The book Englands Treasure by Forraign Trade written by Thomas Mun in the late 1620s, is considered a classic of English mercantilism. Englands Treasure has been used by many writers to show the so-called fallacies in the mercantilist literature. One crucial point of interest is the inconsistency between specie-inflow and price stability. To contemporary students of economic history there seems to be a self-contradiction within the aims of the mercantilists. Mercantilists sought a trade surplus which did not cause domestic prices to rise, but by the self-regulating mechanism, this cannot persist in the long run. As the problem is so obvious now, one may ask why this was not the case in the time of Thomas Mun. Both Mun and other writers were dealing with the elements of the self-regulating mechanism and yet they failed to deduce it. This essay is an inquiry into the causes of this manifest mystery.
I start with a short overview of the general meaning of the concept mercantilism, followed by a closer look at Muns writings concerning Treasure and Trade, which will lead to an explicit description of the dilemma. The causes of this contradiction are then explained. I conclude with a brief section on Muns contributions to economic theory.
This condemnation of the mercantilist writers went unchallenged for a century before first Gustav Schmoller, belonging to the German Historical School, and later, in England, W.J. Ashley and W. Cunningham, began to defend the mercantilist writings. Schmoller (1896) saw mercantilism as ...state making and national-economy making at the same time. Moreover, Schmoller argued that the principal content of the system was not the doctrine of money, nor the balance of trade, but the replacing of a local and territorial economic policy by that of the national state.[29] Thus, Schmoller saw economic policy as dependent on non-economic institutions and mercantilist policies as the remedies to achieve the desired ends.
Eli F. Heckschers Mercantilism condemned this emphasis on power. Heckscher saw mercantilism as a uniform body of doctrine built up on five different parts, where The Pursuit of Power was the most important. But that mercantilist writers, who were mostly merchants, should have been interested in power in itself seems questionable.
Heckschers work was used by John Maynard Keynes in his defence of mercantilism. Keynes thought that unemployment in the mercantilist era was similar to the technological and cyclical unemployment that exists in modern economies.[30] Keynes saw the mercantilist writers as being concerned with the employment situation and he argued that Mercantilist thought never supposed that there was a self-adjusting tendency by which the rate of interest would be established at the appropriate level. On the contrary they were emphatic that an unduly high rate of interest was the main obstacle to the growth of wealth. Keynes considered that the mercantilists, though they did not have a good grasp of the theoretical foundations, saw unemployment as the main problem. Their remedy was to lower the interest rate by increasing the quantity of money.[31] If there existed what is now called Keynesian involuntary unemployment[32] Keynes analysis makes good sense, but if another kind of unemployment prevailed, his analysis seems meaningless. Some writers state that unemployment in the mercantilists view was the result of indolence as in the theory of a backwardly sloped labour-supply curve.[33] Then the policy that would cure the Keynesian unemployment problem would not work in the latter situation, whether or not the mercantilists were concerned with unemployment. Therefore, their alleged concern with interest rate seems rather exaggerated, and one might see Keynes interpretation as ...merely another example of his penchant to appraise all previous theories in terms of his own and to generalise the problems of his own times throughout human history.[34]
Opinions about the mercantilist writings have changed, but the main features of mercantilism are the following: emphasis on bullion as the essence of wealth; regulation of trade to produce an inflow of bullion; promotion of domestic industry; duties on imports; encouragement of exports, in short, a favourable balance of trade. The fear of stocks, or simply, the fear of goods, was also a characteristic of the mercantilist literature as was an abhorrence of luxury imports.[35] Concern about usury is also described as a characteristic of mercantilism, but it was most common in the sixteenth century. There exist differences between the early and the later mercantilists, but one common thread is the tolerance of state intervention in economic matters.[36] Mercantilism can be seen as a kind of partnership between the King, government and the merchants.[37]
Mercantilist writers spoke of national advancement, but that this was a means to an end is sometimes forgotten. Some later writers are inclined to the opinion that mercantilism was ...a period of aggressive and irritable nationalism.[38] One could easily get the impression that Mercantilism is nothing but a tissue of protectionist fallacies foisted upon a venal Parliament by our merchants and manufacturers, grounded upon the popular notion that wealth consists in money, as Blaug interprets Adam Smiths view of mercantilism.
The question whether the mercantilists really equated money with wealth still occupies theorists of economic history, probably due to the fact that almost all mercantilists called for a trade surplus. But the hunt for treasure was brought about by the real drain of monetary supplies, especially in the early 1620s; the low exchange rates were the effect of an unfavourable balance of trade, not the cause.[39]
In chapter three Mun lists ways is which this can be done, the most important being:
1. To be self-sufficient in wares which are now imported;
2. By reducing the import of luxury goods;
3. In the export of goods the merchants must take into account both their own superfluities and their buyers necessities, i.e. selling prices must be flexible;
4. Encouragement of imports with the purpose of re-export;
5. Both export of wares and money; and custom-free export.
How these means were to be implemented, was not discussed. Yet there is a very interesting point in the chapter, namely the third recommendation above. In our exportations we must consider our neighbours necessities, that we may (besides the went of the Materials) gain so much of the manufacture as we can, and also endeavour to sell them dear, so forth as the high price cause not a less went in the quantity. But with regard to the superfluity of our commodities which strangers use, they may abate their vent by the use of some such like wares from other places...We must in this case strive to sell as cheap as possible as we can, rather than to lose the utterance of such wares. What is very clear here is that Mun recognised the principle of elasticity of demand (or a crude price theory) and he also recognised the factors which had influence on this.
Underlying the first chapters of Englands Treasure is a vague and many-sided concept of capital. In some parts it seems to be equated with money, but most often it comes close to the notion of financial capital,[41] as shown by the following. Mun writes concerning treasure that is brought into the country that can either be squandered or increased, that the function of a stock is to provide the country with foreign wares, and that its structure ...is either Natural or Artificial. A tentative conclusion is ...that portion of wealth which is used for purposes of trade represents stock. Mun looks at how specie export can increase the nations wealth, and he says the state should behave like private men, who having store of wares, do not therefore say that they will not venture out or trade with their mony but do also turn that into wares, whereby they multiply their Mony. Money must not be left idle; only by trading with money can the country grow rich because ...plenty of mony in a Kingdom doth make the native commodities dearer and ...for as plenty of mony makes wares dearer, so dear wares decline their use and consumption.... What is seen here is in fact a concept of capital where assets, through the medium of foreign trade are converted into claims upon foreign countries.[42]
To Mun the foreign exchange plays a merely passive role. What is crucial for the specie flow is the balance of trade. He states as plenty or scarcity of mony do make the price of the exchange high or low, so the over or under ballance of our trade doth effectually cause the plenty or scarcity of mony. A minor problem could arise here, what Mun is seemingly doing is to make the deviations of the exchange rate dependent upon the trade balance and making the specie flow, as an effect of these deviations, also dependent upon the trade balance.[43] This, of course, would be to perpetrate a tautology,[44] but that Mun is not making this mistake will be shown later.
Mun also claims that the only way to accumulate treasure is through an export surplus which must therefore be the aim of policy ...if we melt down our plate into Coyn...it would cause Plenty of mony for a time, yet should we not be richer . . .. Interestingly, Mun does not hold that monetary expansion is necessary for the growth of the economy; for we know that there was great trading by the way of commutation or barter when there was little mony. Mun, a former merchant in Italy, knew that Italian cities had used bills of debt instead of specie. It was possible to build up such a credit system because the treasure, was employed in the foreign trade. As mentioned above, the inflow of money was assumed not to cause rising prices.
But in the following chapter Mun writes or when the Merchant hath a good dispatch beyond the Seas for his Cloth and other wares, he doth presently return to buy up the greater quantity, which raiseth the price of our Wools and other commodities, and consequently doth improve the Landlords Rents as the Leases expire daily: And also by this means money being gained, and brought more abundantly into the Kingdom, it doth enable many men to buy Lands, which will make them dearer. Mun here praises rising prices resulting from a specie inflow; it seems that Mun forgets what he stated before, viz. that specie inflow should not cause rising prices.
There seems to be something wrong here. According to the self-adjusting mechanism of specie distribution[45] it seems that Mun apparently is making a self-contradiction. In fact it is very strange that Mun is advocating a balance of trade surplus, knowing that specie inflow can increase the domestic price level, but on the other side does not grasp the self-adjusting mechanism. All the elements of the mechanism are there.
A second explanation is that Mun deliberately ruled out all monetary considerations to enable him to defend the East India Company, of which he was a director, from attacks on its specie export.[47] But there are several problems with this explanation. First, it supposes that Muns purpose in Englands Treasure was only a defence of the Company. Surely parts of it were, but as a whole I think this was not the case. Secondly, with no monetary considerations Mun is then said to have deliberately confused specie with wealth, seeing bullion inflow as an end in itself. Neither of these points can be accepted as I have shown above.
A third explanation for Muns failure to recognise the self-adjusting mechanism is that he missed one of the following steps which were necessary to repudiate the mercantilist doctrine.[48]
1. Statement that the volume of exports and imports depends on the relative domestic prices.
2. Acknowledgement that international balances must be paid in specie.
3. Acceptance of a quantity theory of money.
4. Integration of the first three parts into a coherent theory of a self-adjusting mechanism;
5. Realisation that this destroyed the mercantilist doctrine.
Which of these stages did Mun fail to recognise? The two first propositions do not present any problems. The first was rejected by no mercantilist and the second was a part of the balance of trade doctrine. The third proposition seems, as already stated, also to be recognised by Mun. Some later writers hold that what Mun had in mind was not, in fact, the quantity theory of money but the equation (identity) of exchange.[49] The quantity theory links money to prices where the volume of trade will be determined by real forces, and the velocity of money depends on payment habits and economic institutions. But the equation of exchange, which is true by definition, states that the amount of money in the economy must be enough to finance the total volume of all economic activity. Mun suggested that an increase in the money stock would increase the total volume of activity without an effect on prices, and hence without a reduction in exports. Muns argument was that the bullion inflow would lead to a decline unless the inflow was used as capital to finance a greater volume of trade. This may be the case in the short run, but not in the long run; we see the dilemma once again. So, the failure to grasp the self-adjusting mechanism occurs because Mun did not recognise the correct relationship between the quantity of money and prices. Although he wrote It is a common saying, that plenty or scarcity of mony makes all things dear or good or cheap he saw it more as an empirical statement than as an analytical proposition and therefore it was not integrated into his thought.[50] It is clear why he did not put together a coherent theory that would have destroyed the former doctrine.
There is more to be said on Muns recognition of the quantity theory of money, because a problem arises in distinguishing between the short run and the long run. Some later writers assert that if Mun believed the (correct) quantity theory of money and if he believed that demand for English goods was elastic, he must further have assumed a constant re-export of an ever-enlarged volume of specie inflow which is necessary to prevent domestic prices from rising and thereby limiting the export surplus.[51] But two important objections can be made to this. First, the employment of the specie was probably meant to be in entrepot trade, rather than in the manufacture and export of English goods. Secondly, the self- adjusting mechanism is not the appropriate tool to be used as in the short run it is not valid. The mercantilists were justified by the circumstances of the day, and most interpret them as considering that the risk of inflation was worth bearing for the sake of more economic activity, due to plenty of capital.[52] It was therefore natural for Mun not to adopt the self-adjusting mechanism.
The mercantilists, and especially Mun, were concerned with actual economic conditions. Their writings have to be judged by the circumstances of the day and not by the scientific and elaborated knowledge present to later writers and critics. Therefore Mun was neither self-contradictory nor inconsistent.
Whether or not one agrees with the conclusions in this essay one must admit that Thomas Mun contributed significantly to economic theory, and that the development and elaboration of the self-adjusting mechanism could have taken a very different course if it were not for his contribution.
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