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econ434notes6 - History of Economic Doctrines Lecture 6...

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History of Economic Doctrines Lecture 6 Economics Prior to Adam Smith (cont.) Mercantilism: [ England and Spain, etc., before Hume and Smith] Mercantilists, who were primarily merchants who fancied themselves economic philosophers of empire; thought that the path to wealth was collecting gold. Mercantilists made a logical error in not anticipating the fallacy of composition (what is true for a part, may not be true for the whole: [Ex. you may be better off if you have more gold, but if everyone has more gold, no one is better off.]. Most mercantilists: 1. believed that a balance of trade should be aimed at surpluses, which then allowed a country to accumulate gold. 2. contended that a country should always export more than it imported[X>M]; negating competitive advantage. 3. also believed in colonialism and imperialism. 4. supported the divine right of kings to govern and substantial central planning. * The Transition from Mercantilism to Advocacy of Laissez Faire Markets Sir William Petty [1623-1687] William Petty, physician, royal counselor, empiricist, and entrepreneur, was born poor, but at one point, he was probably the richest man in the world – on paper. Although he lived in an era dominated by mercantilism and shared some mercantilist ideas, his economic theories were far more insightful and sophisticated than those proposed by most mercantilists. Petty condemned most of the conventional wisdom of his time and most of the arguments offered by his contemporaries as “… using only comparative and superlative words and
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intellectual arguments.” In contrast, Petty insisted that economic discussions should be centered in measured quantities, and strove to accumulate the best data available to buttress his analysis. For example, because he thought the relative populations of Ireland, Scotland, England, and France to be important in determining wise national policies, he was a driving force in the development of vital statistics [data on birth rates, death rates, and other demographic data]. He also insisted on collecting data on revenues and trade, and was arguably the first person to attempt measurement of balances of payments and what we now call gross domestic product. Petty was an amazing personality, who combined superb mathematical intuition with practical skills that enabled him to reach the corridors of power in both his native England and in France. He was, for a period, in charge of the Royal Treasury of France after Louis XIV’s government teetered on the brink of bankruptcy, and can be thought of as a major force in the development of partial reserve banking. Alas, an enormous speculative bubble set off by Petty’s policies ultimately burst, so that Petty’s attempts to straighten out France’s fiscal woes ultimately failed.
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