ec120 week 05, topic 4, slide 0 commercial expansion: mercantilism and finance topics: trade,...
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EC120 week 05, topic 4, slide 1
Commercial expansion: mercantilism and finance
Topics:• Trade, plunder and settlement (c1600−c1800)• Economic rivalry among European states• Dutch trading empire• Mercantilism: doctrines and their assessment• Institutional transformation: Britain• Mercantilism as Rent Seeking• Finance and Capital: Historical Overview• Financial Revolution• Joint Stock companies
EC120 week 05, topic 4, slide 2
Trade, plunder and settlement (c1600−c1800)
• From c1600, focus of world trade shifts west, towards the Atlantic
• International commercial relations dominated by geopolitical conflict
• Traded goods: mainly high value/weight products
• Price gaps, between source & destination, remained wide
EC120 week 05, topic 4, slide 3
Emergence of nation-states in Europe
• Gradual decline in arbitrary exercise of power
• Evolution of nation states: (a) common culture in well-defined boundaries, (b) sovereign tax authority, (c) monopoly of coercive power
• Fragile balance of power among Europe rival states
EC120 week 05, topic 4, slide 4
Economic rivalry among European states
• Spain: declining in economic power in 17C and 18C
• France: became a powerful, absolutist nation-state
• Holy Roman Empire: small states, conflicting loyalties
• Eastern Europe dominated by Prussia, emerging Russia & declining Ottoman Empire
• Scandinavia: dominated by Sweden, sparsely populated
EC120 week 05, topic 4, slide 5
Dutch trading empire• Early prosperity based on textiles and North Sea
trade
• Economically efficient relative to rest of Europe
• Merchant marine in 17th century became dominant
• International power waned in 18C: rivalry with France & Britain
EC120 week 05, topic 4, slide 6
Mercantilism: the doctrines• Diverse, practical, interventionist state policies
• Aim: promote the national interest
• Objective: accumulate gold & silver
• How? Favourable balance of trade
• International trade (and relations): a zero sum game
Institutional transformation: Britain
• The Glorious Revolution, 1688/9 – Confirmed Parliamentary supremacy,
against absolute monarchy
• Economic significance commonly dismissed
• Revisionist view: the revolution did matter. Why?• Changed the balance of power
– Party politics, not the King’s agenda– Whig domination
EC120 week 05, topic 4, slide 7
EC120 week 05, topic 4, slide 8
British mercantile policies
• Evolves from regulation to taxation
• Grants of monopoly and privileges to restrict competition– Favour employers (masters) over workers
(servants)– Local enforcement, mainly urban; – Rural areas less regulated
• Monarchy v. Parliament resolved in favour of Parliament– Civil war, 1642-49;
Glorious Revolution 1688–89
EC120 week 05, topic 4, slide 9
Mercantilism: assessmentFavouring mercantilist policies:• Necessary to enable transition to capitalism• Aided emergence of nation-states• Temporary policies support “infant industries”.
Against:• Mercantilist policies restrict growth of trade
– Hence restrict prosperity (income)
EC120 week 05, topic 4, slide 10
Mercantilism as Rent Seeking
• Distinguish between: (a) economic efficiency and (b) distribution of wealth
• Mercantilist policies -> “surplus” = “rent” = “profit”
• “Rent seeking” is the quest to capture the surplus
• Result: redistribution of wealth and economic inefficiency
• Even worse: rent seeking rivalry can dissipate the surplus
EC120 week 05, topic 4, slide 11
Finance and Capital: Historical Overview
• Of ancient origin: loan contracts, money (typically coins)
• From medieval times (to 17C):
– Expansion of banking for trade credit
– Usury laws restricted/prohibited interest on loans
– Expanding land market
EC120 week 05, topic 4, slide 12
Financial Revolution from late 1600s
• Driven by British and Dutch for Govt funding
• Parliamentary ascendency restrains arbitrary action
• Improved administration of tax gathering
• `Secondary’ markets expanded for:Gilt-edged stock and Joint-stock companies’ shares
EC120 week 05, topic 4, slide 13
Joint Stock Companies
• Emerged from medieval associations and guilds
• Main stimulus: growth in overseas trade
• Joint stock form enables – large amounts of capital to be
amassed, – risk-sharing among investors, – transferable stock
• Vulnerable to manias and panics