The Mercantilists Knowledge of Cycles

The Mercantilists Knowledge of Cycles, Business Cycles Theory

Events of such major importance as prosperity and depression, booms and panics, could not fail to receive the attention of econ­omists. While much of the search for causes of business cycles and the efforts to analyze and describe their various characteristics must be credited to modern economists, there is evidence of con­cern about the subject among earlier writers. It was in reality a depressed state of commerce and trade which was responsible for calling forth much of the early literature devoted to economic thought. John Hales' A Discourse of the Common Weal of This Realm of England, was written during the unsettled conditions accompanying the enclosure movement of the 16th century.

Turning of peasants from the land resulted in widespread poverty and the rise of food prices in England. Journeymen demanded higher wages to meet higher prices; masters could not afford to support apprentices; laborers could not find employment. Hales pictured the conditions during the depressed state. Houses, streets, highways, and bridges were left without repair; prices rose but markets decreased, for no one had money with which to buy. Charities were not maintained, and the universities were empty of young men. The cause of such conditions appeared to be two­fold. First the enclosures reduced production of foodstuffs, raised the price of remaining food, and threw large numbers of persons out of employment. Secondly, debasement of English currency caused the prices of foreign goods to rise. As a remedy for de­pressed conditions Hales offered a mercantilist policy: Manufac­ture necessities at home, buy abroad as little as possible, and sell more than you buy. In addition he condemned debasement, ad­vocating a return to a currency of established weight.
A contemporary of Hales, Edward Misselden (1608-1654) also offered explanations of trade depressions. He lived in a period when the efforts of strongly organized wool merchants succeeded in enlisting the power of the king in order to break the hold of a rival group of traders called the Merchant Adven­turers. The latter group had developed strong trade relations with Dutch merchants to whom they sold undyed and undressed cloth. The Dutch traders completed the processing and sold the cloth to northern European cities. The new rival company attempted to dress and dye cloth in England and sell directly to Europe. This move brought on a trade war with the Dutch in which English merchants not only failed in the new effort but lost the original Dutch market as well. This brought on a depression throughout England. Since Edward Misselden was caught in the ensuing battle, his analysis of the causes of depressed economic conditions bears reviewing. He noted four basic causes of the downward swing of the trade cycle: too large an importation of luxuries from abroad, the export of gold (especially as it applied to the policies of the East India Company), too much competition among English merchants, and the failure of the government to inspect carefully the quality of exports. In the remedies which he offered in his essay Free Trade, or the Means to Make Trade Flourish, Misselden proposed strict mercantilist principles. He suggested a means of preventing the exportation of English coins, while by a process of over-valuation foreign coins would be at­tracted to England.

The coin export privileges enjoyed by the East India Company, he felt, should be curtailed. The low value of English money as compared to foreign money should be remedied by agreements with foreign nations concerning the stabilization of currencies. Some of the shallowness of Misselden's thinking on these subjects is apparent when he reversed many of his former ideas after becoming a member of the East India Company.

Daniel Defoe in A Plan of the English Commerce was able to analyze the phases of the business cycle in very modern terms, indicating clearly the frenzied activity of the merchant proprietors when excess demand skyrocketed prices, and the poverty and distress which accompanied business collapse. He ascribed the causes of booms and depressions to "Accidents in Trade" which first cause an unforeseen demand. Merchant proprietors, careless of the future, expand their production, hiring new workers, set­ting up more looms, increasing wages. Instead of confining his production to the orders in hand, he produces to excess, and when the "Accident in Trade" is over, the proprietor finds the market glutted with his goods. The distress of declining business falls hardest upon the new workmen who have been called from the farm to operate the spinners and looms, who, after a short period of work, are dismissed and find it impossible to return to their original employment.

The most dramatic of all the early trade cycles occurred in England and France in 1720, in connection with the Mississippi Scheme of John Law in France and the South Sea Bubble in England, both of which we have already discussed. Since both of these events were closely related to the use of paper money, discussion of trade cycles, or crises, was largely confined to debate upon the value of paper currency. These ideas have been reviewed in the chapter on money and banking. There is no need to do more than mention that, beginning with the first Mer­cantilists, economists have been interested in explaining the re­lationship of money to prices and to fluctuations in trade. Edward Misselden advocated increasing the supply of money, and over­valuing foreign currencies as a means of encouraging the revival of trade. Thomas Mun, on the other hand, said that increasing the quantity of money would raise prices and reduce trade, especially with foreign countries. William Potter wrote in the 17 th century that prosperous trade resulted from an increased quantity of money and greater rapidity of its circulation. The line of authors who have advised increasing the amount of money in order to promote prosperity is long. It includes the familiar names of John Law, Jacob Vanderlint, Sir Josiah Child, and David Hume. It must be admitted, however, that these authors were not concerned with the business cycle except in a vague and secondary manner. Indeed, it may be questioned whether the idea of an actual cycle was ever a clear picture in their minds. Their chief concern lay in the use of money as a stimulant to trade, not in the variations in the quantity of money as an explanation of why business cycles exist.