Mercantilism Continued: Labor and the “Utility of Poverty” and the Defenders of Mercantilism
Besides the main argument regarding hard money and wealth, Mercantilism also had other elements which dealt with wages, labor and poverty. It depends upon which "strand" of mercantilism you look at.
Utility of Poverty idea is that there is "utility" or benefit from some of the population remaining in poverty!
The maintenance of low wages and a growing population often show up in the literature. Why?
Remember that the Mercantilists did not want idle domestic workers. They wanted productivity at home to export abroad. In a sense they wanted to make sure there was a "lower paid class" of workers that would continue being productive.
So there were:
1. the desire to maintain a skewed income distribution as well as
2. the belief in the backward bending supply curve of labor - the curve was not developed yet but the theory was (although not on the level of substitution and income effects);
This
“Utility of Poverty” theory was supported by the belief in the
backward-bending supply curve of labor.
Given
that Q
or Y=f(k,L)
Qls=f(w/p)
where:
Q =
k =
L =
Qls =
w/p =
Substitution Effect: Labor/leisure trade-off.
Income Effect would outweigh the
After
wages reached a certain point -
additional leisure would be preferred over additional income.
Major Critique (of the income effect): This theory is flawed in the sense that if workers worked less then output would fall, prices would go up - which would decrease real wages…pulling people back into work.
So the two effects are not mutually exclusive.
This
idea appears and reappears in the history of economic thought.
Some examples of the Utility of Poverty -
Edgar Furniss called the “Utility of Poverty,” in The
Positioning of the Laborer in a System of Nationalism, labor should be kept
at the margin of subsistence…
“Suffering is therapeutic”
And
high wages would only lead to moral decay in the lower classes!
Therefore:
a. they wouldn't work as much due to the higher wages - backward bending supply curve of labor
b. they wouldn't work as hard because more money would only make them do bad things - go to bars, spend their money on immoral things
Poverty
made them industrious…so they were “better off.”
Unemployment
was voluntary.
Or consider
Mandeville -
argued that children of the poor and orphans should not be given an education at
public expense but should be put to work at an early age.
Education ruins the “deserving poor.”
Under
Colbert
in France -
he favored a large, hard-working, and poorly paid population.
No
child was too young to enter industry—and the state should enforce
child labor.
He
remarked in 1665 “experience has always certainly shown that idleness in
the first years of a child’s life is the real source of all the disorders in
later life.”
In
1668 he commanded that all the inhabitants of Auxerre send their children into
the lace industry at the age of six, or pay a penalty of 30 sous per child.
He
regarded monks, nuns, lawyers and officials as unproductive idlers and tried to
reduce their number.
Interesting
Tax Policy: In 1666 people were exempted from taxes for a number of years
if they married early.
Every father of ten living children was also exempted from taxes.
Interestingly enough, sons who died in the armed forces were counted as
living -
but priests, nuns, and monks were not counted.
This law was revoked in 1683 because of widespread fraud.
Some
see mercantile policies as appropriate for their time…after the collapse of
the feudal system -
those strong policies were justified.
Supply of specie had a very low elasticity at a time when the transactions
requirements of commerce and trade were mushrooming.
Review the concept of elasticity (responsiveness) - how responsive is one thing to a change in another?
Output elasticity of the money supply:
How responsive is the supply of money to a change in the output or number of transactions (the pie)?
% change in supply of money/% change in output or transactions = very low number
Remember, any coefficient less than one means inelastic -- not responsive.
The money supply did not adjust quickly to a change in output or number of transactions - so as the pie got larger, the money supply did not -- so need to pull in money to deal with this increase in the need for money transactions. Since the money was "hard money" that could not be duplicated at will (as with non-backed fiat or paper money) - the idea is that as the pie gets larger, need to get more money by importing it!
One response to this was that velocity of money would simply increase to facilitate the increase in the pie or number of transactions.
Velocity
should increase with the increase in transactions.
But velocity is not indefinitely expansible.
Business and consumers can economize just so much on cash-balance
holdings.
So
the mercantilist quest for specie as a means of facilitating exchange—given
the specie is monetized (legal tender) — was a justification for mercantilism.
Can you think of other ways of dealing with this issue besides import tariffs, etc? What do you think would emerge spontaneously if there wasn't enough gold to facilitate all trade?
(2)
Keynesian Defense
J. M. Keynes - From The General Theory on
Employment, Interest and Money (1936) -
"Notes on Mercantilism, The Usury Laws, Stamped Money and Theories of
Under-Consumption" was a defender of mercantilism.
Remember
that Keynes says that the economy is demand driven.
A
D= Y= C + I + G + Net Exports
Must stimulate AD to stimulate production and employment. By the United States, for example, pushing exports over imports through import tariffs, etc.:
Increases foreign demand -
increase in MS (dollars coming back to the United States)-
decrease in interest rates (more supply of money to loan out) so there is more money borrowed -
GRAPH - the loanable funds market:
this leads to an increase in domestic investment (although Keynes said that only long run domestic investment is a function of interest rates, the short run rates would not change investment very much)-
From Keynes (General Theory):
"At a time when the authorities had no direct control over the domestic rate of interest or the other inducements to home investment, measures to increase the favourable balance of trade were the only direct means at their disposal for increasing foreign investment; and, at the same time, the effect of a favourable balance of trade on the influx of the precious metals was their only indirect means of reducing the domestic rate of interest and so increasing the inducement to home investment."
AD = C + I + G + Net Exports
But Keynes understood that there were "limitations" to this theory "which must not be overlooked":
1. Domestic wages might increase:
His first limitation is that if domestic investment increases so much (leading to an increase in production and employment) - the increased demand for workers could cause wages to increase such that the cost of domestic production increases -- decreasing foreign demand.
"If the domestic rate of interest falls so low that the volume of investment is sufficiently stimulated to raise employment to a level which breaks through some of the critical points at which the wage-unit rises, the increase in the domestic level of costs will begin to react unfavourably on the balance of foreign trade, so that the effort to increase the latter will have overreached and defeated itself."
2. Foreign investment might decrease:
His second limitation is that if the interest rate falls too low - foreign investment will move to other countries - taking precious metals out of the country and therefore offsetting the effects of the "favorable balance of trade" (money supply decreases, interest rate goes back up, domestic investment goes back down).
"Again, if the domestic rate of interest falls so low relatively to rates of interest elsewhere as to stimulate a volume of foreign lending which is disproportionate to the favourable balance, there may ensue an efflux of the precious metals sufficient to reverse the advantages previously obtained."
"The risk of one or other of these limitations becoming operative is increased in the case of a country which is large and internationally important by the fact that, in conditions where the current output of the precious metals from the mines is on a relatively small scale, an influx of money into one country means an efflux from another; so that the adverse effects of rising costs and falling rates of interest at home may be accentuated (if the mercantilist policy is pushed too far) by falling costs and rising rates of interest abroad."
Also interesting:
A favorable balance of trade should not be overlooked:
"Nevertheless, if we contemplate a society with a somewhat stable wage-unit, with national characteristics which determine the propensity to consume and the preference for liquidity, and with a monetary system which rigidly links the quantity of money to the stock of the precious metals, it will be essential for the maintenance of prosperity that the authorities should pay close attention to the state of the balance of trade. For a favourable balance, provided it is not too large, will prove extremely stimulating; whilst an unfavourable balance may soon produce a state of persistent depression."
A favorable balance of trade for one country means a disadvantage for another country. The idea that "wealth" is fixed -- and that "money" is wealth to an economy in the sense that it increased investment from above.
"The fact that the advantage which our own country gains from a favourable balance is liable to involve an equal disadvantage to some other country (a point to which the mercantilists were fully alive) means not only that great moderation is necessary, so that a country secures for itself no larger a share of the stock of the precious metals than is fair and reasonable, but also that an immoderate policy may lead to a senseless international competition for a favourable balance which injures all alike."
Although he does think that too much regulation of international trade is a bad thing -- it will hurt the ability of a country to benefit from the favorable balance of trade - decreasing imports will harm exports.
"And finally, a policy of trade restrictions is a treacherous instrument even for the attainment of its ostensible object, since private interest, administrative incompetence and the intrinsic difficulty of the task may divert it into producing results directly opposite to those intended."
Here he is criticizing the Classical Economics - Hume and Smith especially.
"Thus, the weight of my criticism is directed against the inadequacy of the theoretical foundations of the laissez-faire doctrine upon which I was brought up and which for many years I taught;— against the notion that the rate of interest and the volume of investment are self-adjusting at the optimum level, so that preoccupation with the balance of trade is a waste of time."
Some problems
with the overall theory are:
(A) Is the economy really demand driven? If you are a "Say's law" economist - trying to increase demand does not make sense. Looking at investment as an increase in productivity, instead of as an increase in demand, is another way to approach this.
(B) An influx of money into an economy doesn't necessarily decrease interest rates - depends upon where the money goes, etc. If the new money is spent and not saved -- does not contribute to the supply of loanable funds (at least in the short run) and therefore would not lower interest rates.)
Keynes does qualify this to some degree.
(C) Is this really the best - or even a good - way to stimulate investment in an economy - especially long term? Remember, Keynes was a short-run economist.
Mercantilism
As An Economic Process – the Rent-Seeking View:
Regulation
can be viewed as a “good”:
A decrease in the net benefit to those who stand to gain from regulation, ceteris paribus- expect demand for regulation to fall.
An
increase in cost to supplying regulation, ceteris paribus-
So if it is worth it to companies - they will rent seek:
Remember, economic rent means economic profit (earning above one's opportunity cost). If there is a lot of benefit from spending resources to try to get the government to give you a special privilege that allows you to continue earning economic profit (rent) (due to the government stifling your competition) - then you will do it - demand more regulation.
In
the mercantilist era (and today):
Monopoly privileges were what was sought by merchants.
-Protection
by the State
Consumers not good at organizing because?
concentrated benefits/diffuse costs:
- therefore:
A Form of Cartels (decrease in competition)
-
the acquisition of regulation is a common (and cheap) means for an industry to
organize as a cartel since
regulation provides for the continuous enforcement of the rules…on entry,
prices,
profits, etc.
So as long as the rules of the game allow "rent seeking" as part of the democratic process -- mercantilist policies are in the self interest of many groups in society -- at the expense of consumers and taxpayers.
Today mercantilism is still alive and well. Some call it "protectionism" or "corporatism" or, the most recent is "crony capitalism."