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

3

The Market

THE CLASSICAL VIEW

In the classical view, individuals placed their labor and capital in those employments where returns were comparatively high and withdrew them from those where returns were comparatively low. The final result was an allocation that created equal (incremental) returns in all employments between which resources were transferable. The result was automatic, or “natural,” in the sense of being produced by the discrete and independent action of individuals as distinct from intentionally collective action by them. The famous invisible hand was the operation of self-interest in a competitive market. The end product was a use of resources that brought their owners the highest possible real incomes and the economy the greatest possible total product. Whatever interfered with the operation of self-interest as it directed the movement of resources—whether the interference originated with the government or in private monopolistic practices—would reduce the efficiency of the economy and, what is the same thing, the sum of individual real incomes.

The classical conception of optimum consumption was not developed in as much detail as the theory of resource allocation, but the central elements of the former are clear. In whatever way money income happened to be distributed, individuals could achieve greatest satisfaction from it if they were free to spend it as they chose and if prices were established by the competition of buyers and sellers. The independent bidding of buyers established a set of demand prices, and the independent offering of sellers established supply prices. An act of buying and selling under these conditions was a presumption that both buyers and sellers maximized their returns. Or at least they were better after exchange than before. The gains from it were mutual, although they were not necessarily divided equally between buyers and sellers.

Free exchange was believed to provide commutative justice by providing an income to each person proportioned to what the market believed he was worth. That the individual might be appraised outside the market, in a noneconomic way, was well recognized, and the recognition implied a discrepancy between commutative and distributive justice. The consequence was a dissatisfaction with the distribution of income, even though the classical economists had little to offer as a remedy. Their dissatisfaction was of an ethical, not a positive, kind. Excepting Sismondi and Malthus, they did not believe that inequality could prevent the full employment of resources. They did believe inequality could cause an inefficient use of resources. For example, the rich spent a substantial amount on personal services, which the classicists believed added nothing to the national wealth. They believed the production of goods did add to the national wealth.

The classicists believed that, given the distribution of income, a free market would provide the most efficient use of resources. About the full use of resources, most of them were silent. Their silence can be taken to mean they believed a free market would provide full as well as efficient employment. One reasonably can suppose that if they believed full employment was as much of a problem as efficiency they would have written as much about it as they in fact did write about efficiency.

The classical economists did have reservations about the efficiency of a free market. One of them has been noted—the effect of inequality. They also believed a free market was unable to supply certain goods of great social value and they believed self-interest should not rule in areas, like government, where disinterested behavior was called for.

THE MERCANTILIST VIEW

The mercantilist conception of the price mechanism was similar in certain ways to that of the classicists. Both agreed that self-interest could and should direct the allocation of resources; that prices were and should be determined by supply and demand; that competition was desirable; and that in domestic markets there was mutual advantage in exchange.

The mercantilists did not believe that universal efficiency could be established by the price system. What they did believe was that a limited operation of the system was desirable. They also held a qualified conception of the harmony of self-interest. The issue of full employment was that on which there was the greatest difference between them and the classicists. The mercantilist view was that free international trade would reduce employment, that inattention to the monetary system would have the same result, and that a very unequal distribution of income could reduce spending which in turn would reduce employment.

The mercantilist conception of self-interest, in its psychological aspect, has been explained. From it followed the belief that under certain conditions the free allocation of resources would yield the greatest possible efficiency and employment. The mechanics of the price system was explained by one of the earliest writers, Hales, and he suggested the knowledge was common at the time. It was sufficiently well known to be an issue in some of the controversies over economic reform. Hales was associated with Somerset—the Protector during the minority of Edward VI—in the program to eliminate the enclosures. Hales also was a member of Parliament and introduced three bills for economic reform. One was to maintain tillage and reduce enclosures, another to rebuild decaying houses, and the third to prohibit the monopolistic practices of forestalling and regrating. All of them were defeated.

His discourse is in the form of a dialogue between a doctor and a knight who at one point consider the best means of eliminating the scarcity of corn. The doctor says the price should be free to find its market value just as the price of wool is free.

These remarks taken out of context easily could be interpreted as an argument for the unrestricted operation of the price system. That “every man will gladder follow that wherein they see the more profit and gains” is in agreement with Smith’s statement that “Every individual is constantly exerting himself to find out the most advantageous employment for whatever capital he can command.” Hales also anticipated the classical economists in his statement that “the workman never travails but as the master provokes him with good wages”; in his belief that the common ownership of capital is less productive than individual ownership—“that which is possessed of many in common is neglected of all”—and his conviction that many forms of economic control are ineffective before the power of self-interest—“for many heads will devise many ways to get anything by.”26 So long as only the positive aspects of Hales’s ideas are compared with those of Smith, the two agree. But about the normative aspect there was disagreement, as is shown below.

PRICING AND COMPETITION

Many of the mercantilists explained how prices are determined by supply and demand. Malynes wrote:

Actually, the statement goes much beyond saying that supply and demand determine price. It suggests that utility is the basis of value (“commodious use”), that utility is a subjective magnitude (“truth wherein equality is not admitted or known”), and that there is an advantage in exchange to both buyer and seller (“a certain equality in the value of things”).

The words “true reason” have a special significance both for Malynes’s statement and for the doctrine of other mercantilists. In the quotation above, true reason should be interpreted to mean accurate perception or accurate understanding. The statement then expresses the idea that price or value is determined by individual evaluation and only this evaluation is accurate. The idea implies that individuals are the best judges of their welfare. Malynes again remarked on true reason in his exposition of the law of merchants, which, he said, was the only law that was universal and absolute, the same everywhere and at all times, and that it had its origin in Cicero’s conception of true law as right reason agreeable to nature.28 Malynes’s conception of natural law anticipated that of the classical economists. They (as explained in volume two) identified natural law with reason and made reason an individual trait. That was in contrast to conceptions of natural law which made reason an immanent quality of social institutions or of a supernal power. The doctrine suggested by Malynes was really the doctrine of natural rights.29

The practical result of the doctrine was a policy of individual economic freedom. Petty, for example, argued against the many economic controls imposed by the state and attributed England’s difficulties to the fact that “too many matters have been regulated by laws, which nature, long custom, and general consent ought only to have governed.” Positive laws, he stated, should consist of “whatsoever is right reason and the Law of Nature,” a statement which is best interpreted by placing the word “therefore” before “the Law of Nature,” since Petty did not make a substantive distinction between reason and natural law.30

Because they believed that supply and demand ought to determine prices, most of the mercantilists were opposed to price fixing and to many forms of market control. Barbon stated “the value of all wares arises from their use” and that a “plenty” of wares makes them cheap while a “scarcity” makes them expensive. He concluded that “the market is the best judge of value.” North asserted the “universal maxim” of price is that “plenty of anything makes it cheap.” Law stated that the price of a commodity is determined by the quantity offered for sale in relation to the demand. As the quantity offered increases, the price or value declines. He illustrated the point most interestingly by water and diamonds, explaining that diamonds were more valuable than water, despite its greater “usefulness,” because the quantity supplied of diamonds was less than that of water. This paradox is mentioned by Smith, using the identical commodities; but he does not resolve it as explicitly as Law had who wrote about fifty years earlier. Berkeley expressed the principle of price determination in one of his queries:

The opposition to market control was made explicit by Child. He listed nine laws which he said were impediments to trade and employment. Included were laws that prohibited the export of coin, raised the price of exports, reduced the price of beer, forbade engrossing (“there being no more useful trade in a nation”), and limited the supply of labor by restricting entry into skilled trades. He stated:

Davenant expressed the same conclusion:

Petty believed (as noted above) that economic relations among individuals should be directed by “whatsoever is right reason” and not by the state. Of all the mercantilists, North most clearly expressed the idea that free exchange is the way to national greatness. He wrote:

[25] Hales, op. cit., p. 59.

[26] Hales, op. cit., pp. 78, 49, 46.

Adam Smith, The Wealth of Nations, ed. Edwin Cannan (New York, 1937), p. 421.

[27] Malynes, Consuetudo, etc., p. 67.

[28]Ibid., p. 2.

Cicero De re publica, trans. C. W. Keyes, iii, 22.

[29] See Vol. 2, pp. 20-21.

[30] Petty, op. cit., I, 9, 243.

[31] Barbon, op. cit., pp. 13, 16. North, op. cit., p. 34.

Law, op. cit., p. 4. Smith, op. cit., p. 28. Berkeley, op. cit., Q. 24.

[32] Child, op. cit., pp. 55-56, 80.

Davenant, An Essay on the East India-Trade, quoted by Whittaker, op. cit., p. 147.

[33] North, op. cit., p. 13.