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Tuesday, June 05, 2007

Early Mercantilist Writing on Value and Profits

This is something I want to have in the archives. It discusses economic thought during the early mercantilist era:

[Hunt, E.K., History of Economic Thought: A Critical Perspective, Ch. 2]

Economic Ideas before Adam Smith In the early mercantilist period, most production was carried on by workers who still owned and controlled their own means of production. Capitalists were primarily merchants, and their capital consisted mostly of money and inventories of goods to be sold. It was only natural, therefore, that mercantilist writers looked to exchange, or buying and selling, as the source of profits. These profits were, of course, exchanged for commodities that constituted a portion of the surplus. But the merchants' share of the surplus was not, in this early period, acquired through control of the production process. The feudal lords still generally controlled production and expropriated the surplus. The result of exchange between the merchants and the lords was a sharing of the surplus by the two groups. Therefore, from the merchants' point of view it was exchange and not production that generated their profits.

Merchant capital consists of ownership of the means of buying, transporting, and selling, while industrial capital consists of ownership of the means necessary for producing. During this period industrial capital was still rather insignificant and inconspicuous, while merchant capital was widespread and significant. It was not, therefore, mental or theoretical inadequacy that caused mercantilist writers to look to buying and selling rather than production as the source of profits. Their ideas reflected the economic realities of the era in which they were writing.

Early Mercantilist Writing on Value and Profits Profit accrues to merchant capital when the price at which the merchant sells a commodity is sufficiently high to cover the price the merchant pays for the commod­ity, plus his expenses of handling, storing, transporting, and selling the commodity, plus a surplus over and above these costs. This surplus is the merchant's profit. Therefore an understanding of the determinants of the prices at which commodities were bought and sold was central to an understanding of the merchant's profits.

Earlier medieval thinkers had asserted that the price of a commodity had to be sufficient to cover a craftsman's direct costs of production and to yield the craftsman a return on his own labor sufficient to maintain him in the style of life traditionally deemed appropriate for craftsmen. In other words, prices were determined by the costs of production, including an imputed, appropriate remuneration for the labor of the craftsmen.[1]

The early mercantilists generally abandoned this cost-of-production approach to the understanding of prices and focused on the point of sale to analyze exchange values. One scholar of mercantilist ideas has concluded that, despite a wide range of differences on specific issues, there are three important notions that run through most early mercantilist writings on value theory. First, the "value" or "natural value" of commodities was simply their actual market price. Second, the forces of supply and demand determined market value. Third, mercantilist writers frequently discussed "intrinsic value" or use value as the most important factor determining demand, and hence as an important causal determinant of market value.[2]

Nicholas Barbon, one of the most important of the mercantilist writers, summed up these three points in his pamphlet, A Discourse on Trade:

1. The Price of Wares is the present Value. ... The Market is the best Judge of value; for by the Concourse of Buyers and Sellers, the Quantity of Wares, and the Occasion for them are Best Known: Things are just worth so much, as they can he sold for, according to the Old Rule, Valet Quantum Vendi Potest.

2. The Price of Wares is the present Value, and ariseth by Computing the occasions or use for them, with the Quantity to serve that Occasion. . . . It is impossible for the Merchant when he has Bought his Goods, to know what he shall Sell them for: The Value of them, depends upon the Difference Betwixt the Occasion and the Quantity; tho' that be the Chiefest of the Merchants Care to observe, yet it Depends upon so many Circum­stances, that it's impossible to know it. Therefore if the plenty of the Goods, has brought down the Price, the Merchant layeth them up, til the Quantity is consumed, and the Price riseth.

3. The Value of all Wares arise from their Use; Things of no Use, have no Value, as the English Phrase is, They are good for nothing. The Use of Things, are to supply the Wants and Necessities of Man: There are Two General wants that Mankind is born with; the Wants of the Body, and the Wants of the Mind; To supply these two Necessities, all things under the Sun become useful, and therefore have a Value. ...The Value of all Wares, arriveth from their Use; and the Dearness and Cheapness of them, from their Plenty and Scarcity.[3]

Barbon's pamphlet was written at a time during which economic attitudes were beginning to undergo rapid change. The passages just quoted reflect the attitudes of the earlier mercantilist who saw profits as originating primarily in the act of exchange.

Their profits came largely from two sources. First, the inflation of the sixteenth and seventeenth centuries (discussed in the previous chapter) had created a situation in which there was generally a substantial appreciation of the value of the inventories held. Between the time at which the merchants purchased commodities and the time at which merchants sold them, the increases in the prices of these commodities re­sulted in windfall profits. Second, and more importantly, the differing conditions under which production took place in various regions of a country or various parts of the world, combined with the fact that there was very little mobility of resources, technology, and labor between these regions, resulted in substantially different rela­tive prices of commodities in the various regions or countries. Merchants would buy a commodity in a region or country in which it was relatively inexpensive and sell it in a region or country in which it was relatively expensive.

Under these conditions, it is not surprising that merchants should have conceived of the value of a commodity in terms of its market price rather than its conditions of production. Moreover, it was only natural for them to see differences in market prices as resulting from differences in the willingness or desire to purchase particular com­modities. Supply entered the picture only to the extent that the merchants saw that with a given level of desire to purchase a commodity, the price of a commodity would be high if this commodity was in short supply and low if its supply was abundant. It was for this reason that the large merchant companies sought state-created and en­forced monopolies.

Competition among merchants inevitably led to a reduction in relative price differences and hence to a reduction of their profits. If a particular commodity com­manded a very high price in a particular region, then the merchant who bought this commodity at a low price and transported it to this region would make a larger profit. This profit, however, would inevitably act as a lure inducing other merchants to sell the same commodity in the same region. But more merchants would mean a larger supply, which would lead to a lower price and lower profits. Thus, the great merchant companies went to great lengths to exclude competitors and to maintain their monopolistic privileges.

It appeared to the early mercantilists that control over the conditions affecting the supply of commodities was the principal means by which high profits could be attained and perpetuated. But the early mercantilist period had not yet experienced the change in social attitudes that was later to condone and justify the ceaseless quest for profits simply for the sake of profits. Governments' motivations and ra­tionalizations for their policies of promoting merchant profits were very different from those motivations and rationalizations that were to be characteristic of capitalist gov­ernments in the nineteenth and twentieth centuries.

In the early mercantilist period there was an ideological continuity between the intellectual defenses of mercantilist policies and the earlier ideologies that supported the medieval economic order. The latter relied on a Christian paternalist ethic that justified extreme inequalities of wealth on the assumption that God had selected the wealthy to be the benevolent stewards of the material welfare of the masses.[4] The Catholic church had been the institution through which this paternalism was effec­tuated. As capitalism developed, the church grew weaker and the governments of the emerging nation-states grew stronger. In the early mercantilist period, economic writers increasingly came to substitute the state for the medieval church as the institu­tion that should oversee the public welfare.

During the reign of Henry VIII, England broke with Roman Catholicism. This event was significant because it marked the final secularization (in England at least) of the functions of the medieval church. Under Henry, "the state in the form of God's monarchy assumed the role and the functions of the old universal church. What Henry had done in his own blunt way was to sanctify the processes of this world.”[5] During his reign as well as the reigns of Elizabeth I, James I, and Charles I (1558-­1649), there was widespread social unrest. The cause of this unrest was poverty; the cause of much of this poverty was unemployment; and the cause of much of this unemployment was the enclosure movement.

Another factor, however, was the decline in the export of woolens in the second half of the sixteenth century, which created a great deal of unemployment in England's most important manufacturing industry. There were also frequent commercial crises similar to, but without the regularity of, the depression phase of later business cycles. In addition to these factors, seasonal unemployment put many workers out of work for as many as four months of the year.

The people could no longer look to the Catholic church for relief from widespread unemployment and poverty. Destruction of the power of the church had eliminated the organized system of charity, and the state attempted to assume responsibility for the general welfare of society. In order to do this, "England's leaders undertook a general, coordinated program to reorganize and rationalize ... industry by establish­ing specifications of standards of production and marketing."[6] All these measures were designed to stimulate English trade and alleviate the unemployment problem.

In fact, it appears that the desire to achieve full employment is the unifying theme of most policy measures advocated by mercantilist writers. The mercantilists pre­ferred measures designed to stimulate foreign rather than domestic trade "because they, believe it contributed more to employment, to the nation's wealth and to national power. The writers after 1600 stressed the inflationary effect of an excess of exports over imports and the consequent increase in employment which inflation produced.”[7]

Among the other measures taken to encourage industry during this period was the issuance of patents of monopoly. The first important patent was granted in 1561, during the reign of Elizabeth I. Monopoly rights were given in order to encourage inventions and to establish new industries. These rights were severely abused, as might be expected. Moreover, they led to a complex system of special privileges and patronage and a host of other evils, which outraged most mercantilist -writers every bit as much as similar abuses Outraged late-nineteenth-century American reformers. The evils of monopoly led to the Statute Of Monopolies of 1624, which outlawed all monopolies except those that involved genuine inventions or that would be instrumen­tal in promoting a favorable balance of payments. Of course, these loopholes were large, and abuses continued almost unchecked.

The Statute of Artificers (1563) specified conditions of employment and length of apprenticeships, provided for periodic wage assessments, and established maximum rates that could be paid to laborers. The statute is important because it illustrates the fact that the Crown's paternalistic ethic never led to any attempt to elevate the status of the laboring classes. Monarchs of this period felt obliged to protect the working classes but, like their predecessors in the Middle Ages, believed those classes should be kept in their proper places. Maximum wage rates were designed to protect the capitalists, and furthermore, the justices who set these maximums and enforced the statute generally belonged to the employing class themselves. It is probable that these maximums reduced the real wages of laborers because prices generally rose faster than wages during the succeeding years.

Poor laws passed in 1531 and 1536 attempted to deal with the problems of unemployment, poverty, and misery then widespread in England. The first sought to distinguish between "deserving" and "undeserving" poor; only the deserving poor were allowed to beg. The second decreed that each individual parish throughout England was responsible for its poor and that the parish should, through voluntary contributions, maintain a poor fund. This proved completely inadequate, and the pauper problem grew increasingly severe.

Finally, in 1572 the state accepted the principle that the poor would have to be supported by tax funds and enacted a compulsory "poor rate." And in 1576 "houses of correction" for "incorrigible vagrants" were authorized and provisions made for the parish to purchase raw materials to be processed by the more tractable paupers and vagrants. Between that time and the close of the sixteenth century, several other poor-law statutes were passed.

The Poor Law of 1601 was the Tudor attempt to integrate these laws into one consistent framework. Its main provisions included formal recognition of the right of the poor to receive relief, imposition of compulsory poor rates at the parish level, and provision for differential treatment for various classes of the poor. The aged and the sick could receive help in their homes; pauper children who were too young to be apprenticed in a trade were to be boarded out; the deserving poor and unemployed were to be given work as provided for in the act of 1576; and incorrigible vagrants were to be sent to houses of correction and prisons.[8]

From the preceding discussion it is possible to conclude that the period of English mercantilism was characterized by acceptance, in the spirit of the Christian paternalist ethic, of the idea that "the state had an obligation to serve society by accepting and discharging the responsibility for the general welfare.”[9] The various statutes passed during this period "were predicated upon the idea that poverty, instead of being a personal sin, was a function of the economic system.[10] They acknowledged that those who were the victims of the deficiencies of the economic system should be cared for by those who benefited from it. ...


[1] See Ronald L. Meek, Studies in the Labour Theory of Value, rev. ed. (New York: Monthly Review Press, l7"6), pp. 12-14. Much of the first part of the present chapter relies heavily on chapter I in this very fine book.
[2] ibid., p. 15.
[3] Quoted ibid., pp. 15-16.
[4] See E. K. Hunt, Property and Prophets (New York: Harper & Row, 1975), pp. 8-11.
[5] William Appleman Williams, The Contours of American History (New York: Quadrangle, 1966),p. 36.
[6] Ibid., p. 40.
[7] William D. Grampp, Economic Liberalism, 2 vols. (New York: Random House, 1965), 1:59.
[8] For an extension of this discussion of the poor laws, see Arthur Birnie, An Economic History of the British Isles (London: Methuen, 1936), chaps. 12, 18.
[9] Williams, Contours of American History, p. 41.
[10] Ibid., p. 44.

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