of a conversation between the representatives of different classes of the population: a knight (or landowner), a farmer (or husbandman, a merchant, a craftsman, and a theologian. Each class complaining about the high prices: a knight complains about the high prices charged by the merchants who were forced to either to abandon land or to shift from cultivation to the more profitable line of raising sheep; the farmer complains about the enclosures and the higher rents; the merchant and the craftsman complains about the upward trend in workers wages, and so on. The theologian argues that all these troubles are due to the deterioration (debasement) of the English coinage and the export of ready money. Of course, all of this is an outcome of the fact that 16 th Century England is an underdeveloped country that exports raw materials and imports finished products. Even though, he also suggests the reduction in the import of foreign finished goods, his emphasis is on the stabilization of the exchange rate. His monetarism has led him to believe that it is the debasement of the coinage that produces a deterioration in England s exchange rate which, of course, leads to general rise in the prices of foreign commodities, aggrevating the negative balance of trade. 16
In the opening phase mercantilism had above all to foster the fiscal aims of enriching the state coffers and augmenting state revenues, and it did this by making the population bear a heavier tax burden and by attracting precious metals into the country. Moreover, it was primarily defensive in its trade policy (i.e., the limitation of imports) as opposed to aggressive trade policy of late mercantilism (i.e., the expansion of exports). 17
COLONIAL POLICY Over the course of the 16 th and 17 th Century, the basis of England s exports gradually shifted from raw materials (wool) to the export of finished products. But since there are strong competitors (Flanders), the struggle was for the domination over the world market and the elimination of foreign competition. Creation of trade monopolies. (1) Buy raw materials from the colonies and sell them manufactured goods. (2) Buy finished products from colonies and sell them to European customers and begin to earn from the price margin. 18
Navigation Act of 1651 prohibited the export of colonial products from Britain s colonies to any country other than England. Likewise, commodities could be delivered to colonies only by English traders using either English or colonial ships. Moreover, all commodities imported into England had to be carried either by English ships or by ships belonging to the country where the commodities are produced. As the bourgeoisie grew in strength mercantilism became increasingly transformed into a means of bolstering capitalist trade and industry and defending through protectionism. Whereas early mercantilism exercised rigid control over each individual commercial transaction, late mercantilism restricted its regulation of trade and industry to a broader, national scale. Similarly, the focus shifted in late mercantilism, from the movement of precious metals to commodities. 19
THE BALANCE-OF-TRADE DOCTRINE (BALANCE OF TRADE SYSTEM) Contra bullionism, it was argued that it was the flow of goods that governed the exchange rate and flows of bullion, not the other way around. Thomas Mun (1571-1641). Board member of the East India Company. Theory of growth centered on trade. England s Treasure by Forraign Trade (1630) Mun is a representative of a rising merchant capital which is in the process of acquiring new markets and is asprining to expand its exports. (p. 50) The difference between natural produce., i.e., its raw materials surpluses, and artificial produce, i.e., industrial articles of its own production and the commodities imported from other countries. 20
The objective of late mercantilist policies are: 1. To have raw materials worked up by domestic industry and exported as finished products. We may gain so much of the manufacture as we can, and also endeavor to sell them dear, so far forth as the high price cause not a less vent in the quantity. (p. 50) 2. To develop the carrying trade, whereby the produce of colonies is imported in order to be resold to other countries at a higher price. We make a far greater stock by gain upon these Indian Commodities, than those Nations doe where they grow, and to whom they properly appertain, being the natural wealth of their Countries. (p. 52) 21
Mercantilists attempted to resolve the basic problems of their age and of their social class namely, 1. those of the transformation of a natural economy into a money economy 2. those of acquiring primary accumulations of capital in the hand of merchant bourgeoisie. When the origin of profit is non-equivalent exchange the advantages falling to one party in the exchange are equal to the losses incurred by the other one person s gain is the other s loss. (p. 55) Money=Wealth? 22
5. What is the place of Mercantilism in the history of economics? Ha-Joon Chang, 2002. Kicking Away the Ladder: Development Strategy in Historical Perspective. London: Anthem Press. See also: http://www.paecon.net/paetexts/chang1.htm 23