econ1006 02 roots 091006a no blues

7/29/2019 Econ1006 02 Roots 091006a No Blues

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2.1 Balance of trade and wealth of nation

2.2 The Quantity Theory of Money

2.3 Efficiency in production

2.4 Measuring national income

UCL ECON1006. HISTORY OF ECONOMIC THOUGHT. Hugh Goodacre.

2. SOME ROOTS OF ECONOMIC ANALYSIS


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Mercantilism (unfashionable term no single school of

thought) / pre-classical economic thought: characteristics;

Wealth-getting no longer considered sinful

Government (prince) the principal economic agent

Commercial wars between nation states.

Increases in nations wealth a zero sum game

Colonialism; beginnings of slave trade. Beginnings of systematic analysis of economic issues.

Initial discussions on nature of wealth of nation.


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What is wealth of nation? An initial answer:

Bullionism: Wealth identified with gold/ precious metals.

Zero sum game:

England has no gold mines, so get gold from Spain;

letters of marque, etc.

An early estimate of Englands national income

(Petty, early 1670s) includes 60,000 taken from

the Spaniards.


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Wealth of nation: a more subtle definition.

A more elaborate form of mercantilism developed beyond

bullionism to identify wealth with trade surplus.

Antonio Serra.A brief treatise on the causes which canmakegold and silver plentiful in kingdoms where there are

no mines. 1613.

Thomas Mun.Englands treasure by foreign trade. 1621

[published 1664].


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The two columns balance by definition / accounting identity / assumption.

Exports 22,000 Imports 20,000

Balance / inward specie flow /

kingdom enriched

2,000

BALANCE: 22,000 22,000

Balance of trade.

Precious metals (specie) were the means of international payment.

balance established through speciemovements.

e.g. Muns example:


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Trade surplus / favourable balance of trade (BOT).

Todays definitions:

Balance of Trade (BOT):

goodsexports and imports (visibles) only.

Balance of Payments (BOP):

BOT + invisible exports and imports: services,

freight, tourism, etc.

+ interest payments, capital movements,

etc., etc.

Either way, there is always by definitiona balance, through

international payments.


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(1) Exports (3) Imports

(2) merchant gains, etc.

(= invisible exports)

(4) Payments to foreigners for their

merchant gains, etc.

(= invisible imports)

(5) Balance (movements of specie)

1 + 2 3 + 4 + 5

Trade surplus / favourable balance of trade (BOT).

BOT / BOP distinction not yet made by Mun; in trade, he includes

not only goods but also all aspects of merchants mark-up: insurance,

freight, merchant gains, etc., i.e. invisibles.

The two columns balance by definition / accounting identity / assumption:

1 + 2 = 3 + 4 + 5


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(1) Exports (3) Imports

(2) merchant gains (invisible

exports)

(4) invisible imports

(5) Balance (movements of specie)

1 + 2 3 + 4 + 5

Trade surplus / favourable balance of trade (BOT), contd

Policy conclusions:

Bullionists: get gold from Spain, etc.; prevent gold exports. Ensure (5) > 0 and maximise!

Mercantilists: OK to export gold in the course of expanding trade,

e.g. buying goods for re-export.

i.e. Maximise (1+ 2) - (3 + 4)


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Balance of Trade (BOT) / BOP.

Examples of merchants mark-up (Mun):

Exported from

England to Italy

Fetched from

England by Italian

merchants

Shipped to Italy

by Englands

merchants

Merchant's

mark-up

Corn,

per quarter

25s. 50s25s

= 100%Red herrings,

per barrel20s. 40s

20s.

= 100%

Price in

England

Bought from

the Dutch in

Amsterdam

Mark-upBought in

East IndiesMark-up

Pepper,

per pound2s = [24d.] 20d.

4d.

[= 16.7%]3d.

21d.

[= 700%]

Remote or far countries trade far more profitable, e.g.

12d (penny, pence) = 1s. (shilling).20s. = 1.


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P

100

75

50

25

S

D

Supply, demand, competition: Muns example.

25 50 75 100 Q

S'

may raise above fifty upon the

hundred in the quantity vented

twenty five in

the hundred less

in the price

Theme: Note the

international context of

these beginnings of S &

D analysis!


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2.2 The Quantity Theory of Money (QTM)

Topical issue in early modern period: influx of precious metals from

Americas in 16th century rise in prices.

first clear statements of QTM, i.e. M P

Problem for bullionists: this would mean price inflation, whereas,even for Mun, etc., more gold is in general good.

But mercantilists argued that this inflationary pressure would be

neutralised:

Lack of M (i.e. gold, silver) is an obstacle to trade.

Equivalently, more M quickens trade / drives trade, i.e.

stimulates an increase in transactions (T).


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Quantity Theory of Money (QTM) in early modern period, contd

Quickening / driving trade in terms of Fisher (1911) Equation of

Exchange:

Assume V = V, (as was normally assumed), we have:

M.V = P.T so that P = M/T.V

Gold / silver from Americas M1 > M0BUT this quickens trade T1 >T0

If we assume that M and T increase proportionately, then:

M1/T1 = M0/T0

We thus have:

P1 = M1/T1.V = M0/T0.V = P0

i.e. Increase of precious metals does not necessarily lead to price

inflation.


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Note / preview: Assumption that V is stable:

A characteristic of classical economics.

Preview: challenged by Keyneshoarding, Liquidity Trap, etc.

Estimating V today: Not measured directly; just use Equation of Exchange:

Data for P Price Index

(Consumer Price Index, Retail Price Index, etc.)Data for M Money Supply (Preview: Problem: M0? M1?

M4?, etc.)

Data for T Transactions within a given year

i.e. Y (National Income)

M.V = P. Y V = P.Y / M

We have data for P, Y and M we just read off what V must be.

i.e. V given as an identity; not measured directly.


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Pettys suggestion that V could be measured DIRECTLY.

Petty suggests that V could be measured directly if enough data were

available on transactions payments.

He assumes V depends on frequency of payments of income:

Estimates annual expense as 40m and assumes this is equal to

income.

If all income payments were weekly, as normal for wage-earners,then V would need to be 52, so 40m/52, or less than 1m, would be

needed to drive the trade of the nation.

If all payments were quarterly, as rent and tax payments were, then

40m/4 would be needed, i.e. 10m.

Petty assumes a mixture of the two; crudely calculates:

10m + 1m = 11m.

Halve this, and we have 5 m, which will be enough to drive

trade.


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Efficiency in production

Beginnings of transition:from mercantilism focus on trade

to classicalfocus on production.

Mun: artificial trade more profitable than natural.

(Arts = manufactures, technology.)Benefits of large population /number of people.

Particularly those in arts.

Early 17th century: promotion oftechnological progress.

Advancement of useful learning (Bacon).

Agricultural technology, etc.


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Efficiency in production, contd

Topical issue: Holland: small country, but a leading commercial

power.

William Petty (1623-87) on the benefits of spatial compactness

An early attempt at a theory of productivity.

Focussed on fact that Holland was most dynamic European

economy and most densely populated.


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William Petty (1623-87) on the benefits of spatial compactness,

contd

Pettys argument: Spatial compactness of population (as in Holland)

living compactly gives conditions for:

Economies of scale.

Though note: administration / social overheads rather thanproduction process itself.

Technological progress.

London the supreme example.

Division of labour.

Specialisation, etc.. (Nothing new in itselfancients too!)


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William Petty (1623-87) on the benefits of spatial compactness,

contd

Pettys policy proposals to increase compactness:

Multiply the people, i.e. encourage higher birth rate.

Wealth of nation lies in high populationpopular idea at the

time.

Forced inward migration to England from Ireland

(transplantation). Give England same advantages of population compactness

as Holland.


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Today:

Three measures:

Expenditure

Income

Product (Output)Quoted figure (UK) is average of all three.

Early modern anticipations: Mun had already urged an annual account of balance of trade.

Petty: first suggested theoretical framework for National

Income accounting.

Expenditure

Product

Income

2.4 Measuring national income


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National income: first attempt at theoretical framework: Petty, c. 1667.

Expenditure m Income m

Personal expenditure of6m persons at 6.67 per

head 40

Rent of land 8

Yield on money and

other personal estates 7

The labour of the

people 25

TOTAL 40 40

Note: Anticipates concept of factors of production:

Land, Capital, Labour

But Capital is weakly anticipated in Pettys Money and other

personal estates: all kinds of things jumbled inhousing, shipping,

livestock, precious metals, merchandise, furniture, etc.


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LEFT HAND COLUMN:

EXPENDITURE

MEASURE:

Population:

6m

Expenditure per head:6. 13s. 4d. p.a.,

or 4 d. per diem.

Thus total expenditure is:6m x 6 2/3

= 40m.


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RIGHT HAND COLUMN:

INCOME MEASURE:

Income of landowners, i.e. rent:

8m p.a.

The value of land is 18 years purchase, i.e.

8m x 18 = 144m

The rent therefore represents yield on land of

8 / 144 = 5.5 %.

Income on money and other personal estates

Value is estimated at 106m (by adding up housing, shipping, livestock, etc.)

So at same yield as rent, the income (interest, etc.) would be 5.5 % of 106m

= 5.89m.

But these earn more than rent, so suppose it to yield 7m


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RIGHT HAND COLUMN:

INCOME MEASURE, contd.

We now have:

Income of landowners: 8m. Income on money, etc.: 7m

i.e. These account for 15m of income.

Total expenditure is 40m.

So wages must account for the rest:

i.e. 40m15m = 25m.

i.e. Wages are estimated as the residual.


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Motivation for the calculation / Pettys political arithmetic:

Pettys calculation (c. 1667) addressed monarchys need for war

finance.

(Second of three Anglo-Dutch wars, 1665-7.)

This calculation indicated that a greater burden of tax could fall on

wage-earners: 25 / 40 = 5/8, or 0.625.

Method was largely excise, i.e. indirect taxation: beer and other

goods consumed by labouring class.

Less sensible to labourers than direct taxes.

Remained a popular idea; avoid tax revolts.

Note: Illustrated end of egalitarian ideals of Civil War period.


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The value of the people.

Yield on Land + Money, etc. = 8 + 7 = 15mValue of = 144 + 106 = 250m

So Yield is 15 / 250 = 6%

Or equivalently:

Value is 250 / 25 (= 16 2/3) times the annual yield.

Yield on people is 25m.

So value of the people must be 16 2/3 times 25m.

= 417m

There are 6m people, so their value is 417m / 6m

= 69 each.

Th l f th l d


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The value of the people, contd

Petty explicitly associates this concept with slave prices.

Various estimates in Pettys writings:

African slave: 25 for adult, 5 for child.

He also estimates:

The value of the Slaves, brought out of Africa, to serve in our

American Plantations, Twenty thousand pounds (c. 1673).

i.e. 20,000 / 25 = 800 adults?

Value of French and Irish: worth less than English.But note: value of Irish can increase with residence in England:

Through prolonged residence in England / intermarriage

with English, Irish can be transmuted into English.

Value will increase from 7 to 10, i.e. 42%.


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Pettys Bank for war:

there being 3 Years of Peace in these Nations for one of Warr, the said

3 Years Overplus will be 3324 Thousand Pounds; which, added to 2676

Thousand Pounds, will make a Bank of 6 Millions Pounds for the oneYear of War.

Kings

revenue

Peacetime

expenditure

Revenue net of

peacetime

expenditure

Cumulative fund /

bank for war

Year 1 2.676m 1.568m 1.108m 1.108m

Year 2 2.216m

Year 3 3.324m

i.e. in Year 3, total revenue of King:

2.676m + 3.324m = 6m

Enough to fight a war.


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Characteristics of early modern economic thought

State still the principal economic agent.

War aims / raising finance for war still dominant concern

fiscal-military:

90% state revenue was for war.

Economic issues not yet a distinct field of inquiry, let alone

a discipline.

Not differentiated from political, geographical, religious

issues, etc.


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Characteristics of early modern economic thought, contd

Pettys policy proposal illustrates all these characteristics:

State policies to multiply the people.

State action / forced inward migration to England from

Ireland (transplantation).

Give England same advantages of population

compactness as Holland.

Aim: Bank for war from 2m extra annual state revenue.

His compactness concept was spatial /geographical,

concerned government and administration as well as

economic ends; would also solve religious and political

issuesend Irish rebellions, etc.


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Main themes:

Overseas / open economy: Beginnings of economic discussions concern surplus and

deficit internationally.

Same for early QTM and Supply and Demand analysis.

Colonialism, beginnings of slave trade, etc.

War finance dominant in fiscal debates.

Crisis:

Trade crisis with Holland in 1620s.

Civil wars in England.

War generally: kind of cycle!


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Transition / forward pointers:

Division of society into three great classes, each with own

source of revenue.

Labour produces a surplus, which is distributed as rent and

yield on money, etc..

Beginnings of wider theories of production / output /

efficiency rather than just trade; i.e. away from

mercantilism and transition towards classical tradition.

Quantitative calculations and quantitative mode ofexpression; Pettys political arithmetic.

Economic not yet separated from other spheres of

discussion.

2 ROOTS OF ECONOMIC ANALYSIS


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2. ROOTS OF ECONOMIC ANALYSISsummary.


From bullionism to Mun, etc. Importance of overseas trade.

Beginnings of Supply and Demand analysis.

2.2 The Quantity Theory of Money

Arguments against and for bullionism. Velocity of circulation and its

measurement.

2.3 Efficiency in production

Beginnings of transition from mercantilism to classical tradition.

Example: Petty, Holland, and spatial compactness.

2.4 National income

First attempt at calculation. Labour income as residual. Indirect

taxation Fiscal military motivation

econ1006 02 roots 091006a no blues

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