An Outline of the history of economic thought - Chapter 1 pdf

Before this there were just a few interesting ideas: Aristotle’s theories of ‘natural chrematistics’, that is, the art of becoming rich by producinggoods and services useful to life, and

1 The Birth of Political Economy

1.1 Opening of the Modern World

1.1.1 The end of the Middle Ages and scholasticism

The feudal economy rose from the ashes of the slave economy of the RomanEmpire The relationship between owner and slave, a relationship that is onlypossible if the slave can produce more than he consumes, was transformedinto one between owner and serf The serf was tied to the land he cultivatedand received protection from the lord in return for certain economic andpolitical services The ultimate control of economic activity was in the hands

of the king, who could, in most cases, transfer the feuds from one lord toanother Land and labour were transferred rather than bought and sold; andthis meant that there was no need for labour and land markets Authority,faith, and tradition were enough to guarantee that the system worked well.The relative economic security created by the feudal institutions con-tributed to an improvement in the living conditions of the population, if for

no other reason than that the social condition of the serf was higher than that

of the slave At the same time, the formation of cities in densely populatedareas and the widespread diffusion of craft workshops laid the ground forthe beginnings of intense commercial activity The figure of the independentmerchant appeared, initially, in the gaps in and at the edges of the traditionaleconomy and, later, in a new economic sphere: the free city and its markets;the seeds of the modern European city

The growth of the city economies and of the commercial and financialtraffic of the urban bourgeoisie began in the twelfth and thirteenth centuries

It was in this period that the first serious attempts at economic theorizingstarted Before this there were just a few interesting ideas: Aristotle’s theories

of ‘natural chrematistics’, that is, the art of becoming rich by producinggoods and services useful to life, and of ‘unnatural chrematistics’, whichconcerns enrichment from trade and usury; his distinction between the usevalue and the exchange value of goods, the former consisting of the ability of

a good to satisfy a specific need and the latter of the quantitative relationship

in which one good is exchanged for another; and his attempt to define the

‘just price’ of goods on the basis of the equivalence of the values exchanged.The scholastic philosophy of the thirteenth century, whose principalexponent was Thomas Aquinas, was explicitly linked to Aristotelian philo-sophy and heavily marked by the attempt to assimilate it into Christianity

Its crucial assumption was that human intelligence is able to reach the truth

by means of the speculative method There are three orders of truth to whichspeculation should be turned: divine law, as manifested in the revelation;natural law ( jus naturalis), as embodied in the ‘universals’ which God hadgiven to the creatures; and positive law, produced by human choices andconventions and valid for all of mankind ( jus gentium) or for the subjects ofthe single states ( jus civilis) The majority of the economic propositions ofscholasticism come under positive law and only a few under natural law Thetheory of the ‘just price’, reduced to the communis aestimatio (commonevaluation) of the normal price in the absence of monopoly, was derivedfrom Aristotle There was also a theory of the ‘just wage’, which was defined,again according to the communis aestimatio principle, as the wage whichwould guarantee the worker a standard of living adequate to his socialcondition In connection with this, there were also signs of a just price theorywhich, by virtue of the principle of ‘exchange of equivalents’, was connected

to the cost of production and, therefore, mainly to the cost of labour A profit

is included in the cost of production, but it must be fair and moderate, anhonestus quaestus, an honourable earning, just enough for the merchant tolook after his family and devote a little money to charity Thus, taking intoaccount the fact that commerce was only considered legitimate if it wasuseful to the collectivity, it is difficult to see little more than the notion of

a wage for direction in the scholastic concept of profit

The just price is an intrinsic property of a good, as it expresses its intrinsicvalue (bonitas intrinseca), But how this value is determined is not clear Theprevailing opinions oscillate between the theory of the efforts sustained inproduction and that of the capability of the good to satisfy a human need Inboth cases, however, we are dealing with an objective property of the good.And it is not clear whether the propositions concerning the value of thegoods are of natural law, as suggested by the theory of the bonitas intrinseca,

or should be reduced to the positive law, as the theory of communis timatio seems to suggest In fact, the scholasticists were not really interested

aes-in understandaes-ing what value is or how it is determaes-ined They believed thatthe just price must be such as to guarantee commutative justice, that is, equalexchange, in such a way that nobody can obtain more than he gives from theexchange of goods If this price is ‘just’ because it corresponds to the naturallaw, it is also true—and, in a certain sense, even truer than the prices at whichthe goods are really exchanged on the market, which can be a little higher orlower than the ‘just’ price itself This is probably the distant origin of theclassical theories of natural and market prices, which will be considered inChapter 2

Unlike real goods, which have an intrinsic value, money has a conventionalvalue (impositus), a value imposed by the prince, and there is no doubt thatthe doctrine of the value of money comes within positive rather than naturallaw At any rate, a conventionalist theory of money predominates in

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scholastic thought, and especially in the work of Thomas Aquinas, whoconsidered money as a standard invented by man to measure the value ofgoods and facilitate trade Money was also considered as a replaceable goodwhich is consumed in use In fact, the main justification for the condem-nation of usury was derived from this Non-fungible goods were those thatcould be used without being destroyed They roughly corresponded to what

we would now call ‘durable goods’ Fungible goods, on the other hand, wereobjects destroyed through use, as for example, wine In the first case, use can

be separated from ownership so that one can be sold independently of theother This is not so in the latter case Money came into the fungible goodscategory: when used to buy goods it is lost Anyone lending it is entitled to itsrestitution, but cannot expect to receive a price for its use, for that would beusury The debtor should in fact return it intact Even a low rate of interestwas taken as usury, since anything added to loaned capital was consideredsuch Thomas Aquinas took up the Aristotelian condemnation of usury andadded to it a theory according to which money, as it is not a durable goodwhich produces services, like capital goods, cannot be rented out, so that itslending cannot give the right to the collection of interest He was againstthose who maintained that interest, being proportional to the duration of theloan, is produced by time, an opinion that he attacked by arguing that time is

a common good It is God’s gift to mankind, and nobody has the right toappropriate it for himself or to appropriate its fruits The ban on usury waspartly overcome by applying the damnum emergens doctrine, i.e the viewthat interest compensates for the risk run by the lender of losing part of hiscapital ( periculum sortis) Compensation was generally granted for this riskwhen there was a delay in returning credit, precisely because the delay couldgive rise to losses Default interest was therefore admitted In these cases,compensation was considered to be ‘interest’, not ‘usury’ It was acceptable

to expect a premium for damnum et interesse Usury was prohibited, defaultinterest was not Some authors also made allowances for missing profit; this

is what today is known as ‘opportunity cost’ in loan granting Supporters ofthe legitimacy of compensation for ‘missing profit’ held that interest mustcompensate for the profits renounced by the lender, since his money is notemployed for alternative uses Many canonists maintained however thatmoney put to alternative uses should not generate a profit anyway, and that itwas therefore right to condemn usury, nullifying remuneration of all mon-etary uses of capital A loan should not entitle the lender to compensation formissing profit

Finally, Aquinas made an interesting attempt to justify private property,

an attempt that seems to be the first link in the long chain which, as we willsee, connects scholastic thought to the seventeenth-century natural-lawphilosophy and to nineteenth-century socialism God created the earth forthe whole of mankind, and nobody can claim a right which deprives othermen of the goods created Private property, however, could be justified as

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the birth of political economy

a stimulus to work and is not in contrast with natural law, even though

it is not established by it It can be seen as a form of concession that thecommunity gives to individuals, provided they use it as a service to thecommunity: it is not a right of using, enjoying, and abusing ( jus utendi,fruendi, et abutendi), but only a power of procuring and dispensing ( potestasprocurandi ac dispensandi)

It is not difficult to understand the strong moralist tone of the scholastictheories and their normative function This was a period in which the revival

of commerce threatened to break up a social order which was supposed to bebased on the divine will, while bringing wealth and welfare, if not to all thecommunity, certainly to some new classes and social groups In this situationthere was a strongly felt need to keep under the community’s control,wherever possible, the economic instruments by which the new wealth wasaccumulated: commercial profits, prices, usury loans, and private property.The economic ideas of Aquinas, and of scholasticism in general, havemoral implications rather than scientific, and belong to the prehistory ofeconomic science But they cannot be ignored in any history of this science

as, after becoming part of the social doctrine of the Catholic Church, theyhave continued to influence economic thought for several centuries, even inwriters who did not agree with them Economists who have elaboratedopposing doctrines have had to take them into consideration An excellentexample is the abbe´ Galiani, who, as late as the eighteenth century, at theheight of the Enlightenment, was not able to formulate his own moderntheory of interest without feeling the need to show its coherence with thedoctrine of ‘commutative’ justice and the precept that prohibits usury

1.1.2 Communes, humanism and the Renaissance

From the end of the twelfth century onwards, European society and nomy underwent a process of transformation which continued until aroundthe middle of the sixteenth century It began in Italy and already in thethirteenth century it had spread and became firmly established in otherregions, Flanders, England, northern Germany and southern France A newform of social organization developed: town civilization In a typical town ofthe late Middle Ages, or, better still, Renaissance period, citizens were free tomove around and meet up in different places: in churches, the governmentpalace, the merchant’s court, the guildhalls, the buildings of confraternitiesand those of the trainbands, the marketplace, the palaces of the wealthybourgeoisie; particularly in the streets which provided the backdrop fortrading and social conflict, and lastly, in the main square, the venue for thepeople’s political assembly, or ‘Parliament’, where public decisions weretaken, often resorting to the argument of weapons

eco-This civil revival came as the result of a long economic and socialrevolution At economic level, manufacturing, commercial and financial

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capitalism developed In the textiles sector, in particular, where importanttechnological innovations, such as the wide loom, had been introduced,production grew to such an extent that extensive ‘workshops’ were built forthe great number of wage-workers which often ran into hundreds Moreover,the invention of the mechanical clock enabled time to be measured accur-ately and consequently wage-workers to be used more efficiently Trading,

on continental scale, embraced the whole of Europe and the Mediterranean.Finance and international banking developed to such an extent that bankersfrequently conditioned diplomacy and wars between great powers Duringthis period several important economic innovations were introduced: the bill

of exchange, double entry accounting, securitazation of the public debt,insurance, the merchants’ forum, the bank, the stock exchange and thecommenda—the forerunner of today’s joint stock company

At social level, the rise of the bourgeoisie during a long revolutionaryprocess led to the armed ‘people’ undermining the power of the old aristo-cratic classes, while Communes were set up as autonomous states, inde-pendent of imperial rule Already around the end of the thirteenth century,serfdom had been abolished in many of the Italian republics to smite thearistocracy’s economic power and release labour to import to the city, butalso in deference to a new concept of human freedom It was during thisperiod that the modern idea of freedom developed, intended as ‘freedom ofthe people’, that is, autonomy of the people set up as a Commune against theprerogatives of imperial power, on the one hand, and ‘individual freedom’,that is, the right to take autonomous decisions about one’s life in economic,political, and moral fields, on the other

But most important of all was perhaps the cultural revolution, which saw arevival of the arts, architecture, literature, philosophy, and law Humanismrepresented the unifying spirit of the entire process The rediscovery of Greekand Roman literary and philosophical works enabled the intellectuals of thetimes to take a step back ahead of the Middle Ages and lay the foundationsfor a jump forward to modern times, to what has been called ‘civil human-ism’ The rediscovery of ancient juridical works, on the other hand, led to theconstitution of Corpus iuris civilis and the birth of studies in Roman law,creating the premisses for overriding feudal and canon law and the birth of

an advanced law more in keeping with capitalist development And while

in public law, the concept of a constitutional state with popular sovereigntybegan to take shape under the guidance of Marsilio da Padova, in privatelaw a form of regulation of the employment relationship emerged, which byrestoring the concept of locatio operarum, led to the end of feudal disciple-ship and the birth of the modern employment contract

The hero of humanism is an active subject, open to innovation, a lover offreedom who is proud of his civil virtues: in short a merchant-manufacturer.This new Hercules combined action and reflection, art and accountancy,religion and politics, theory and practice, in the immense effort to create

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the birth of political economy

his own world and in that world, a space for his own freedom The economicand political reality in which an individual is immersed is no longer adatum; the old unchangeable order recounted in Menenio Agrippa’s apo-logue and prescribed by divine design no longer exists The new order isongoing and is created by the valorous and prudent man, who no longerconfines himself to taking what he needs to live from nature but, indeed, liveshis life in the immense superhuman endeavour to create what nature isunable to offer him: that surplus of artistic beauty, political power andeconomic wealth which represents the spice of good bourgeoisie living.Freedom is an essential condition for this hero’s existence, but even moreessential is the set of human and institutional relations which makes thatfreedom possible For economic freedom is impossible without politicalfreedom Only in a free republic can an active man exercise his creativeaction, a republic that defends its citizens from the threat of tyranny But arepublic is none other than a group of citizens gathered together in a close-knit Commune.

Notwithstanding the many differences that undoubtedly exist among thevarious humanist thinkers, the insistence on the essential relationality of theperson is common to all and is an extremely important concept of economictheory From it derives the belief that interpersonal relations are the trueeconomic resource As M Palmieri wrote in Della vita civile (On civil life): ‘ofall beings, man is the most useful to man The goods he needs he can obtainonly from his fellow creatures’ (p 29) Civil humanism continued into theRenaissance, and in the sixteenth century, that of Niccolo` Machiavelli,Thomas More, and Erasmus of Rotterdam, it became the essence ofmodernity

It was Machiavelli who best expressed the significance of this revolution inpolitical and social thought The philosopher of The Prince was certainly notone to deceive himself over man’s natural goodness His country’s declinewas there before his very eyes; he could see that the Italian people’s republicswere by now far from being true democracies—indeed, they were places ofwar against all and everyone, of the fight between social classes, of the tri-umph of tyranny He put the cause for this situation down to moral dec-adence He did not, however, deduce that human nature is evil, that theoriginal sin turns homo into homini lupus In Discorso sopra la prima deca diTito Livio he let loose his Utopian inclinations, showing a certain predilec-tion for a republican government; making it clear, however, that that politicalsystem presupposes a public-spirited man with a love of freedom In otherwords, Machiavelli broke away from the fundamental contradiction ofmedieval thought and its continual oscillation between Aristotelian optimismand Judaic-Christian pessimism, by refusing to define human nature inmetaphysical terms Machiavelli saw man not as an Aristotelian ‘politicalanimal’, nor as son of the original sin There is nothing natural about humannature, which is in reality affected by the historical context in which man

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operates It is socially determined, or, as we would say today, it is genous But the sociopolitical context is, in turn, determined by man’s col-lective action The form of social organization changes with man’s moralinclinations and vice versa A republican government presupposes citizenswith a public spirit and love of freedom; but that same government, throughits institutions, induces citizens to develop those very moral qualities Thedespotism of the Prince, on the other hand, is made necessary by thedecadence and moral corruption of the people, which it contributes to fuel.From this derived a sort of historical and institutional relativism which hasremained alive in all Italian political and economic thought: GiambattistaVico brought it to its logical historicist consequences This conception is not

endo-in contrast with its humanistic origendo-ins, it is endo-indeed their supreme realization

In formulating his first law of the evolution of society, Vico wrote thatdecadence begins when men no longer find within themselves a reason torelate their lives to that of others and not when material resources run short.The cultural reform brought about by humanism contributed to fuelinnovation also in the field of economic thought Of the many ideas thatemerged in the field of economics, we shall confine ourselves to recalling justtwo that abound with modern implications: Francesco da Empoli’s theory ofinterest and Antonio Pierozzi’s use-value theory, both of which wereelaborated in Florentine monastic Studia

In the fourteenth and fifteenth centuries Florence was one of the mostimportant financial and industrial centres in Europe It issued ‘the only trueinternational currency of the times’, the gold florin, and exported all over thecontinent and the Mediterranean area the refined woollen and silk cloth

it produced in hundreds of workshops, the largest of which employed over

200 factory wage workers and scores of spinstresses, weavers, and otherhome workers The Florence Commune also set up an advanced system ofrepublican institutions and a sophisticated economic administration thatmade widespread use of public debt management policies

A flourishing secondary market for government securities grew up whichencouraged extensive and refined speculation (so refined as to practicestellage operations) To curb the tendency, the government was obliged tointroduce a sort of ‘Tobin tax’ ante litteram: a 2 per cent gabelle on alltransactions The speculation phenomenon gave rise to bitter disputesaround the middle of the fourteenth century, which in turn led to a vastnumber of theories on the new forms of usury and the problem of the morallegitimacy of profits made on the finance market Canonists and preachers ofthe times raged violently against these speculative practices, re-proposingand brushing up Thomistic theories on usury

One voice raised against the mainstream was that of the Franciscanpreacher, Francesco da Empoli, who argued that government securityspeculators were not usurers, first, because securities were exchanged on themarket on the basis of a sale contract and not a loan contract It should be

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noted that according to canon law and scholastic doctrine, only loans—and

no other uses of money—could give rise to usury Those who bought ernment securities on the market did not lend money to the Commune thatissued them or to the citizen who re-sold them Therefore, any earningsobtained could not be considered remuneration for the loan of money.Second, it was a right rather than a commodity that was bought onthe market, to be exact, the right to collect an income and, in the event, acapital Nevertheless, in the third place, the value of this right was uncertain.There was, in fact, no guarantee that the Commune would actually repayits debts, which had become unredeemable around the mid fourteenthcentury The speculator could redeem his capital by selling the securities toother private investors But since the market price was subject to sharpfluctuations, the value of the investment was always ‘doubtful’ Moreover,the Commune paid interest at a fixed nominal rate (sometimes as high as

gov-15 per cent), so that, because of the instability of the market price ofsecurities, the actual interest rate too was always doubtful In otherwords, an exchange of securities on the market took the form of a venditiosub dubio, which is tantamount to saying that the buyer made a riskypurchase

The element of risk inherent in the transaction induced da Empoli toassimilate this type of contract to insurance Thus, in the same way that anunderwriter covered a merchant’s risk for which he obtained a premium inexchange, the buyer of a government bond on the secondary market coveredthe seller’s risk, by making a secure cash payment As a premium, heobtained in exchange the right to receive payment from the Commune atsome future date Since the actual value of these payments was uncertain,the buyer assumed a risk Accordingly, any profit he might make was notconsidered usury, but a premium for the risk undertaken It should be borne

in mind that Church doctrine condemned all forms of usury, but consideredinsurance premiums acceptable Francesco da Empoli’s argumentationcannot properly be referred to that of periculum sortis, i.e the capital risk.Taking his analysis outside the context of a loan contract, the Franciscanmonk reduced the risk to one of income In his opinion, it was not thelender’s risk that was compensated, but the service offered by the buyer incovering an income risk

Passing now to the theory of value, we wish to recall a practice widely used

in Florentine wholesale trading, known as ‘tagging’ The most important cityguilds, the Woollen, Silk Cloth, and Merchants Guilds, invited their mem-bers to apply a tacca (tag) to sold goods; this was a wooden or parchmentlabel which set out details of cost: primi costi (i.e the cost of raw materials),labour costs, transport costs, warehousing costs, indirect taxation, exciseduty In this way, information on the cost of production was made public.The sale price was then fixed by adding a gross mark-up warranting an

‘honourable profit’

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This prescription aimed to encourage market transparency and the tice of fair trading and was justified by the doctrine of just price The jus-tification was, however, misleading because, according to doctrine, a justprice should be determined by excluding monopolistic practices An hon-ourable profit should be earned, made up of two components: remuneration

prac-of managerial work, quasi stipendium laboris, and a fund for charity ities, a danaio di Dio, God’s money (although some guilds classified thedanaio di Dio among the cost items) In actual fact, the major FlorentineGuilds of the fourteenth and fifteenth centuries operated as authenticindustrial syndicates, by controlling outlet and supply markets, regulatingthe labour market and wages and limiting competition among its membersthrough fixing production quotas The ‘just’ price they fixed tended to be amonopolistic price collectively determined by representatives of the verysubjects to whom it was prescribed In view of the enormous profits itguaranteed, no one believed that it was just in the commonly accepted sense

activ-of the word nor that it guaranteed only an honourable gain

While the practice of tagging appeared to give rise to a theory of value asproduction price, in reality it brought to light the role of market controlpractices in fixing prices and, consequently caused a rift in the objectivisttheory of value Undoubtedly, it drew attention to the weight of demand indetermining prices and consequently on subjective factors The theoreticalelaboration of Antonio Pierozzi, better known as Sant’ Antonino da Firenze,Dominican prior, Bishop of the city and Doctor of the Church, contributed

to widen this rift He argued that the formation of a price is undoubtedlybased on objective factors, in particular on raritas and difficultas, the scarcityand cost of production But there is also a subjective factor, complacibilitas,the individual assessment of the value of a good This is not yet a utilitytheory of value, but closely resembles one One important thesis of Pierozzi

is that complacibilitas contributes to form a communis aestimatio but also todiverge from it In fact, Antonino maintained that a product is exchangedwhen a buyer who values a good as worth more than the money it costsencounters a seller who values it less; he therefore considered a sale at otherthan the current price as also acceptable, as long as both contracting partieswere in agreement

1.1.3 The expansion of ‘Mercantile’ capitalism

A slow but inexorable process of economic, social, political, and culturaltransformation began around the middle of the sixteenth century and was tolast beyond the middle of the eighteenth, when all the preconditions for thebirth of modern industrial capitalism had been laid down The economicleadership of Europe moved northward

One of the main factors in this transformation process was the flow ofgold from the Americas The prices in Europe tripled from 1500 to 1650

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The social consequences were enormous On the one hand, there was agradual impoverishment of those classes, aristocratic and clerical, who lived

on incomes which, being fixed by custom, adjusted extremely slowly to thefall in the value of money On the other hand, there was an unprecedentedenrichment of the mercantile class, who lived on ‘profits upon alienation’,namely, incomes derived from the difference between the buying and sellingprices of goods, a type of profit that naturally increases with inflation Thisgrowth of the monetary wealth of the middle classes and the correspond-ing gradual expropriation of the old dominant classes was one of thefundamental factors in the process of primitive accumulation

The expansion of trade, especially long-distance commerce, led to theformation of commercial and industrial centres and, gradually, to the newfigure of the merchant-manufacturer, thus inducing profound changes inproductive activity The need for an increasing quantity of manufacturedproducts and, above all, the need for greater stability in their supply led themerchants to extend their control over the production activity The ‘putting-out’ system spread in England and France towards the end of the sixteenthcentury—that same system which had been experimented in Italy and theFlanders in the fourteenth century At first, the merchant supplied the rawmaterials and commissioned the craftsman to transform them into finishedproducts, while the work continued to be done in independent workshops Inthe succeeding phase, the ownership of the tools of production, and often theworkshops themselves, passed to the merchant, who was then able to employworkers himself Workers no longer sold the finished product to the mer-chant but instead sold their own working capacity The textile industry wasone of the first sectors in which this new method of production took place.Thus occurred the slow formation of a modern working class on a nationscale, a social class whose members are deprived of control over the produc-tion process and for whom the sale of their own working capacity representsthe only way of making a living In the countryside this process was favoured

by the diffusion of the putting-out system, the enclosure movement (especially

in England), and the increase in the population Furthermore, the increase inprices in the towns drastically impoverished those categories of semi-skilledcraft workers who made up the lowest strata of the old guilds, and who earned,

at least in part, incomes which were fixed by tradition Such incomes wereheavily cut by inflation This social group merged with the farmers expelledfrom the countryside and the poor craftsmen whose goods were no longercompetitive because of lack of commercial outlets

Another important change that occurred in these three centuries, startingafter the Westphalia peace, was the affirmation of the modern nation states.The transformation ended in the dissolution of the Holy Roman Empire,thus giving life to various national unification processes which were com-pleted towards the end of the fifteenth century, at least in England, France,and Spain In the following three centuries, European wars were wars among

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nation-states, where the reason of the state prevailed over every other, evenwhen, as with religious wars, the ideological element was very strong.

1.1.4 The Scientific Revolution and the birth of political economy

With humanism and the Renaissance, man had been placed at the centre ofthe universe and philosophy had emancipated from Aristotle and Thomism.And while politics, with Machiavelli, had ceased to be a branch of moralphilosophy and became a science, with the Protestant Reformation the faithitself, or the spiritual base of the free act, had emancipated from traditionand authority To say it with Nietzsche—the Reformation made eachindividual a priest of himself, which is a form of libertinage Machiavelli’sThe Prince was written in 1513; Luther began preaching against the sale ofindulgences in 1517

The Renaissance also witnessed the beginning of that great process ofintellectual emancipation known as the Scientific Revolution In the six-teenth and seventeenth centuries there was a second wave in the expansion ofEuropean universities The first wave had taken place in the late Middle Agesunder the protection of the Church Later, in the fourteenth and fifteenthcenturies, the university system collapsed, mainly because of the attempt bythe freer and more creative intellectuals to escape from the spiritual control

of the Church and to look for employment in the royal courts and in the layacademies During the revival of the universities in the sixteenth andseventeenth centuries, the State tended to take the place of the Church in thecontrol of intellectual activity In this period, the traditionally higher-rankedfaculties of theology, law, and medicine, where the spiritual control fed bythe wars of religion was still important, lost prestige and importance At thesame time the faculties of philosophy, relegated to an ancillary role in theMiddle Ages, acquired increasing prominence

Modern philosophy was born in the new universities, and with it science.And it was not by chance that the greatest philosophers of the period werealso great scientists, or at least showed great interest in scientific research.The Scientific Revolution began with Copernicus in the first half ofthe sixteenth century, continued with Keplero, Galileo, Bacon, Leibnitz,Descartes, and was completed by Newton in the eighteenth century

It was in this climate of cultural revolution that the basis of moderneconomic thought was laid down While the natural sciences were freeingthemselves from belief in various forms of magic, economics wished toemancipate itself from ethics and political philosophy The process had beenunder way for some time when Antoyne de Montchre´tien announced theprogramme in the title of his main work, Traite´ de l’ oeconomie politique(1615), in which he sustained that economics, the ‘science of acquisition’, was

an important part of politics, and that it should concern itself, not only withthe household, but also with the State The birth of economic science passed

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through two emancipation processes The first led to the abandonment of theAristotelian and Thomistic idea that economics should deal exclusively withthe behaviour of individual economic agents and households, while the otherresulted in the abandonment of scholastic metaphysics and gnosiology Wewill consider them separately.

In classical Greek thought, economics was considered as the art of familymanagement It is true that, as early as in the first century bc, the termpolitike` oikonomı`a was already used by some Epicurean philosophers in themodern sense However, owing to the influence of Aristotle on scholasticthought, the Latin word oeconomia passed to medieval philosophy with itsmicro-economic meaning For Thomas Aquinas, this discipline dealt withthe ‘government of the house’ It should be focused on the private sphere ofhuman action In this role it was subordinate to ethics and political philo-sophy, the philosophical disciplines which study the public activities of man.Politics was concerned with the behaviour of collective agents such as socialclasses, the State, and its organs, whereas economics should study thebehaviour of the individual social agents, the families The aim of the ‘sci-ence’ of political philosophy was the study of the political society In relation

to this, families represent something which was considered inessential

On the other hand, political philosophy and ethics produced knowledge,whereas economics only had practical ends For Aristotle, as for his fol-lowers in the late Middle Ages, especially Aquinas, ‘science’, that is to say,speculative knowledge, consisted of the application of a rational deductiveprocedure to an object of study, on the basis of which propositions could beformulated and conclusions reached that would be both universal andnecessary The universality of political propositions was derived from thefact that God’s will was manifested in the popular consent given to thelegislative power of the governors; while the universality of ethical pro-positions derived from the fact that the ends of human action coincided withthe ends which God had modelled for all creatures The economic activities

of a household could not be studied in this way All the actions of the singlesocial cells would come under either ethics or politics, and those which couldnot thus be classified were not worth ‘scientific’ study In other words,economics was not a ‘science’ because it was neither ethics nor politics.Indeed, Schumpeter is right when, in his History, he observes that Aquinaswas not interested in economic questions in themselves, and that ‘it is onlywhere economic phenomena raise questions of moral theology that he tou-ched upon them at all’ (p 90) He is also correct when he observes that, inscholasticism, economics as a whole was never treated as a subject in itself.Aquinas considered individual commercial action as despicable What uni-versal propositions could be formulated on it? How could a ‘science’ dealwith it?

Now, pretending to be public, civil, national, or political economy, the newdiscipline defined itself as a science precisely because it had located its own

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subject of study within the sphere of public activity With this it affirmed,among other things, its own autonomy from the new political science, whichwas developing at the same time They were two independent disciplineswhich studied different aspects of collective action: one was concerned withthe accumulation and management of wealth, the other with the accumu-lation and management of power Both studied the behaviour of collectiveagents: still the State and its organs, but now subordinately to another socialsubject, the nation From the latter the State tended to receive legitimacy,especially as the legitimacy of the Papacy or the Empire had been stronglyweakened Public welfare was becoming one of the legitimating factors bywhich a new sphere of State activity was to be defined Political economy wasborn, together with theories of economic policy, in order to give sense andefficacy to this activity.

In order to outline the second aspect of the process of emancipation ofeconomics from Thomism, it is important to note that the birth of politicaleconomy occurred at the same time as the concept of science underwent asecularization process Only when human action is no longer motivated byspiritual ends does it make sense to study it without aspiring to reach uni-versal propositions And it is precisely when public choices are no longerlegitimated by God, but only by the ends of men and the nation, that it ispossible to study them scientifically

This secularization process, as far as political economy is concerned, wascompleted in the seventeenth century, when the new science was fertilized bynatural-law philosophy, English empiricism, and Cartesian rationalism But

it had begun much earlier, at the time of the philosophical debates about

‘universals’ The ‘universals’ are the essential properties of things According

to Aquinas, before existing in the mind of man, who is able to understandthem by means of abstraction, universals exist in the mind of God They alsoreside in things themselves, behind and at the roots of their empirical reality

It is for this reason that speculation leads to ‘science’: the human mind, withits speculative ability, operates on an ontological structure of the world towhich it corresponds

A different theory of knowledge was put forward by the nominalistphilosophers, who denied the real existence of the universals These, from thenominalist point of view, were purely conventional signs: the names of thingsand not their real essence The principal supporters of this conception wereRoger Bacon and William Ockham, to whom we owe the distant origin ofmodern scientific thought The nominalist philosophers looked for know-ledge in the study of the individual and empirical aspects of the things, ratherthan in their universal essences

Karl Pribram has pointed out that it was some of the nominalist thinkers,above all students and followers of Ockham, who, in the late fourteenth andearly fifteenth centuries, made the first attempts at scientific reasoning ineconomics Jean Buridan, who tried to explain the values of goods, not as what

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they should be, but as what they really are; and not as substance but asrelational phenomena, expressions of human needs Nicholas Oresme, whodistanced himself from Thomism by attributing a real rather than a con-ventional value to money, a value linked to that of the precious metals fromwhich money was made Oresme was also one of the first scholars to have aclear idea of ‘Gresham’s Law’, which we will consider in the next section Stillanother one was the already mentioned Antonio Pierozzi, who tried to turnthe doctrine of communis aestimatio to serve a subjectivist theory of value.

1.2 Mercantilism

1.2.1 Bullionism

We should immediately point out that a school of thought that defined itself

as ‘mercantilist’ has never existed—even as a current of opinion aware of itsown theoretical homogeneity However, there is no doubt that Adam Smithwas to a degree correct in placing in the category of ‘trade or mercantilesystem’ the group of economic ideas that dominated European political andcommercial circles in the sixteenth and seventeenth centuries and most of theeighteenth A common theoretical core did exist, and this not only permitteddebates and dialogues but also gave a certain homogeneity to the variousnational economic policies What is difficult is to identify a ‘system’ in thoseideas It would be at least necessary to admit some important differencesconnected with national characteristics, and also to admit a minimum ofhistorical evolution We have insufficient space here to consider the nationaldifferences, except for a few points which will be mentioned when necessary;however, historical evolution cannot be ignored

For simplicity’s sake, we will follow Cannan’s suggestion and distinguishbullionism from mercantilism in its strict sense, even though we are wellaware that this classification is a little forced

Bullionism had dominated the opinions circulating in the European courts

up to the end of the sixteenth century It was characterized by the convictionthat money, or gold, was the wealth Now, there is obviously no doubt thatmoney is wealth The mistake, according to Smith, was the belief that it wasthe only form of wealth However, it is doubtful that there have ever beeneconomists who really thought in this way Rather, there was a widespreadopinion that treasure was the only type of wealth worth accumulating—anopinion which had more than a grain of truth from the point of view of theState, in an era in which wars were won with gold This idea also accordedwell with the merchant’s point of view, for whom money was capital and,actually, the only type of capital capable of increasing in value In fact, it wasclear to almost every economist of the period that money was a means ofincreasing wealth and power What many of the bullionists did not admit

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was the idea that that means should be used to increase the welfare ofpeople, the wealth of nations, as Smith claimed But why should the Stateand the merchants have had to pursue such an objective? In fact, thefirst bullionist economists, when they were not merchants, were adminis-trators of the sovereign’s private finances rather than civil servants; in otherwords, they were still concerned with a household economy This wascertainly true of the German cameralists, who worked at the Kammer, ortreasury, of the sovereign; and the same was true for many of the Spanishbullionists They had good reasons, therefore, to work towards rulers’private goals.

The real mistake made by these economists, however, and the onewhich distinguishes them from the mercantilists of the following century, was

in the methods they suggested for achieving these objectives A wide lation of money within the national borders was considered to guarantee anextensive tax base; therefore, the outflow of precious metals had to beprevented The simplest way to do this was to prohibit the export of gold andsilver, a method that was applied rigorously, sometimes even ferociously, inmany countries Another measure often adopted was that of raisingthe purchasing power of the foreign currencies by law within the nationalterritory, so as to induce an inflow of money from abroad Besides this,there were also attempts to force national companies to pay for importswith goods instead of money Finally, a measure that was used above all inSpain was that of the ‘balance of contracts’: buying from each foreigncountry an amount of goods which did not exceed the amount exported tothat country

circu-Another bullionist ‘mistake’ was the tendency to seek the causes of asystematic outflow of precious metals solely in monetary factors, namely, inthe deviations of exchange rates from the parity determined by the metalliccontent Such deviations were attributed to illegal behaviour, forgery, andmanipulations by bankers and merchants But the Crown also, often andwillingly, resorted to illegal monetary techniques, such as ‘clipping’, i.e.reducing the metallic content of the currency in relation to face values, or

‘raising’, i.e increasing, by means of a proclamation, the official value of thecurrency in relation to its metallic content There were many learnedinvestigations in this field, some of which led to the formulation of animportant economic law, ‘Gresham’s Law’, according to which bad moneydrives out good If, in a country, two types of currency circulate which havethe same nominal value but different intrinsic values (because one of the twohas a lower content of precious metal, because it is a forgery or worn), thepublic will tend to use the bad money for internal payments The good will

be hoarded, melted down, or used for international payments, and willtherefore disappear from circulation

In regard to the naming of this law, it is worth pointing out that in 1857 itsdiscovery was attributed to Thomas Gresham by Henry McLeod, who later

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changed his mind and called it the ‘Oresme–Copernicus–Gresham Law’.Gresham provided a precise formulation of the law in a letter to QueenElizabeth I Today it is known that the first formulation goes back to

1519 and is owed to Nicholas Copernicus, even if some hints of it can befound in Nicolas Oresme

1.2.2 Mercantilist commercial theories and policies

Bullionist doctrines were still professed in the seventeenth century Forexample, Gerald de Malynes sought the basic causes of a disequilibrium inthe balance of trade in the alterations in the exchange rate The mostinteresting part of Malynes’s arguments, however, is not bullionist, and can

be summarized in the following way An exchange rate which is higher thanthe metal parity leads to an outflow of precious metals which diminishes theamount of money in circulation in the country under consideration Thisreduces prices and worsens the terms of trade Consequently, the trade deficitincreases There are two interesting aspects to this way of thinking: the use(albeit in an approximate way) of the quantity theory of money, andthe implicit hypothesis of a low price elasticity of imports and/or exports Wewill consider this later Less interesting is the solution proposed: the inter-vention of the ‘royal exchanger’ against illegal practices and monetarymanipulations, which had, according to Malynes, the sole responsibility forthe fluctuations of the rate of exchange

Counter-arguments were advanced by two learned merchant adventurerswho disdained neither science nor politics: Edward Misselden and ThomasMun Misselden overturned the theories of Malynes: it is the surplus or thedeficit on the balance of trade which makes the rate of exchange vary, andnot the other way round Rather than worry about the exchange rate, theState should encourage exports and discourage imports This is the gist ofthe mercantilist doctrine, a doctrine which was expressed perhaps moresystematically by Mun than by any other contemporary economist WhileMalynes placed great emphasis on the particular trade balances of onecountry with each other country, taken singly, Mun showed that what reallymattered was the overall balance of trade The inflow and outflow of golddepends on the general balance of trade, and the State should pay directattention to this Thus it was permissible to maintain a commercial deficitwith some countries, such as those from which raw materials were imported,

if this was conducive to the increase of the national production of industrialgoods Many of these goods could be sold abroad at high prices, because ofthe monopolistic advantages associated with the superior technologyrequired to produce them

From the point of view of the birth of political economy, the identification

of the interests of one particular social class, the merchant class, with those

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of the collectivity, was extremely important In this way, economics ceased to

be ‘domestic economy’ and became ‘political’ The profits of that class,profits upon alienation, were obtained from an excess of the value of salesover purchases This gap gave rise to the accumulation of money The entirenation was considered as a great commercial company Its net inflow of goldcorresponded to the excess of its foreign sales over and above its foreignpurchases And, as with the merchant, the nation would also have to avoidkeeping its stock of money idle It had to reinvest it in the form of stock, inorder to buy (import) the goods necessary to produce new goods; with these

it would be able to increase sales (exports) and profits (trade surplus).Although production, and therefore the transformation of the imported rawmaterials, played an important role in this way of thinking, it was still onlythe excess of sales over purchases which was seen as the source of profits, forthe collectivity as well as for the individual

The theory of economic policy that sprang from this doctrine wassimple Commercial policy had to be protectionist Export duties had to beabolished and import duties raised Moreover, exports should be encouraged

by incentives and imports hindered as far as possible and even forbidden incertain cases These principles were rigidly followed by the French customstariffs instituted by Colbert in 1644 England moved in this direction espe-cially towards the end of the seventeenth century However, certain veryimportant exceptions were made: the import of raw materials, which wereconsidered useful to the national industries, was not to be obstructed, whilethe export of important raw materials such as wool should be forbidden.Mercantilist commercial policy also favoured national shipping; and manymeasures were taken aimed at reinforcing the merchant navy The 1651English Navigation Act, for example, prohibited the importation of goods

on non-British ships This cultural attitude also influenced colonial sion policy, in relation especially to the demand for the mother country’sproducts and for the supply of low-cost raw materials that were expected

expan-to come from the colonies Finally, it is important expan-to mention the policy ofconceding privileges and monopoly rights to the great national commercialcompanies The British East India Company was founded in 1600, and theDutch in 1602

The mercantilist industrial policy aimed at encouraging productiveactivity within the national territories by the concession of monopolisticprivileges, State subsidies, and tax exemptions to national enterprises, as well

as by the importation of advanced technology, the acquisition of facturing secrets, and the encouragement of the immigration of skilledworkers The industrial policy even included the creation of State factories

manu-In this field French mercantilism again excelled: Colbert brought industrialpolicy to obsessive levels, to the point of administrative prescription ofmeasures relating to production and quality control

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