Roger E. Backhouse: The Ordinary
Business of Life
Chapter 3 The Emergence of the Modern
World View – the Sixteenth Century
Udayan Roy
Lecture Notes 2008
The emergence of the modern
world view
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The Renaissance
The Reformation
The rise of the European nation state
Mercantilism
Machiavelli
The School of Salamanca
England under the Tudors
Conclusions
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The Renaissance
• The end of the 15th century marks the beginning
of the modern world view
– The Great Voyages of Discovery
• Columbus reaches the Americas in 1492
• Vasco da Gama explores the African coast and reaches India
in 1498
• The results are: expanded trade and broader view of
humanity
– Rediscovery of Greek and Latin classics. Huge
explosion in the creative arts, especially in Italy, and
in science, especially in astronomy
• Discovery of the physical laws of gravity that explained the
movements of planets as well as simple objects led to
speculation about general laws that determine social and
economic life
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The Reformation
• Publication of Martin Luther’s 95 theses in
1517
– Impact accelerated by
• the invention and spread of movable-type printing
• The rise of nation states
• Effect on economic thinking was minimal
• Greater impact on political thought
– Natural Law, rather than papal authority,
became the basis for political legitimacy
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The rise of nation states
• England, France, Spain, and Portugal
• Attention focused on how national power could
be enhanced
– To protect access to new trade routes that developed
as a result of the Spanish and Portuguese
geographical discoveries
– To do the work that had hitherto been done by the
Catholic church
• Introduction of the Poor Laws in England by Elizabeth I in
1597 – 1601
– Emergence of a new school of economic thought,
Mercantilism
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Mercantilism (1500-1776)
• This school of economic thought arose in
England during the 16th through the 18th
centuries, and then spread to France,
Holland, and other countries.
• Many of the contributors to this literature
were merchants or members of the
mercantile class, hence the name.
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Mercantilism—main themes
• The main themes of Mercantilism are as follows:
– The ultimate objective of economic policy is the political power,
both internal and external, of the state.
– The power gained by one state means power lost by another
state.
• Therefore, the interests of nation states are perpetually in conflict.
– A nation’s power is measured by its population and its stock of
precious metals such as the gold and silver that are embodied in
the money in use at the time.
• A high population could supply soldiers.
• Money (in the government’s treasury) could pay for large armies
and navies.
– Continued on next slide
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Mercantilism—main themes
• The main themes of Mercantilism are as follows:
– Continued from last slide
– Population growth and a rich treasury could only come from
prosperous industry and trade.
– This prosperity could be brought about if the economy’s stock of
money (i.e., gold and silver coins) is large.
– Assuming a state does not have gold and silver mines, the only
way it would increase its stock of those metals is if it exports
more than it imports. As a result, ensuring a trade surplus for
oneself and a trade deficit for one’s rivals is the primary objective
of economic policy.
– Tariffs and other import restrictions can be effective in reducing
imports. Subsidies and regulation can be effective in increasing
exports.
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Mercantilism—the lasting
contributions
• All this was pretty illogical stuff and the mercantilist
literature lost its luster as soon as the Classical school
emerged in the 18th century.
• However, even the casual thinking of the mercantilists
made some lasting contributions.
• The mercantilists understood that an increase in the
quantity of money increased output and employment,
while a decrease in the quantity of money decreased
output and employment.
– This idea is now widely accepted except that the effect of money
on output and employment is now seen as temporary, a point
that the mercantilists were not clear on.
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Mercantilism—the lasting
contributions
• In 1588 Giovanni Botero published a theory of population that was
essentially the same as the theory of population for which the
Classical economist Thomas Malthus gained fame. Population tends
to grow without limit. Food, however, is limited. Therefore,
population growth would ultimately be slowed by celibacy or through
war, famine and epidemics.
• Also in 1588, Bernardo Davanzati stated that people work in order
to be happy and not for some other motive, a form of the principle of
utility maximization.
– Marginalist economists would later develop the idea into a full-fledged
theory of demand.
• In 1696 Gregory King discussed the now widely used concept of
the price elasticity of demand and even used data on prices and
sales of wheat to calculate an estimate of the price elasticity of
wheat.
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Mercantilism—the lasting
contributions
• Building on the commonplace idea that countries trade
because not all countries can grow everything,
mercantilists built a theory of international trade that
came close to a statement of the principle of
comparative advantage for which the classical economist
David Ricardo is famous.
– In 1663, Samuel Fortrey explained that we should produce and
export what foreigners want if that would allow us to import more
of what we need than we could produce at home.
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Mercantilism—the lasting
contributions
• Pierre le Pesant, Seigneur de Boisguilbert (16461714) made two important points.
– First, he pointed out that taxes reduce the productivity of the
economy and that more tax revenues for the government did not
necessarily mean less after-tax income for taxpayers. If the tax
system is designed in a way that takes care to reduce the
negative effects of taxes on productivity, the government could
earn more tax revenues without reducing the after-tax incomes
of the citizens. This idea is nowadays championed by a group of
economists called supply-siders.
– Second, Boisguilbert also said that left to itself the economy
settles down to a stable outcome instead of becoming chaotic.
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Mercantilism—assessment
• While the main ideas of the mercantilists caused a lot of
harm and are now discredited, the economists of that
period came up with many ideas that lasted and created
the foundation of the Classical school.
• The problem was that the good ideas of the mercantilists
had not yet won the debate, which is why they simply
coexisted with all the other bad ideas.
• As the classical era progressed, the good ideas of the
mercantilists were filtered out, recognized as good ideas
and incorporated into the classical canon.
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Niccolo Machiavelli (1469 – 1527)
• The Prince, 1513
• The interests of the state were seen as unrelated to
religion
• A distinction was drawn between the science of how
politics works and the ethics of how it ought to work
• Both inductive and deductive analysis were used
• It was assumed that people would behave
unscrupulously, in a self-interested manner
– Machiavelli understood that in some cases men may behave
morally, but felt that his analysis would make better predictions if
self-interested behavior was assumed
– This has become the standard assumption in economic analysis
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The School of Salamanca
• These writers in Spain continued
developing the ideas of the scholastics
and made innovations in monetary
economics
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The School of Salamanca–
Navarrus (1491 – 1586)
• As in the case of any other trade, moneychanging was okay as long as it earned
moderate wealth for the changer
• The price of a currency depended on availability,
need, uncertainty about the possibility of
debasement or even repudiation
• It was okay for a money changer to buy a
currency when it is cheap and to sell it when it is
expensive
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The School of Salamanca–
Navarrus (1491 – 1586)
• He provided a unified theory of supply and
demand to explain the prices of all commodities,
including money
– ‘all merchandise becomes dearer when it is in great
demand and short supply, and that money … is
merchandise and therefore becomes dearer when it is
in great demand and short supply.’
• This theory was used to explain the inflation in
Spain after the inflow of gold and silver from its
American colonies
• Navarrus and Jean Bodin (1530 – 1596) provide
the first statements of the crucial idea that
increases in the quantity of money lead to higher
prices
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The School of Salamanca–money
• Thomas de Mercado (? – 1585) explained why the gold
and silver in Spain eventually leaked out to other
countries
– The inflow of gold and silver from the American colonies led to
higher prices in Spain.
– So, the Spanish people used the gold and silver to buy foreign
goods.
– This outflow would continue till prices were equal in Spain and
elsewhere
– Laws prohibiting the export of metals would fail
• The idea that scarcity makes goods expensive (and
plenty makes them cheap) was known in ancient times
• Therefore, it is not surprising that Jean Bodin (1530 –
96), a French economist, also detected the link between
the availability of precious metals and inflation.
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England under the Tudors
• Sir Thomas Smith (1513 – 77)
– Explained the distinction between nominal and real
(inflation-adjusted) income
• especially the fact that people on fixed income are affected
by inflation, but not traders
– Noted that prices were rising even when goods were
plentiful and assigned currency debasement as the
reason for rising prices
• This highlights the idea that the supply and demand for
goods affects their relative prices, whereas the supply and
demand for money affects nominal prices
– Smith was a mercantilist in his views on trade policy
– But he had a clear understanding of how markets
worked and how prices were determined
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Conclusions
• Lawyers, officials, and other non-priests
were beginning to write on economic
issues
• As a result, the focus shifted from moral
issues to how economies actually worked
• Besides, the economies were becoming
more complex entities
• These factors led to progress in economic
thought
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