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

5

The Economic Setting of Mercantilist Policy

What is more useful is to speculate over why the mercantilists attended so closely to the problem of unemployment.41 There was extensive poverty in the period of mercantilism, from about 1500 to 1750 (and later, too, but affecting economic thought differently then). The main cause was unemployment. Another cause was the large proportion of the population that was not in the labor force: children, old people, and many able-bodied adults. In that last group were people who had been out of a job for so long that they no longer expected to find one, people who were born into poor families and never had been able to find work, and a sizable number of people who preferred to be supported by others. This last group consisted of beggars, vagabonds, of those who relied on the relief authorities, their relatives, friends, or whomever else would support them. This group was the object of the policies that the mercantilist writers proposed for increasing the size of the labor force. The group was large and certainly constituted a problem, of a political and social kind as well as economic.

More important however was the problem of unemployment. Even without certain people in the labor force, it was not fully employed. The enclosure movement seems to have been the principal cause of unemployment in the first part of the mercantilist period. By replacing tillage with grazing, the enclosures reduced the amount of labor required in agriculture and drove large numbers of persons into the towns and cities where they were not easily absorbed (to say the least) into the urban labor force. In the last half of the sixteenth century, the export of woolens declined, and there was protracted unemployment in that industry, which was the most important in manufacturing of the time. The transfer of large numbers of workers from one occupation to another is difficult even in the most favorable circumstances; and circumstances in the sixteenth century were not favorable. The guilds were not eager to increase their output at any time, and one easily can suppose they were not pleased by the large numbers of workers who were swept off the land and into the towns to seek employment.

Another cause of unemployment was the frequent commercial crises which by their strangeness must have baffled the early economists (no less than the later). Although the fluctuations seem not to have been of regular occurrence, as cyclical movements later were, they were more than occasional and sporadic changes. In addition to these two types of unemployment, which today would be called structural and cyclical, there seems also to have been seasonal unemployment. Urban workers often were out of jobs for about four months of the year. If one can accept Petty’s observations, which, he said, had “visible foundations in nature,” seasonal unemployment was considerable. He stated that the annual wages of workers in the third quarter of the seventeenth century were about seven pounds and that weekly wages were about four shillings. The figures imply the average worker was employed about 35 weeks in the year. Petty’s figures on wages are interesting to compare with his estimates of the cost of living. He said the weekly cost of food was two shillings per person, or about five pounds and four shillings annually and that the yearly cost of clothing was about 30 shillings. This implies the worker had about six shillings to buy shelter and other goods for the year and to provide for his family. One wonders where the money for gin and ale came from (for which the workers were so often scolded), not to mention the pennies spent on ribbons, ruffles, cockfighting, tea drinking, and such things.42

Whatever the accuracy of Petty’s figures, unemployment and poverty seem to have been extensive. The management of those two problems was made more than usually difficult by a factor arising from the Reformation. When the power of the Catholic Church was destroyed, so too was its organized system of charity. An effort was made to place the responsibility upon local governments but they did not accept it entirely. In many areas they refused charity to persons from other localities, a practice which added immobility to unemployment. The guilds did look out for their members, but were unable to care for the newly created poor from agriculture even if they had wished to.

Not only was there less providing for the lower classes, but, after the middle of the seventeenth century, there was less interest in doing so and less concern over the problem of unemployment. Under the Tudors there seems to have been a genuine solicitude for the lower classes, a feeling which perhaps came of the knowledge that disaffection with an absolute monarch can have disastrous results. After the revolution of 1688, the power of the monarchy was severely abridged and therefore it was less responsible for the general welfare, while Parliament could be only a diffuse object of resentment to those who thought the state was not looking after them properly. Elizabeth could say with reason, “Yet this I account the glory of my crown, that I have reigned with your loves.” It is difficult to imagine words of the same sincerity coming from a sovereign after 1688.

The unemployment of the sixteenth and seventeenth centuries was, in the language of today’s economics, the result of (a) frequent deflations, some of them quite severe; (b) the long-run decline of particular industries such as the manufacture of woolens and the raising of grain; (c) the immobility of resources and especially of labor; and (d) the wage and price rigidity caused mainly by the monopolistic practices of the guilds. The unemployment might have been eliminated (one easily can say 300 years later) if labor could have been moved from areas where it was abundant to where it was scarce and if certain wages and prices could have been reduced in order to make increased employment profitable to the entrepreneurs of the age. But the mercantilists seem not to have thought this solution was adequate. Although they did propose to increase labor mobility and to make wages and prices more flexible, they did not rely entirely on these measures. Instead, they appear to have had greatest confidence in measures that had an inflationary effect—those that would have increased total spending by increasing the money supply.

It is interesting to note that Great Britain had a similar unemployment problem about 200 years after the close of the mercantilist period and solved it by methods quite suggestive of the mercantilists’ proposals. After World War I there was substantial frictional employment, and a lowering of money wages was not feasible. A few years after World War II, when the inflationary policies of the Labour Government had shown their effect, a United Nations report on economic stability observed that the frictional unemployment “which had previously been attributed mainly to lack of mobility of labour, melted away, leaving an acute labour shortage.”43 This report was written mainly from the viewpoint of Keynesian economics, which, the reader may have noticed, has an affinity to mercantilist doctrine.

When classical economic doctrine developed, circumstances were much different from those of the period of mercantilism. There no longer was the problem of managing a large amount of permanent unemployment. The system of poor relief was improved and contributed much less to labor immobility than formerly. The internal market of Great Britain was much better organized, in the sense of there being greater mobility of labor and of commodities and capital as well. By 1750 the government no longer enforced any important controls over the internal market. The obstacles to price and wage flexibility were much less formidable than they had been in the preceding three centuries. Improvements in transportation, especially after 1800, brought the parts of the internal economy into closer connection and increased the extent of competition. Finally, there was an expansion of British foreign trade, resulting from the decline of the Dutch empire at the end of the seventeenth century, from the weakening of the imperial power of Spain, and from the increased efficiency of British manufactures and shipping which gave the nation a cost advantage in the world market. These circumstances dictated a much wider use of the market as the appropriate economic policy, just as the different circumstances confronting the mercantilists required restrictions on the market.

[41] See D. C. Coleman, “Labour in the English Economy of the Seventeenth Century,” Economic History Review, 2nd series, VIII (1956), no. 3.

[42] Petty, op. cit., I, 244, 305.

[43]National and International Measures for Full Employment. Report by a Group of Experts Appointed by the Secretary-General (United Nations, Lake Success, New York, 1949), 25.