1. EC120 week 05, topic 4, slide 0 Commercial expansion: mercantilism and finance Topics: Trade, plunder and settlement (c1600−c1800) Economic rivalry among European states Dutch trading empire Mercantilism: doctrines and their assessment Institutional transformation: Britain Mercantilism as Rent Seeking Finance and Capital: Historical Overview Financial Revolution Joint Stock companies

2. EC120 week 05, topic 4, slide 1 Trade, plunder and settlement (c1600−c1800) From c1600, focus of world trade shifts west, towards the Atlantic International commercial relations dominated by geopolitical conflict Traded goods: mainly high value/weight products Price gaps, between source & destination, remained wide

3. EC120 week 05, topic 4, slide 2 Emergence of nation-states in Europe Gradual decline in arbitrary exercise of power Evolution of nation states: (a) common culture in well-defined boundaries, (b) sovereign tax authority, (c) monopoly of coercive power Fragile balance of power among Europe rival states

4. EC120 week 05, topic 4, slide 3 Economic rivalry among European states Spain: declining in economic power in 17C and 18C France: became a powerful, absolutist nation-state Holy Roman Empire: small states, conflicting loyalties Eastern Europe dominated by Prussia, emerging Russia & declining Ottoman Empire Scandinavia: dominated by Sweden, sparsely populated

5. EC120 week 05, topic 4, slide 4 Dutch trading empire Early prosperity based on textiles and North Sea trade Economically efficient relative to rest of Europe Merchant marine in 17th century became dominant International power waned in 18C: rivalry with France & Britain

6. EC120 week 05, topic 4, slide 5 Mercantilism: the doctrines Diverse, practical, interventionist state policies Aim: promote the national interest Objective: accumulate gold & silver How? Favourable balance of trade International trade (and relations): a zero sum game

7. Institutional transformation: Britain The Glorious Revolution, 1688/9 –Confirmed Parliamentary supremacy, against absolute monarchy Economic significance commonly dismissed Revisionist view: the revolution did matter. Why? Changed the balance of power –Party politics, not the King’s agenda –Whig domination EC120 week 05, topic 4, slide 6

8. EC120 week 05, topic 4, slide 7 British mercantile policies Evolves from regulation to taxation Grants of monopoly and privileges to restrict competition –Favour employers (masters) over workers (servants) –Local enforcement, mainly urban; –Rural areas less regulated Monarchy v. Parliament resolved in favour of Parliament –Civil war, 1642-49; Glorious Revolution 1688–89

9. EC120 week 05, topic 4, slide 8 Mercantilism: assessment Favouring mercantilist policies: Necessary to enable transition to capitalism Aided emergence of nation-states Temporary policies support “infant industries”. Against: Mercantilist policies restrict growth of trade –Hence restrict prosperity (income)

10. EC120 week 05, topic 4, slide 9 Mercantilism as Rent Seeking Distinguish between: (a) economic efficiency and (b) distribution of wealth Mercantilist policies -> “surplus” = “rent” = “profit” “Rent seeking” is the quest to capture the surplus Result: redistribution of wealth and economic inefficiency Even worse: rent seeking rivalry can dissipate the surplus

11. EC120 week 05, topic 4, slide 10 Finance and Capital: Historical Overview Of ancient origin: loan contracts, money (typically coins) From medieval times (to 17C): –Expansion of banking for trade credit –Usury laws restricted/prohibited interest on loans –Expanding land market

12. EC120 week 05, topic 4, slide 11 Financial Revolution from late 1600s Driven by British and Dutch for Govt funding Parliamentary ascendency restrains arbitrary action Improved administration of tax gathering `Secondary’ markets expanded for: Gilt-edged stock and Joint-stock companies’ shares

13. EC120 week 05, topic 4, slide 12 Joint Stock Companies Emerged from medieval associations and guilds Main stimulus: growth in overseas trade Joint stock form enables –large amounts of capital to be amassed, –risk-sharing among investors, –transferable stock Vulnerable to manias and panics