This document provides an overview of the history of economic thought, beginning with mercantilism. It discusses key thinkers and schools of thought that evolved over time, including Adam Smith and classical economics, Marxism, marginalism, neoclassicism, Keynesianism, and the Chicago school. It focuses on explaining mercantilism in more depth, covering its origins, key figures like Thomas Mun, theories around bullion and trade balances, and criticisms from Adam Smith and later economists.

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History of economic thought
Introduction:
 The history of economic thought deals with different thinkers and
theories in the field of political economy and economics from the
ancient world right up to the present day.
 Economic thought evolved through feudalism in the Middle Ages to
mercantilist theory, when people were concerned to orient trade
policy to further the national interest.
 The modern political economy of Adam Smith appeared during the
industrial revolution.
 Following Adam Smith's Wealth of Nations, classical economists
such as David Ricardo and John Stuart Mill examined the ways the
landed, capitalist and labouring classes produced and distributed
national income.
 In the London slums, Karl Marx disagree with the capitalist system of
exploitation.
 After the wars of the early twentieth century, John Maynard Keynes
advocated governmental intervention in economic life through fiscal
policy to stimulate economic demand, growth and prosperity.

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Topics to be studied:
 The Mercantilist School
 The Physiocratic School
 The Classical School
 Adam Smith
 Thomas Malthus
 David Ricardo
 Jean-Baptiste Say
 John Stuart Mill
 The German Historical School
 Marxian School
 The Marginalist School
 The Neoclassical School
 The Neoclassical School--Monetary Economics
 The Keynesian School--John Maynard Keynes
 The Chicago School

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Mercantilism
 Mercantilism is an economic theory that the prosperity of a nation
depends upon its supply of capital, and that the global volume of trade
is "unchangeable."
 Economic assets, or capital, are represented by bullion (gold, silver,
and trade value) held by the state, which is best increased through a
positive balance of trade with other nations (exports minus imports).
 Mercantilism suggests that the ruling government should advance
these goals by playing a protectionist role in the economy, by
encouraging exports and discouraging imports, especially through the
use of tariffs.
 The economic policy based upon these ideas is often called the
mercantile system.
 Mercantilism was established during the 16th to the 18th century,
which roughly corresponded to the emergence of the nation-state.
 Internationally, mercantilism encouraged the many European wars of
the period, and fueled European imperialism, as the European powers
fought over "available" markets.
 Belief in mercantilism began to fade in the late 18th century, as the
arguments of Adam Smith and the other classical economists won
favour in the British Empire.

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 The Great Depression influenced American government to return to
neo-mercantilism imposing high protectionist tariffs and suspending
private ownership of gold.
 Today, mercantilism has seen a resurgence in economic theories that
focus on the trade surplus and deficit as determinants of monetary
value, but mercantilism as a whole is rejected by many economists.
History
 Early mercantilist writers belief that (bullion) quantities of gold and
silver were the measure of a nation's wealth. Later mercantilists
developed a different view.
 Many European economists between 1500 and 1750 are today
generally considered mercantilists; however, these economists did not
see themselves as contributing to a single economic ideology.
 Adam Smith saw English merchant Thomas Mun (1571-1641) as a
major creator of the mercantile system.
 Beyond England, Italy, France, and Spain had noted writers who had
mercantilist themes in their work.
 However, many British writers, including Mun and Misselden, were
merchants, while many of the writers from other countries were public
officials.
 Beyond mercantilism as a way of understanding the wealth and power
of nations, Mun and Misselden are noted for their viewpoints on a
wide range of economic matters.

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Thomas Mun
 An English businessman named Thomas Mun (1571-1641) in
his book England's Treasure by Foreign Trade represents early
mercantile policy.
 He was a member of the East India Company and also wrote
about his experiences Trade from England unto the East India
(1621).
 According to Mun, trade was the only way to increase
England’s treasure (i.e., national wealth) and he suggested
several courses of action.
 Important were frugal consumption in order to increase the
amount of goods available for export, increased utilisation of
land and other domestic natural resources to reduce import
requirements, lowering of export duties on goods produced
domestically from foreign materials, and the export of goods
with inelastic demand because more money could be made
from higher prices.
Theory
 Mercantilism as a whole cannot be considered a unified theory of
economics because mercantilism has traditionally been driven more
by the political and commercial interests of the State and security
concerns than by abstract ideas.

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 There were no mercantilist writers presenting a comprehensive view
for the ideal economy, as Adam Smith would later do for classical
economics. Rather, each mercantilist writer tended to focus on a
single area of the economy.
 Mercantilists viewed the economic system as a zero-sum game, in
which any gain by one party required a loss by another. Thus, any
system of policies that benefited one group would by definition harm
the other, and there was no possibility of economics being used to
maximize the "commonwealth", or common good.
 Mercantilist domestic policy was more fragmented than its trade
policy. While Adam Smith portrayed mercantilism as supportive of
strict controls over the economy, many mercantilists disagreed.
 Many mercantilists also realized that the inevitable results of quotas
and price ceilings were black markets. One notion mercantilists
widely agreed upon was the need for economic oppression of the
working population; laborers and farmers were to live at the "margins
of subsistence".
 The goal was to maximize production, with no concern for
consumption. Extra money, free time, or education for the "lower
classes" was seen to lead to vice and laziness, and would result in
harm to the economy.
 Merchants benefited greatly from the enforced monopolies, bans on
foreign competition, and poverty of the workers. Governments
benefited from the high tariffs and payments from the merchants.

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 Mercantilism developed at a time when the European economy was in
transition. Isolated feudal estates were being replaced by centralized
nation-states as the focus of power.
 Technological changes in shipping and the growth of urban centers
led to a rapid increase in international trade. Mercantilism focused on
how this trade could best aid the states.
 Another important change was the introduction of modern accounting.
This accounting made extremely clear the inflow and outflow of trade,
and thus the balance of trade.
 Of course, the impact of the discovery of America cannot be ignored.
New markets and new mines pushed foreign trade to previously
inconceivable heights. The latter led to “the great upward movement
in prices” and an increase in “the volume of merchant activity itself.”
Evaluation
 Adam Smith had rejected focusing on the money supply, arguing that
goods, population, and institutions were the real causes of prosperity.
 Keynes argued that the money supply, balance of trade, and interest
rates were of great importance to an economy. These views later
became the basis of monetarism, whose proponents actually reject
much of Keynesian monetary theory, and has developed as one of the
most important modern schools of economics.
 Adam Smith rejected the mercantilist focus on production, arguing
that consumption was the only way to grow an economy. Keynes

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argued that encouraging production was just as important as
consumption.
 Keynes also noted that in the early modern period the focus on the
bullion supplies was reasonable. In an era before paper money, an
increase for bullion was one of the few ways to increase the money
supply.
 Keynes and other economists of the period also realized that the
balance of payments is an important concern, and since the 1930s, all
nations have closely monitored the inflow and outflow of capital, and
most economists agree that a favorable balance of trade is desirable.
 Keynes also adopted the essential idea of mercantilism that
government intervention in the economy is a necessity.
 While Keynes' economic theories have had a major impact, few have
accepted his effort to rehabilitate the word mercantilism.
 Today the word mercantilism is often used to attack various forms of
protectionism.
 Some other systems that do copy several mercantilist policies, such as
Japan's economic system, are also sometimes called neo-mercantilist.
 Nonetheless, The Wealth of Nations had a deep impact on the end of
the mercantilist era and the later adoption of free market policy.