B416: The Evolution of Global Economies

Lecture 3 : Bullionism & Mercantilism Part 2 + John Maynard Keynes

Learning Outcomes

By the end of this lecture, you should understand the following:

• Protection of mercantilism (regulation)

• European, American and African trade routes

• American Revolution

• American colonies

• English Navigation Laws

• Mercantilism and industrilaisation

• Enforcement of mercantilism & Taxation

• Arguments for and against mercantilism

• Colonial Vs British perspective

• Work of John Maynard Keynes

2

Protection in Mercantilism 1a) Forms of Protectionism:• import quotas, or import bans• export subsidies• tariffs and excise duties on imported goods: • Navigation Laws

b) Goals of Protectionism in early-modern Mercantilism• Ensure a ‘favourable balance of trade’: • Promote industrial and economic growth• belief in national gains from ‘value added’ • Promote Δ employment • Promote national power• Promote Import Substitution industries

c) Importance of Overseas Colonies:• potential source of precious metals• exclusive source of vital raw materials • guaranteed markets • promote population growth

Protection in Mercantilism 2The English Navigation Laws:• Parliamentary legislation on both shipping and foreign trade:

– to exploit overseas colonies for sole benefit of England – to promote growth of English shipbuilding – to cut the Dutch out of English trade & shipping– to promote a ‘favourable balance of trade’

• England’s major Parliamentary legislation:– 1651: Navigation Act (Cromwell)– 1660: Navigation Act (Charles II)– 1663: Staple Act (Charles II)– 1673: Navigation Act (Charles II)

• Chief provisions of the Navigation Acts– all trade between England and its colonies– Enumerated Articles list– English foreign trade: all imports and exports to be conducted solely on English or colonial ships

• Subsequent series of acts to reserve North American markets exclusively to English manufacturers

• Consequences of the Navigation Acts:– success in promoting English shipbuilding and shipping disputed– my personal view (despite supporting Free Trade)– these laws, and French navigation laws, etc. , did have a negative impact on Dutch shipping by 18th

century– Impact on the American colonies: plus and minus

The American Revolution (1776-83) 1

• American colonists angered by restrictions on their trade and industry: wanted to trade directly with French & Spanish colonies

• British enforcement acts: for sugar trade, tea– Molasses Act of 1733: heavy duties on imports of foreign sugar– Sugar Act of 1764: banned direct trade with the French – Tea Act of 1773: gave British East India monopoly on tea sales in North

American markets Boston Tea Party of 1773

• Taxation: requiring colonists to help pay for their own defence: i.e., pay for British troops stationed there Δ American resistance revolt

• American Revolution: ended the era of the Navigation Laws (which remained on the statute books until 1849)

• But North America still remained within British commercial orbit: took a third of British exports in 1798 : see the table

The American Revolution (1776-83) 2

Colonies

Colonies helped nations grow rich in several ways.

• They provided various raw materials

• They provided mines that produced gold and silver.

• They served as markets for goods made in the home country.

• Trade expansion enabled English manufacturing base to grow and it necessitated an enlarged merchant fleet.

• Additional bases for the royal navy (i.e. outposts).

• As suppliers of raw materials only, the colonists could not compete with England in manufacturing (unless the goods could not be produced in England).

Mercantilism and Industrialization

a) Emphasized the key importance of industrial manufactures, but in full accordance with their belief that foreign trade was the true source of wealth (bullion) & power

b) “Valued-added”: A country gains more from exporting fully finished manufactures than from exporting raw materials: e.g., England’s shift from being wool exporter to a cloth exporter

c) Specific measures to promote the industrial manufacturing sector:– tariff-free imports of all raw materials

– subsides or bounties for some industrial exports

– tariff or import-quota protection against imports of foreign manufactures

d) Create tariff-protected import-substitution industries– “Infant industries” argument (already seen): tariff protection to allow

industries to grow achieve sufficient economies of scale to compete

– such industries enabled the country to avoid spending ‘treasure’ on imports, even if they failed to become competitive abroad

Regulations to Support Mercantilism

• To encourage certain types of manufacturing, the British government subsidized producers of those products, thus making them more profitable to sell or more affordable to buy.

• The British government also granted monopoly status to producers of certain commodities (e.g. British East India Co.)

• In short, the government’s taxing/spending authority was used to encourage/discourage certain behaviors and economic activities.

Enforcement of Mercantilism

• Navigation Acts

– Keep colonies dependent on mother country -> maximize profit

• Restrictions on buying

– Buy only from Britain; duties on foreign goods

• Restrictions on selling

– Could only ship/sell to Britain (enumerated goods)

• Restrictions on shipping

– All trade only on British ships, all goods shipped through England, crews must be ¾ English

• Restrictions on manufacturing

– Prohibited in colonies: keep colonies dependent on Britain, prevent competition (monopoly)

The Act of 1663 was passed by Parliament.

"No Commoditie of the Growth Production or Manufacture of Europe shall be imported into any Land Island Plantation Colony Territory or Place to His Majestie belonging . . . but what shall be bona fide and without fraude laden and shipped in England Wales [and] the Towne of Berwicke upon Tweede and in English built Shipping."

The intentions behind the act.

Staple Act

The Usual method for tax collection

These collectors were susceptible to a more lucrative kind of graft:• Violations of the Sugar Act were

punishable by seizure of the offending vessel and cargo

• Both would be sold and the proceeds divided into thirds:o 1/3 to English treasuryo 1/3 to colonial governoro 1/3 to customs officer

responsible for seizure• To an enterprising officer bent on

amassing a fortune, the prospect of making as many seizures as possible was inviting

• Perceived as a racket to colonists

Issues of Taxation

Colonists British

Importance of property: Source of life (subsistence/food/resources)Source of liberty (self-reliance, self

subsistence, Independence of other men)

w/o property, people could be starved into submission; if liberty rested on property, a threat to property was a threat to libertyLocke’s theory: property must not be taken w/o people’s consent given either in person or by their representatives.Taxes were a gift, given by the people through their representatives; taxes were legitimate only in a representative system; and even then, they only apply to those constituents who were actually represented.No taxation without representation; they fact they were not represented in Parliament should exempt them from “the burden of ungranted/involuntary taxes(colonists asserted this as a privilege/right).

Seven Years War against France doubled English national debt.British people of the British Isles already saturated with taxes while colonists taxed very little (colonists were only paying ¼ taxes the British in the British Isles were paying during the height of taxation.(Idea of relieving their own burdens by taxing the colonists).During the period of benign/salutary neglect; the colonies had prospered (bountiful resources & availability of land)By 1750’s Avg. American was better off socio-economically than anywhere in the world.If the colonists could afford to bribed the customs agents, surely they could afford to pay the miniscule tax (i.e. they could afford to pay).

Issues of Taxation

Colonists British

As a matter of principle, how could property remain secure if it could be taken away at the pleasure of another?Colonists viewed the taxes as a means of collecting in America $ which would benefit only the constituents of the Parliament that levied the tax.The authority to tax was reserved exclusively to assembly of their own elected representatives; Parliament had no authority to tax colonists at all.Colonists pointed out that the British System obviously reflected this b/c taxes could only originate in the House of Commons. Theory of virtual representation only applied to Great Britain b/c there, even though many people had no right to vote, they were still bound to the voting population/ representatives by similar interests; on the other hand, the interests of the colonists (3,000 miles away) were apt to be the opposite of the British people in the British Isles and wholly incapable of expression through virtual representation.Also opposed actual (direct) representation as a matter of principle; even with actual representation, colonial representatives would be a minority within Parliament and therefore would still be out voted on matters where colonial—British interests came into conflict.Colonists were not/could not be represented in the House of Commons

If the colonists were going to benefit from the protection of the royal navy, they should share in the burden.(i.e. they should pay)Power to tax belonged exclusively to Parliament; most important feature of its supremacy over the king and the most important guarantee of English liberty.Agreed that English liberty forbade laws/taxation w/o consent, but asserted that no such thing was involved in any of the acts (Sugar Act, etc…)Theory of virtual representation:British officials pointed out that limited suffrage in England meant most British subjects in the British Isles were not actually represented either; both these home subjects and the colonists were, however, represented by each and every member of Parliament which as a collective body represented the entire empire(in reality; members of Parliament were generally provincial)

Did mercantilism help the Colonies?• Protection from foreign competition helped New England's ship

building industry.

• Individual colonies benefited by specializing.

• Various colonial exporters benefited when they exported to Britain because competing goods from foreign nations were subject to tariffs theirs were not.

• The colonies were easily made into “international traders” because of the British Empire.

• Bounties: incentive payments to encourage production of highly desired goods (tobacco)

• Steady market for raw materials & cash crops

• Defense -> protect colonies

• Shipbuilding industry developed in colonies

Arguments against Mercantilism• The Navigation Act severely restricted colonial trade to

the benefit of England.

• On the other hand, colonists paid more than they otherwise would have for imports from foreign countries (Tariffs)

• Southern planters, particularly rice and tobacco planters, bore much of the burden, because most Southern exports went there, while smaller shares of the other two regions' exports went there.

• New Englanders often evaded this cost through trading with foreign countries illegally (this situation wasn’t helped by the fact that customs officers were often bribed to look the other way).

Tension Develops

• Limited profits of colonists (threatened prosperity)

• Foreign goods more expensive (taxes)

• Colonists resentful of restrictions

• Colonists treated as inferiors –“colonials”

Page 20

John Maynard Keynes (1883-1946)

The father of Macroeconomics.

Wrote “The General Theory of Employment, Interest and Money” during WWII”.

“Ideas shape the course of history”.

Major Achievements

• Helped in the economy’s recovery during the Great Depression

• Influenced the general economic boom by Western Nations between 1945-1975

• Formed the basis of Keynesian economics

• Introduced the Macroecomics theory. He believed that government spending could pull an economy out of recession.

• His theory still applied and relevant after the 2008 banking crisis.

Key features 1

• Treatise on Money, was published in 1930 in two volumes.

• The core idea - if the amount of money being saved > the amount being invested , then unemployment will rise.

• This is in part a result of people not wanting to spend too high a proportion of what employers pay out, making it difficult, in aggregate, for employers to make a profit.

Key features 2

• Keynesian Economics: Howe does it differ from the Classical Economics? GDP = the sum of consumption, investment, government spending and the new export.

• Employment can be enhanced by increased spending• Total savings of the society are determined by the total

income• It is essential that the Government stimulate the

demand in times of high unemployment and decrease spending in times of economic security.

• Control Tools at Government’s disposals. For stimulus –government spending via public works, defence spending, entitlement programs etc. For deterrence –taxation. He also established that if savings > investment (if interest rates are too high), then unemployment will rise.

Background 1• The Great Depression - Period of high rates of

unemployment• He advocated interventionist economic policy• Urged government to use financial and monetary

measures to reduce the adverse effects of business cycles, economic recessions, and depressions

• Spend on public works like programs to promote employment

• He outlined the limitations of Microeconomics theory. Due to unemployment and poverty, the demand for good and services dropped. Many workers were unwilling to accept lower wages

• Studies the individual parts of economy, the household and the firms, make decisions to allocate limited resources. How good or services are bought and sold.

Background 2• High unemployment rate greatly influenced the development of

macroeconomics.• Challenged the established neoclassical economics with the

Introduction of important concepts such as: – Consumption– Multiplier– Marginal efficiency of capital– Liquidity preference – End of Government's responsibility is to NEOCLASSICAL– Reach and maintain full employment THEORIES!– Regulate markets and free trade such as Laissez-faire

• Keynesian Economics Impact: – Aid in the formation of the 20th Century’s economy– Consequences of the Great Depression were lessened– Government took an active role in the country's economy

(Departure from neoclassical theories)

Critique• Why did the Keynesian theory didn't work?

• Government spend too much money on post-WWII events. Examples: Vietnam war, sending the first man to the moon

• The Keynesian solution stopped working

• Unemployment became worst

• It created Inflation

• In conclusion Keynesian theories work best on economics catastrophes

And Now…Work Outside the Lecture

Preparation

For

Padagogic

Style

Preparation

Time Budget

Individual

TaskGroup Task Output Week 3 Preparation Activity

Read Chapter 1 to Chapter 4 + Chapter 10 from

Core Text Book: The Age of the Economist

An outline of the history of economic thought by

SCREPANTI & ZAMAGNI, Section 1 to 3 + Section

9

Seminar 3 30 Minutes Read above Material + Seminar material

Workshop 3 1 HourOnline Collaboration Activities relating Group

Presentation in Week 6

2 HourLecture 3

End of presentation

© Pearson College 2013