The Online Library of Liberty

A project of Liberty Fund, Inc.

• Foreword
• Economic Liberalism the Beginnings
• 1: The Stoic Origins of Liberalism
• 1: The Consequences of Stoicism
• 2: Zeno and the Moral Sage
• 3: The Modifications In Stoicism
• 4: Epictetus
• 5: Cicero
• 6: The Stoic Legacy
• 2: The Mercantilists As Liberals
• 1: National Power and Full Employment
• 2: The Means to Full Employment
• 3: The Market
• 4: The Political Ideas
• 5: The Economic Setting of Mercantilist Policy
• 6: Comment On the Commentaries On Mercantilism
• 3: The Origins of American Liberalism
• 1: The Constitutional Convention
• 2: The Ideology of the Federalists
• 3: Economic Policy of the Federalist Party
• 4: Republican Economic Policy

1

National Power and Full Employment

It is not in an obvious way that mercantilist and liberal economic doctrine are related. What is indeed obvious, is the great difference between the measures that each proposed to advance its policy. The liberals usually have wanted the market to make most (but not all) of the decisions of economic organization (i.e., about production and distribution). The mercantilists believed the decisions would be made better if the market was controlled in certain ways. There is, however, another way to look at mercantilist doctrine. It is to ask: What did the mercantilist writers believe was the objective of economic policy? And what were their measures of control meant to achieve?

Had the mercantilists been asked to state what their objective was, they undoubtedly would have said it was to create a strong and secure England. Although their motives were mixed and they wanted to do many things, what they wanted to do most was to promote the national interest. But so did the classical economists. They, too, were nationalists. They valued the political and military power of England above all things and were ready to sacrifice efficiency and even justice for it. The title of the major work of classical economics is An Inquiry into the Nature and Causes of the Wealth of Nations—not the wealth of the world, or of the people of Great Britain, but of Britain itself. The title suggests what Smith believed was most important to those who made economic policy. The policy of John Hales is indicated by the title of his work, A Discourse of the Common Weal of This Realm of England, written about 1549. Now the word “nationalism” is a piece of intensional language, and when applied to the economists it has to be shorn of its offensive connotations. They were not like Lord Copper who stood for “strong mutually antagonistic governments everywhere, self-sufficiency at home, self-assertion abroad.” It was rather that they were devoted to God, St. George, and particularly England.

What separated the mercantilists from the liberal economists was the means that each proposed for advancing the national interest. The mercantilists believed it required a prosperous and growing economy. That in turn meant a brisk trade, adequate domestic spending, a proper wage and price structure, a particular distribution of income, an excess of exports over imports, a diligent and obedient working class, the security of private property, the absence of monopoly, the full utilization of agricultural lands, an adequate supply of money, a low rate of interest, and the full utilization of the labor force.

Among these factors the greatest attention was given to the money supply, spending, and employment. By spending they meant what now is called effective demand, and employment meant just what it does today. There were various definitions of the money supply, but all writers agreed it was that which could be used as a medium of exchange. They believed that spending and employment determined each other in the sense that a change in one would cause a change in the other in the same direction. The money supply was made another determinant of spending by some writers, while others made it independent of spending and employment. To most mercantilists, the sufficient condition of prosperity was an amount of spending that would maintain full employment, and they subordinated the accumulation of bullion and other methods of increasing the money supply to the position of determinants of spending. Employment was taken to measure the economy’s output, and output was the measure of the nation’s material welfare. Welfare was essential to national power; hence a large output contributed to such power. Since output depended on employment, the object of economic policy must be full employment. So it was that the objective of mercantilist economic policy was full employment, and that objective was perfectly consistent with the objective of its political policy, which was national power.

The idea that employment and output should be maximized was expressed early in the period of mercantilism. John Hales, in the Discourse noted above, wrote that the state should adopt measures which would assure a “great plenty” of goods and that a “great plenty” required the employment in agriculture and the towns of all who were able to work. In the same year that Hales’s work is believed to have been published, 1549, there appeared an anonymous tract called Policies to Reduce This Realme Unto a Prosperous Wealthe and Estate. The author stated that foreign and domestic trade would be increased “if every laborer and artificer, and all other [of] the common people of this realm were well set at work.” The mercantilist objective of full employment, its connection with a flourishing trade, and the importance of trade to the nation were all summarized by Edward Misselden in 1622:

The importance of employment was expressed by William Petty (1662) in his familiar proposition that, as the nation’s population increased, its wealth increased in greater proportion, a proposition which was true, he made clear, if employment increased as much as or more than the population. He said the state should take the greatest care to utilize the labor force and to keep its skills in order. If necessary, the idle workers should be

Petty’s expedient was ridiculed sixty-six years later by the author of the anonymous Considerations on the East India Trade, but Petty’s principle was accepted. The later author wrote:

Yet as a method of increasing employment, the Considerations continued, such a shift was no more silly than the restricting of imports. If trade was free, “every individual man in England might be employed to the profit of the kingdom.” It is clear the later author believed the wise economic policy was one that maximized the national output; it also is clear that this was exactly what Petty believed. What they differed about was how to maximize. The later author implied that labor was mobile, or he may have believed that free trade would create labor mobility; he then could argue that maximum output required the specialization which free trade provides. Petty, on the other hand, made no such assumptions, and therefore the maximizing of output seemed to him to require the full utilization of labor by whatever means were appropriate to the circumstances of the moment.2

William Temple (1671) said the riches of a nation were in its people, and that they would add to the country’s wealth in proportion to necessity’s driving them to industry and enterprise. Nicholas Barbon (1690) believed employment was more important than efficiency in consumption and in the use of resources. Josiah Child (1690) believed the obstacles to greater national wealth were those that restricted free exchange and consequently reduced employment, and the reforms he submitted gave attention to increasing employment. Sir Dudley North (1691), who has been called one of the first free traders, wrote: “Commerce and trade, as hath been said, first springs from the labour of man, but as the stock increases, it dilates more and more.” As trade expands, or “dilates,” it “never thrives better, then when riches are tost from hand to hand.” Charles Davenant (1695) said that security of employment increased the industry of the worker, encouraged him to be thrifty, and hence was favorable to economic growth. John Law (1720) argued that one of the main benefits of an increase in the money supply would be an increase in employment. Daniel Defoe in his famous defense of tradesmen (1732) said the main benefit of trade was in the numbers it employed and he decried the effort of large tradesmen to lower costs and prices by reducing the number of hands through which goods passed on their way to the final buyer. John Cary (1745) stated that the wealth of the nation was in the “labour of its people.” Josiah Tucker (1750) wrote that the country was more prosperous, “the more persons there are employed in every branch of business.” Bishop Berkeley (1751) wrote on economics in the mercantilist period and stated that the satisfaction of wants is the end of economic activity and requires the complete and efficient employment of resources. Malachy Postlethwayt (1759) said the satisfaction of individual wants required full employment and competition.3

The preceding summary is meant to show that full employment was the major objective of mercantilist policy. The writers indicated how important it was by their frequent assertion that the wealth of the nation depended on its “labor”; in the significance they gave to the size of the population; in the common statement that the advantage of trade was in the numbers it employed; in the grave concern expressed over the extent of unemployment, idleness, and poverty, and in the numerous remedies by which these problems were to be solved and the productivity of labor was to be increased. Most of the measures of policy can be explained more simply and completely by assuming that full employment was the mercantilists’ objective than by supposing some other purpose directed their ideas.

One can, however, assume that an increase in the amount of “trade” was the objective if one uses that word, as the mercantilists almost always did, to include all economic activities. Then, their designs for “a brisk trade” become methods of assuring the maximum amount of productive effort, which of course is what full employment is meant to assure. But the word “trade” has a narrower meaning in modern speech, denoting one aspect of the distributive process, and its use can mislead the reader into thinking the mercantilists ignored shipping, manufacturing, agriculture, and other industries, which in fact they did not. Moreover, many of the mercantilists’ ideas can be related more directly to the amount of employment, than to the amount of trade. (For example, their ideas about psychological motivation have a plainer connection with work than with economic activity in general.)

The objective of the mercantilists was not, as often supposed, the accumulation of bullion, a favorable balance of trade, the advancement of private interests, the subordination of the working class, low interest rates, or the elevation of trade at the expense of manufactures and agriculture. Some of these considerations were means to the end of full employment. A few mercantilists may have confused money with wealth and so made bullion an end in itself. The importance of the other considerations is questionable. Certainly none of them had as important a place as full employment did and none serves as well to unify the particular measures of policy that were proposed.

Once full employment is taken as the objective of mercantilist policy, that policy’s difference from liberal policy narrows considerably. Although the difference is not eliminated, it is much less than if one supposes the objective of mercantilist policy was, say, a favorable trade balance, which the liberals never could have accepted as an end in itself.

As very many of the commentaries on mercantilism make a favorable balance of trade the objective of its policy, I must explain why that view is not accepted in this chapter. If the mercantilist writers had wanted a favorable balance of trade for its own sake, they surely would not have given as much attention as they did to the money supply, employment, spending, and domestic trade. Moreover, they would have emphasized (and not merely mentioned), a restriction of imports at least as much as an increase in exports, because either method would create a favorable trade balance. One can, of course, explain away the difficulty by supposing they were uninformed or inconsistent. But that attitude, as those who have worked in the field of intellectual history know, is usually mistaken. In this field the object is to understand what a writer said and not, except as a last resort, assume that he didn’t understand what he was saying.

My explanation of why the mercantilists wanted a favorable balance of trade is that they assumed England would be able to increase employment by exporting more than it imported. In the short-run this is perfectly possible (and the short-run may be a rather long time). The policy is a beggar-your-neighbor device, but as the writers were nationalists this could not have troubled them. In the long-run, a favorable balance of trade could have supported employment at home if England had invested its net receipts abroad. Indeed some mercantilists like Thomas Mun (1630) recommended this be done. Some commentaries on mercantilism have gone beyond the favorable balance of trade and explained it as a device to secure bullion which in turn was thought by the mercantilists (so the commentaries say) to increase the national wealth. As the mercantilists’ monetary theory is explained below, all that need be said here is that most of them did not think this at all.

[2] John Hales, A Discourse of the Common Weal of This Realm of England, ed. Elizabeth Lamond (Cambridge, 1893), pp. 59, 98.

Tudor Economic Documents, ed. R. H. Tawney and Eileen Power (London, 1924), III, 323.

Edward Misselden, Free Trade, or the Meanes to Make Trade Florish (London, 1622), p. 4.

Sir William Petty, Economic Writings, ed. Charles Henry Hull (Cambridge, 1899), I, 34, 31.

A Select Collection of Early English Tracts on Commerce (London, 1856), pp. 581, 582.

[3] Sir William Temple, Works (Edinburgh, 1754), II, 59-60.

Nicholas Barbon, A Discourse of Trade ([London, 1690] A Reprint of Economic Tracts, ed. Jacob Hollander, Baltimore, 1905), p. 32.

Josiah Child, A New Discourse of Trade (5th ed., Glasgow, 1751), pp. 54-56.

Sir Dudley North, Discourses Upon Trade ([London, 1691] A Reprint of Economic Tracts, ed. Jacob Hollander, Baltimore, 1907), pp. 25, 27.

Charles Davenant, An Essay Upon Ways and Means of Supplying the War (London, 1695), p. 143.

John Law, Money and Trade Considered, with a Proposal for Supplying the Nation with Money (London, 1720), p. 11.

Daniel Defoe, The Complete English Tradesman, etc. (London, 1732), II, 109, 111.

John Cary, A Discourse on Trade (London, 1745), p. 82.

Josiah Tucker, A Brief Essay on . . . Trade (2nd ed., London, 1750), p. xii.

The Right Rev. George Berkeley, The Querist (Glasgow, 1751), Queries 46, 47, 168.

Malachy Postlethwayt, Great Britain’s Commercial Interest Explained and Improved (2nd ed., London, 1759), II, 367, 370-371, 377.