History of Economic Thought
Boise State University
Fall 2015
Prof. D. Allen Dalton

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– Artistic and literary renewal
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– Constancy of natural world
– Empiricism, measurement, mechanics
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– From ethics to self-interest

• Artistic, literary and cultural flowering centered in Italy, from mid-15th century
– Rediscovery of Latin and Greek classics of literature and the flowering of art
• da Vinci (1452-1519)
• Michelangelo (1475-1564)
• Raphael (1483-1520)
– Scientific impact – naturalism and humanism

• Conservative reaffirmation of Christian morality and theology against humanism of Renaissance and against the abuses of the Roman church
– Martin Luther (1483-1546)
– Jean Calvin (1509-1564)
– Ulrich Zwingli (1484-1531)
• Resulting problems
– no single ecclesiastical authority
– the question of political obligation (when ruler and subjects are of different faiths)

• Grows out of the “measuring mania” at
Universities during the 14 th Century
– Merton Calculators (Oxford)
– Parisian Scholastics
• Jean Buridan
• Nicholas Oresme
– Relationship to the monetized society
– No direct application to real world
(contingency of real world due to world being the result of God’s will)

• Copernicus (1473-1543)
• Commentariolus (1514); first modern statement of heliocentric theory
• De Revolutionibus Orbium Coelestium (1543)
• Tycho Brahe (1546-1601)
• Tycho - first observation of supernovae (1572)
• Johannes Kepler (1571-1630)
• Kepler - Astronomia Nova (1609); Kepler's first two laws of planetary motion
• Galileo (1564-1642)
• A Dialogue Concerning the Two Chief World
Systems (1632) promotes Copernican theory

• Francis Bacon (1561-1626)
– Novum Organum (1620) argues for experimental, empirical science; natural laws induced from collected facts
– Founder of Royal Society
• René Descartes (1596-1650)
– Discourse on the Method of Rightly
Conducting the Reason and Seeking the
Truth in the Sciences (1637) argues that science is built upon axioms, self-evident truths; emphasis on deduction; the world as a mechanism

• Isaac Newton (1642-1727)
– De Analysi per Aequationes
Numero Terminorum Infinitas
(1669)
• first systematic account of the calculus (“fluxions); circulates as manuscript but not published until
1711; dispute with Leibniz over discovery (1684)
– Philosophiae Naturalis Principia
Mathematica (1687)
• universal law of gravity; laws of motion; predicts nonspherical earth

• Machiavelli (1469-1527)
– The Prince (1513)
• separation of state and religion
• ruler has as objective of increased state power
• “Politics have no relation to morals
.”
• “War should be the only study of a prince. He should consider peace only as a breathing-time, which gives him leisure to contrive, and furnishes as ability to execute, military plans.”

• Thomas Hobbes (1588-1679)
– Served as Francis Bacon’s last secretary
– English Civil War (1640-1651) spent in Paris
– Leviathan (1651)
• Men in a state of nature are in a war of all against all
• Social contract establishes the state
(not divine right), with absolute authority, to keep peace and order
• without absolute authority, property is insecure, contracts are unenforceable and economic life is impossible

Quantity Theory of Money
• The Response of Jean Bodin to the Paradoxes of
Monsieur de Malestroict…(1568) - Jean Bodin
– several reasons for rise in prices but “principal reason” is the abundance of gold and silver (follows Navarrus’s argument that the increase in quantity of monetary metals causes price inflation)
• A Discourse of the Common Weal of This Realm of England (1549, 1581) “W.S.”
– usually attributed to Sir Thomas Smith and nephew
William Smith, but has also been attributed to Jonathan
Hales
– first English statement of the quantity theory of money
(preceded by Navarrus in 1556 and Bodin in 1568) in note appended to 1581 edition

• The economic thought of 15 th to early
18th centuries
• Descriptive term originates with Marquis de
Mirabeau (1763) and Adam Smith (1776)
• system of trade regulation and money
(balance-of-trade doctrine)
• “Mercantilist” Thought and Policy
• pamphlets oriented to specific issues
• state and secular concerns
– source of funds for the state/king
– encouragement of specific industries

• Common Aspects of Mercantilist Policy
– “bullionism;” an attempt to accumulate gold and silver and prohibit export
– encouragement of domestic manufacture through monopoly, subsidy, and high tariffs
– encouragement of cheap raw material imports
– government support of agriculture and prohibition of foodstuff exports
– large merchant navies and navigation laws
– encouragement of fisheries
– colonies as economic subordinates in imports and exports

“The ordinary means... to encrease our wealth and treasure is by Forraign
Trade, wherein wee must ever observe this rule; to sell more to strangers yearly than wee consume of theirs in value.”
Thomas Mun, England’s Treasure by Forraign Trade (1664)

• Director, East India Company
– East India Company’s purchase of goods resulted in export of bullion
• A Discourse of Trade (1621)
• England’s Treasure by Forraign Trade (likely written in 1620s, pub. 1664)
• Wealth as produced commodities; monetary movements depend upon condition of trade balance
• Domestic trade zero-sum; international trade is the source of national wealth and power
• Money wages must be kept low in order to stimulate labor to be productive
• Low interest rates to encourage industry
• Profits arise from buying cheap, selling dear

• Governor, East India Company
• Member of Parliament
• Brief Observations Concerning Trade and
Interest of Money (1668), reprinted anon. with minor additions as Discourse about Trade
(1690); reprinted as A New Discourse of Trade
(1693)
– Reduction of the legal interest rate in England from 6 percent to 4 percent
• began by citing reasons for the wealth of
Dutch Republic
• argued that low interest rate in the Dutch
Republic was primary cause of Dutch wealth
• argued that past reductions in legal limit in
England had been followed by increased
English wealth

• Doctor of Medicine, Oxford, 1648
• Professor of Anatomy, Oxford, 1650
• Chair of Music, Gresham College, 1651
• Served in Cromwell’s Army in Ireland, 1651-3
– Medical officer; topographical surveyor; ended with large Irish estate
• Founding member of Royal Society
• Primary works:
– A Treatise of Taxes and
Contributions (1662)
– The Political Arithmetick (1690)
– The Political Anatomy of Ireland
(1691)

• human body as metaphor for human society
• Influenced by English empiricism, focused on quantifying economic relationships
• general laws describe the operation of the economy and are deduced by reason
• economic policy succeeds if in accordance with general laws

• A Treatise of Taxes and Contributions
(1662)
• “public finance” text
• proper objects of expenditures and the qualities of tax avoidance and tax payment
– Social Division of Labor and the Social Surplus
• Hierarchy of productivity (but no distinction between productive and unproductive)
• Surplus of agriculture at base of further division of labor
• Existence of rent also an indication of agricultural surplus

– Sophisticated discussion of land and rents
• natural rent is the surplus of corn
• identifies this quantity with the natural surplus of silver mining (rate of returns are equalized)
• argues that all things ought to be naturally valued in land or labor
• uses rental value as basis for capital value of land
• finally, notes that the interest is to the amount of money lent as the amount of rent is to the land that can be bought with money lent

• Political Arithmetick (1670s, pub. 1690)
– attempt to quantify wealth of England
– established national income accounts that equated personal spending with sum of wages, profits and rents
– argued that value of assets are linked by common discount rate
– mercantilist argument that nation benefits from accumulating treasure and adding to money supply to drive trade
– increases in quantity of money lower rate of interest

• Money and Trade Considered; with a Proposal for Supplying the Nation with Money (1705)
– Economic depression due to shortage of metallic money; requires paper currency as substitute
– Money was Credit, Credit based in confidence
– Money supply should be related to needs of trade
– Expansion of money supply will permanently increase output and employment without raising prices
– The interest rate is the price of money’s use; changes in the money supply affect interest rates and therefore investment

• Money and Trade Considered; with a Proposal for Supplying the Nation with Money (1705)
– elaborates upon Charles
Davazanti’s distinction between
“value in use” and “value in exchange”
– presents “diamond-water” paradox and argues that relative scarcity is the creator of exchange value, solving the paradox

• Exiled to Europe
• French bankruptcy and debt as consequence of Louis XIV’s wars and policies
– Regent Duke d’Orleans in Paris
• 1716, establishes Banque G énérale
• 1717, establishes Compaigne d’Occident
• 1718, Bank G énérale becomes Banque
Royale, and Mississippi Company absorbs other trading companies
• 1719, Massive note inflation and Stock market bubble in Company shares
• Early 1720, Company and Banque united
• Mid-1720, Price of shares collapse, bank-run and collapse of Banque
Royale