Seventeenth-century England produced an explosion of pamphlets dealing with economic questions. In most of them, merchants and businessmen sought to defend their own interests and to argue for policies that were to their own advantage. Trade was organized through trading companies (such as the Merchant Adventurers and the East India Company) which regulated trade to parts of the world in which they were given monopoly privileges. Each of these companies had its own interests, as did outsiders who were opposed to the companies' privileges. The result was a proliferation of new economic ideas. However, the fact that most writers were motivated by self-interest did not preclude careful and subtle analysis, with the result that great progress was made. The rise of this literature can be related to the economic problems facing the country and to a political system that gave people the incentive to provide rational arguments for the policies they wanted to see adopted. Underlying it was an increasingly secular outlook, reflected in new attitudes to both science and politics which had profound effects on the way in which people thought about economic questions.
Two figures dominated seventeenth-century thinking on science. The first was Francis Bacon (1561–1626), whose Novum Organum (1620) provided a manifesto for experimental, empirical, science. He called for a reconstruction of knowledge on the basis of two principles: natural history (the detailed, systematic collection of facts about nature) and induction (deriving laws of nature from these facts). Scientists were to be servants and interpreters of nature. Bacon was critical of Aristotle and other ancient authorities for creating elaborate arguments based on premisses that were not based on careful observation and that were frequently contrary to nature. He was far from being the first to make these complaints, but his views were widely discussed.
The second dominant figure was René Descartes (see p. 53). Like Bacon, Descartes challenged scholastic philosophy and sought to establish firm foundations on which knowledge could rest. He is most famous for his phrase ‘Cogito ergo sum' (‘I think, therefore I am’) – the only thing that cannot be doubted is that I am doubting. However, in the scientific context, the most significant aspect of his thought is the importance he attached to reason. Whereas Bacon sought to base knowledge on experimental science, Descartes sought, in the manner of mathematics, to base it on a set of simple, self-evident truths. Using deductive logic, more complex truths could then be derived from these. The result would be a body of knowledge that was certain and free of internal contradictions.
Bacon and Descartes both challenged traditional authority and offered methods that they believed would provide secure foundations for knowledge. The methods they offered were radically different, in that Bacon emphasized induction and Descartes deduction. However, there were similarities. Descartes argued that the simplest, most comprehensible view of the world was to see it not as a single organism but as made up of various parts. It was to be understood in terms of the way those parts moved and interacted – as a mechanical system. The scientist should rely not on subjective judgements about the world but on qualities that could be measured. Despite their differences, which were substantial, Descartes's belief in measurement paralleled Bacon's belief in experimental science. They were united in rejecting authority as the basis for knowledge.
Bacon's programme was taken up by the Royal Society, which received its charter in 1662 and included most of the leading scientists of the period, such as Robert Boyle (1627–91 – the leading figure), Isaac Newton, Robert Hooke (1635–1703), John Locke and Samuel Pepys (1633–1703). Its motto, ‘Nullius in verba' (‘On no man's word’), echoed Bacon's rejection of arguments from authority, and the Society laid down procedures about how experiments were to be conducted and reported if their results were to be accepted. There were serious difficulties with the inductive part of the programme (even the concept of induction was ambiguous). The Society's critics (such as Thomas Hobbes (1588–1679)) raised justifiable questions about its experimental procedures; some of the fact-gathering was pointless, and some of the experiments performed by the ‘virtuosi' merited the scorn poured on them by writers such as Jonathan Swift (1667–1745). However, despite these problems, the Royal Society was undoubtedly extremely successful. The achievements of Boyle and Newton alone are enough to establish that.
From the start, economic questions formed part of the Society's programme. Bacon had called for natural histories of different trades – of ‘nature altered or wrought’. The major figure here was William Petty (1623–87). Petty studied medicine in Holland and France, served for a short time as an assistant to Hobbes (who himself may at one time have been an assistant to Bacon), and then returned, in 1646, to Oxford. There he met Boyle and became involved in the circle from which the Royal Society developed. However, having become established as Professor of Anatomy at Oxford, and Professor of Music at Gresham College in London, he took leave of absence in order to go to Ireland as physician to Cromwell's army. Cromwell was faced with the task of dividing Irish lands to reward his soldiers and financiers. In 1655–8 Petty undertook the task of surveying, and produced some of the best maps of any country at the time. Through buying land from soldiers who wanted to sell the land they had been given, he established himself as a major landowner, though he had to spend much time defending his titles.
Petty's thoroughly Baconian approach to economics is stated clearly in the Preface to his Political Arithmetick, written in the 1670s though not published until 1690, after his death: ‘Instead of using only comparative and superlative words, and intellectual arguments, I have taken the course… to express my self in terms of number, weight or measure; to use only arguments of sense, and to consider only such causes, as have visible foundations in nature.’1 His objective in writing the book was to show that, contrary to much popular belief, England was richer than ever before. He tried to achieve this by providing arguments based on numbers and arithmetic calculations.
Central to Petty's claim about England's wealth was an argument about the value of labour. Wealth comprised people as well as land (of which France clearly had more than England) and capital. Starting from the observation that people each spent £7 per annum and assuming a population of 6 million, he calculated that national income must be £42 million. Deducting £8 million for rents and a further £8 million for profits on ‘personal estate' (housing, ships, cattle, coins and stocks of goods), this left £26 million which had to be produced by labour. This gave the following national accounts:
Expenditure |
Income |
||
Personal spending |
£42 million |
Wages |
£26 million |
Profits |
£8 million |
||
Rents |
£8 million |
||
Total |
£42 million |
Total |
£42 million |
Petty went on to compute the value of the population itself. He made the assumption that the rate of return for labour was the same as that for land. He further assumed that its value was 20 times the annual revenue that could be derived from it (implying a rate of interest of 5 per cent per annum), and deduced that, if labour contributed £26 million a year, its value must be 20 times that – namely £520 million. Dividing by the population, this gave him a value for the population of £80 per head. This could then be used to calculate such things as the value of the population lost in the Great Plague.
In his other works, Petty produced more detailed national accounts. In Verbum Sapienti (1665) he derived his figures for average annual spending from assumptions about the distribution of spending (that one-sixth of the population spent 2d. per day, another sixth spent 4d. per day, and so on), the number of days worked in a year (287), and the proportion of the population that worked (50 per cent). He also derived his figure for rents by assuming that England had 24 million acres of land yielding rents of 6s. 8d. per acre. Even more detailed accounts were prepared in The Political Anatomy of Ireland (1672), in which he analysed the distribution of landholdings, house sizes and occupations.
Simple as these national accounts were, they involved major conceptual advances. Expressing these in modern terminology, these included the following ideas. (1) National expenditure (or output) and national income are equivalent. (2) National income is the sum of payments received by all factors of production (land, labour and capital). (3) The values of all assets are linked by a common discount rate to the incomes received (i.e. the ratio of rent to the value of land is the same as the ratio of profits to the value of capital). This was clearly a major achievement. However, the accuracy of the numbers involved in these calculations was, to say the least, highly dubious. Petty estimated population from bills of mortality (parish records of deaths from different causes) without discussing the assumptions he had to make in order to do his calculations or the reliability of the underlying data. Even worse, many of his figures were pure guesswork. He admitted as much in the preface to Political Arithmetick, where he wrote that many of his observations were ‘either true, or not apparently false… and if they are false, not so false as to destroy the argument they are brought for; but at worst are suppositions to shew the way to that knowledge I aim at’.2 In short, by modern standards he was cavalier about his figures. The reason for this may have been that he was not interested in completely precise figures. His aim was just to establish magnitudes sufficiently precisely to make the points he wished to make.
Petty's economics was mercantilist in the sense that he believed that a nation benefited from accumulating treasure, and that taxes on imports might help to achieve this. However, he did not simply confuse treasure and wealth. He recognized that foodstuffs were riches too, and he had a theory about why money was particularly important. What was different about silver, gold and jewels was that they were not perishable and thus were wealth ‘at all times and all places’. Furthermore, money was needed to drive trade. This is why it might benefit a country for plate to be melted down and coined. The amount of money that was needed depended on how quickly it circulated. Here again Petty turned to a numerical example. If 6 million people spend £7 per annum each, their total spending amounts to some £800,000 per week. If ‘every man did pay his expence weekly’, money would circulate within the week and £1 million would be enough. On top of this, however, rents of land (amounting to £4 million) are paid half-yearly, requiring a further £4 million, and the rent of housing (another £4 million a year) is paid quarterly, which requires a further £1 million. In total, therefore, £6 million is required by the nation. Petty also argued that increases in the quantity of money led to falls in the rate of interest. Over the previous forty years, he claimed, the interest rate had fallen from 10 per cent to 6 per cent per annum, this being ‘the effect of the increase of mony’.3
It is easy to look at Petty's data and conclude that he failed to match the achievements of his contemporaries in the Royal Society, such as Boyle and Hooke. His arguments were mercilessly satirized by Jonathan Swift in A Modest Proposal, for Preventing the Children of Poor People in Ireland from being a Burden to their Parents or Country; and for Making them Beneficial to the Publick (1729). It is possible to argue that Petty failed to live up to his Baconian methodology – that his deductions were not about causes that had ‘visible foundations in nature’, that they were no less speculative than those of his predecessors, and that his use of arithmetic was no more than a rhetorical device. This, however, is to miss the point that his methodology did lead him to ask new questions. Merely to ask about the size of labour's contribution to national wealth, the amount of money needed to drive trade, or the effects of different taxes was to view economic phenomena in a new way. In asking these questions Petty was indeed being faithful to the methods of Bacon and the Royal Society. His involvement in surveying Ireland provided him with some data and stimulated much of his work. However, given the extreme paucity of information available to him and the complexity of the problems he was trying to tackle, it was inevitable that his statistics were unreliable.
Though historians of economics associate the term ‘Political Arithmetick' with Petty, he was not alone in applying such methods. John Graunt (1620–74), a close friend of Petty, was elected a fellow of the Royal Society in 1662 on the basis of his book Natural and Political Observations… made upon the Bills of Mortality (1662). He studied data on births and deaths to estimate the population of London and to construct the first survival table (showing how many people lived to various ages). Towards the end of the century, his work and Petty's were followed up by Gregory King (1648–1712). Having more data available, King produced improved estimates of population and much more detailed national accounts than Petty had been able to construct. He calculated national savings, dividing the population into those classes that saved and those with expenses in excess of their incomes. He also produced comparative accounts of income, population and income per head for England, France and Holland, for 1688 and 1695. These and several of his other calculations were motivated by his interest in understanding the potential of these countries to continue in their then state of war. For the case of England he estimated the sources of war finance, calculating the amounts met from increased production, reduced consumption and disinvestment. He calculated, in 1695, that war could not be sustained beyond 1698. (Peace was negotiated in the summer of 1697.) Finally, mention should be made of Charles Davenant (1656–1714), who studied the distribution of taxes across different regions and was responsible for publishing King's work after the latter's death.
The twentieth-century creators of national-income accounts saw Graunt, Petty, Davenant and King as pioneers. However, interest in their work fluctuated greatly. Adam Smith, like many eighteenth- and nineteenth-century economists, was sceptical about the value of ‘Political Arithmetick’, with the result that it had little influence on the discipline. It was only when the resources of the modern twentieth-century state were applied to the task that it became possible to construct systematic, reasonably reliable national accounts.
England was in a state of political turmoil for much of the seventeenth century. The early Stuart kings, James I (r. 1603–25) and Charles I (r. 1625–49), were obliged to turn to Parliament when they needed more funds than they could raise from the royal estates and from established forms of taxation such as customs duties. For a time (the ‘eleven years' tyranny’, 1629–40) Charles tried to rule without Parliament altogether. The country then experienced a period of civil war (1642–9), which was eventually followed by the Protectorate under Oliver Cromwell. The Stuarts were restored in 1660 and, though it was now clear that they could not revert to the absolutism of their forebears, constitutional conflict persisted. This came to a head when Charles II (r. 1660–85) was succeeded by James II (r. 1685–8), a Catholic. James was forced to flee England in 1688 after William of Orange (r. 1689–1702) landed at Torbay. William took the crown as a strictly constitutional monarch. All this political turmoil raised fundamental questions about the basis on which society was organized.
Lying behind such questioning was a deeper change in men's attitudes towards what were, at the time, known as the passions: greed, envy, lust and so on. By the seventeenth century it had become accepted that such destructive passions could not be contained by religious or moral teaching, and that it was necessary to look for an alternative explanation of how society might be held together. One possibility was that one passion might be used to keep others under control. Bacon had argued that, just as a hunter uses one animal to catch another, or rulers use one faction to control another, so one ‘affection' could be used to master another. (This approach can clearly be traced back to Machiavelli.) Hobbes believed that the destructive passions (the desire for riches, glory and domination) could be checked by countervailing passions (the fear of death, the desire to live comfortably, and the hope of achieving this through work). These countervailing passions came to be known as ‘interests’.
However, at the same time as people started thinking that society was held together by interest, there was a profound shift in the way in which the term was understood. In the late sixteenth century ‘interest' was synonymous with ‘reasons of state’, and was seen as lying in between passion and rationality. In England, during the Civil War, the concept of interest began to be applied not simply to the national interest but to individuals and groups within the nation. At this time, the term covered all human aspirations (glory, security and honour as well as material comfort) and implied an element of reflection and calculation about how these were to be achieved. By the end of the seventeenth century, however, interest had begun to take on a more narrowly economic interpretation. The same changes happened in France. Thus in 1661 Cardinal Richelieu's secretary could write, ‘the name of interest has remained attached exclusively, I do not know how, to the interest of wealth’.4 Thus by the eighteenth century we find writers regularly assuming that people are motivated by, as it was put by David Hume (see pp. 114–6), ‘avidity of acquiring goods and possessions' or, more simply, the ‘love of gain’.5
One of the most widely debated contributions to this process was that of Thomas Hobbes in Leviathan (1651). This was influential not because people agreed with it but because, although his conclusions were intensely disliked, Hobbes's arguments seemed so compelling that they could not be ignored. Leviathan offended all sides. It offended royalists by arguing against the divine right of kings. At the same time the book alienated the opponents of monarchy in arguing that sovereignty must of necessity be absolute.
Hobbes's argument was that civil society is possible only if there is a government to make and enforce laws. Without government, society would revert to a state of nature in which every man had to look after himself. Hobbes went so far as to describe such a state of nature as a state of war. Every man would be free to do as he liked, there being no government to stop him. Furthermore, every man would be aggressive towards his neighbours, in order to defend himself. Human behaviour would be unpredictable, and the result would be universal fear and insecurity. Property would be insecure, contracts would be unenforceable, and economic life would be impossible. Hobbes worked on Leviathan during a decade (1641–51) spent in France after fleeing England to avoid the Civil War. While England's descent into civil war after Parliament had challenged the King's sovereignty may have influenced his views, it seems likely that Hobbes was influenced as much by what happened in Germany. During the Thirty Years War (1618-48) Germany descended into economic as well as political chaos as competing rulers fought each other while seeking to establish their own claims to sovereignty.
The way out of such a situation, Hobbes argued, was for men to choose a sovereign (either one man or a body of men) who would become both lawgiver and law-enforcer. If they did this, civil society would become possible. In itself, this is a standard social-contract theory of sovereignty. What distinguishes Hobbes's theory from other social-contract theories is his argument that sovereignty must be absolute – that it cannot be divided or limited. To impose limitations on sovereignty, Hobbes argued, would create conflict, ultimately resolvable only by war. The sovereign therefore must have the right to administer justice, to appoint and reward his servants (for it is physically impossible for one man to rule alone), and to censor political and religious opinions. The last of these was inevitable given that religious divisions were one of the major sources of conflict both in the Thirty Years War and in seventeenth-century England.
Hobbes's argument about sovereignty is important in the history of economic thought because in Leviathan he was tackling the fundamental question of what it is that holds society together. Though he saw this as a political question, many of those who responded to him began to see it as an economic one. Almost as important is Hobbes's method. His conclusion that civil society requires an absolute sovereign is based not on theological arguments but on rational deductions from assumptions about human nature – that, in the absence of restraints, people will be aggressive towards their neighbours in pursuing their own security. This is a resolutely secular outlook on society. It resembles Machiavelli's approach to politics, but it goes a step further. Whereas Machiavelli argued that it was prudent for rulers to base their actions on the assumption that men might behave in this way, Hobbes works out his whole theory of sovereignty on the assumption that they will do so.
In the fifteenth and sixteenth centuries the economic heart of Europe was northern Italy. The city state of Venice dominated trade in the Mediterranean, and was a thriving manufacturing centre. Trade across the Atlantic was dominated by Seville. In the seventeenth century, however, economic power shifted decisively from the Mediterranean to north-west Europe. During the seventeenth century the population of northern and western Europe (Britain, Ireland, the Low Countries and Scandinavia) rose by a third, while that of the Mediterranean countries (Italy, Spain and Portugal) fell by 4 per cent. After 1600 Venice entered a period of decline. The Dutch acquired the spice trade, the Counter-Reformation created difficulties for book publishing, and the Thirty Years War in Germany took away important markets. Currency debasement in Turkey raised the cost of cotton and silk, two vital raw materials for the textile industry. In Spain, the inflow of American silver declined and the government of Castile faced a series of financial crises. The previous century's prosperity had not been accompanied by any sustainable industrial growth. In contrast, though they experienced severe economic crises, notably in the early 1620s, the economies of northern and western Europe did experience a period of growth, the most successful economy being that of the Netherlands. The fluitschip, first launched in 1595, with its long flat hull and simplified rigging, which was much cheaper to build and run than comparable ships from other countries, was perhaps the main symbol of this success.
Like the Netherlands, England was very dependent on overseas trade, and the Dutch were seen as clear rivals to the English. Naval wars, in which trade was the main bone of contention, were fought in 1652–4, 1665–7, 1672–4 and 1680–84. People sought to understand why the Dutch were so prosperous. In particular, were the low interest rates on loans in Amsterdam the cause or the result of Dutch prosperity? If they were the cause, then this could be used to support measures to lower interest rates (such as usury laws); but if they were the result, then such measures might be harmful.
From 1620 to 1624 England experienced an acute commercial crisis, the immediate cause of which was a decline in sales of cloth to Europe. The number of cloths exported from London by English merchants fell from 102,300 in 1618 to 85,700 in 1620. Two years later sales had fallen to 75,600, and it was not until 1628 that they returned to their 1618 level. Unemployment was widespread. Though the underlying long-term cause of the crisis was the growth of foreign competition, the short-term cause was a sudden loss of markets – first in Germany and the Baltic, and later in the Netherlands.
The crisis provoked a large number of pamphlets arguing about its causes and proposing remedies, with different groups seeking to defend their own interests and to blame people other than themselves. Some located the cause of the crisis within the cloth industry itself – the growth of foreign competition and a fall in the quality of English cloth. Others blamed merchants, criticizing the monopoly privileges of the Society of Merchant Adventurers, which accounted for over half of England's cloth exports. The most significant discussions, however, were to do with money. There was a widespread view that ‘shortage of money' was a major problem, and that this was related to instability in the foreign exchanges. Currency upheavals in Germany, linked to the outbreak of the Thirty Years War, could plausibly be seen as the reason why exports fell so rapidly from 1618 to 1620.
The traditional explanation of the crisis was put forward by Gerard Malynes (fl. 1586–1641), a merchant and government official. He claimed that silver had left England because the English coin was undervalued. Foreign-exchange dealers could force the value of English coin below its par value, the value set by the Mint. If the par value reflected the world price of gold and silver, this would cause English coin to be exported, for it would be worth more as precious metal than as coin. This would account for the shortage of money in England. The low exchange rate explained both why English goods were sold cheaply and why imports were dear. The remedy, he argued, was to restore the Royal Exchange and to regulate foreign-exchange transactions in order to restore the exchange rate to its proper level.
Against this were ranged the arguments of the so-called balance-of-trade theorists, notably Edward Misselden (fl. 1608–54, a member of the Merchant Adventurers) and Thomas Mun (1571–1641, a member of the East India Company). They argued that it was flows of goods that governed the exchange rate and flows of bullion, not the other way round. To stem the outflow of treasure it was necessary to increase the balance of trade – to reduce imports, especially of unnecessary items, and to increase exports. This required a low exchange rate, not a high one. More significantly, it was the ‘balance of trade' that determined flows of money, not the other way round.
It can be shown that if exports and imports do not respond at all to prices Malynes was right in wanting a higher exchange rate, but that if exports and imports are very responsive to prices Misselden and Mun were right. However, their differences involved more than different assumptions about the responsiveness of trade flows to prices. They agreed that money was the ‘soul' of commerce and that England's losses of money abroad had to be stopped, but behind this agreement lay two different views as to how the economy worked. In Malynes's world view, coins had an intrinsic value, dependent on their gold or silver content, which it was the sovereign's prerogative to establish. The Royal Exchange was thus necessary to provide merchants with information on the true value of the coinage, so that exchange transactions could reflect this value. In contrast, for Misselden and Mun the buying and selling of goods was fundamental: supply and demand, not the sovereign, determined values, including the value of the currency.
The work of the balance-of-trade theorists was important for establishing a link between money and economic activity. They viewed money not as wealth to be accumulated but as working capital. For Mun, the clearest exponent of this view, money was needed to drive trade. The way to accumulate treasure was to allow it to be used in trade. In his posthumously published England's Treasure by Forraign Trade (1664), in a chapter entitled ‘The Exportation of our Moneys in Trade of Merchandize is a means to encrease our Treasure’, Mun argued that the purpose of exporting money is
to enlarge our trade by enabling us to bring in more forraign wares, which being sent out again will in due time much encrease our Treasure. For although in this manner wee do yearly multiply our importations to the maintenance of more Shipping and Mariners, improvment of His Majesties Customs and other benefits: yet our consumption of those forraign wares is no more than it was before; so that all the said encrease of commodities… doth in the end become an exportation unto us of a far greater value.6
Mun's theory of the balance of trade was important for several reasons. It was a theory of growth centred on foreign trade: as such, it embodied a particular conception of economic activity, increasingly challenged in the seventeenth century, in which production was fundamental. In the passage just quoted, Mun states explicitly that consumption of foreign commodities will not increase. England's entrepôt trade will grow. In addition, Mun's theory provided a justification for the East India Company, of which he was a director, being allowed to export bullion to India. This was necessary because the Company could not find suitable goods for export.
From the restoration of Charles II to the end of the seventeenth century a recurring question was whether or not legislation should be passed to lower the rate of interest. In 1668 a bill was introduced into Parliament to lower the maximum legal interest rate from 6 to 4 per cent per annum. The most influential advocate of the proposal was Sir Josiah Child (1630–99), a merchant who had made money through supplying the Royal Navy and who was one of the chief defenders of the East India Company. Child was in many respects a representative of what one scholar has called the ‘old style' of doing economics: ‘he looks like an advocate rather than theorist, a purveyor of patent remedies, an interested party asserting his objectivity, an imperfect copyist rather than a vigorous innovator, and only an occasional liberal’.7 (The new style was that of the objective scientist.) His Brief Observations Concerning Trade and Interest of Money (1668) opens by asking why the Dutch are so much more successful than the English. He offers fifteen explanations, but claims that the last, a low rate of interest, is the most important, being the cause of the other causes of Dutch wealth. Child supports his case with two types of evidence. The first is that previous reductions in the legal maximum interest rate (from 10 to 8 per cent in the 1620s, and from 8 to 6 per cent in the 1640s) were followed by increases in both the number of merchants and their individual wealth. The second is evidence from comparing different countries. Parts of Italy paid 3 per cent interest and were prosperous; Spain paid between 10 and 12 per cent and was desperately short of money; France, with 7 per cent, was in the middle. According to Child, countries are ‘richer or poorer in exact proportion to what they pay, and have usually paid, for the interest of money’.8 This rule, he claimed, never failed.
Child recognized that such evidence did not establish that a low interest rate was the cause rather than the effect of prosperity. However, he offered almost no arguments to support his claim that it was. He claimed that reducing the interest rate from 6 per cent to 4 per cent or 3 per cent would double the nation's capital stock, but he did not explore this and turned instead to answering other people's objections to lowering the interest rate. In response to the absence of usury laws in the Netherlands, he argued that other Dutch institutions had the same effect: high-quality securities, banks, the use of bills of exchange, and low public spending.
The opposite case was argued by John Locke (1632–1704), secretary to Lord Ashley, then Chancellor of the Exchequer, in a pamphlet entitled Some Consequences That are Like to Follow upon Lessening of Interest to 4 per cent (1668). Although Locke is not completely consistent and makes clear mistakes (perhaps not surprising, since it was his first venture into economics), his pamphlet differs from Child's in that its method is to construct tight logical arguments.
Restricting the rate of interest to 4 per cent would, Locke argued, reduce the supply of funds available for lending. Going beyond this, he argued that there was a ‘natural' rate of interest determined by the quantity of money in a country relative to the volume of that country's trade: ‘By natural use [interest] I mean that rate of money which the present scarcity makes it naturally at.’9 Unlike Child, who focused exclusively on the rate of interest, Locke saw that if a lower rate of interest was produced by increasing the supply of funds (by banks, the use of bills and so on) its effects were very different from the effects of imposing a statutory maximum interest rate.
If interest depended on the amount of money needed for trade, how much money was required by a nation? Petty's calculations, discussed above, could be seen as an attempt to provide a definite answer to this question. Locke's answer introduced the idea of ‘quickness of circulation’:
Because it depends, not barely on the quantity of money, but the quickness of its circulation – which since it cannot easily be traced [observed]… to make some probable guess we are to consider how much money it is necessary to suppose must rest constantly in each man's hands as requisite to the carrying on of trade.10
Such arguments took Locke away from the rate of interest into the broader questions of monetary economics, such as the relationship between the money supply and the price level. Echoing sixteenth-century writers such as Navarrus and Bodin, he argued that the value of money (or equivalently the value of commodities) depended on the quantity of money in relation to trade. Plenty of money would mean that money would be cheap and commodities dear. If the economy were isolated, this would mean that the quantity of money would not matter: if the quantity of money were lower, prices would be lower and more trade could take place.
On the other hand, in a country open to world trade and that used the same money as its neighbours, there must be a particular ratio of money to trade. The reason is that, if a country has less money (relative to trade) than its neighbours, then either prices must be lower or else goods must remain unsold, there being insufficient money to buy them at the prices prevailing abroad. If home prices were lower than foreign prices, the country would lose through paying more for its imports than it received for its exports. In addition, the country would risk having workers migrate to countries with higher wages.
Locke was not alone in insisting that low interest was the result of wealth, not its cause. Another writer to argue this was Dudley North (1641–91), who made a fortune trading with Turkey, before returning to England to become a commissioner for the customs and then the Treasury. His Discourses upon Trade (1691) was stimulated by renewed moves to lower the legal maximum rate of interest. It was published with a preface in which his brother Roger North (1653–1734), an accomplished political writer, emphasized the importance of abstraction and of reasoning being based on ‘clear and evident truths’. Knowledge arrived at in this way had become ‘mechanical’. This Cartesian method of reasoning, Roger North argued, was characteristic of his brother Dudley's work: ‘He begins at the quick, from principles indisputably true; and so proceeding with great care, comes to a judgement of the nicest disputes concerning trade… he reduceth things to their extreams, wherein all discriminations are most gross and sensible, and then shows them.’11
Dudley North's starting point was that trade was ‘a commutation of superfluities’.12 Those men who are most diligent, grow the most crops or produce the most goods will be wealthy even if no one has any gold or silver. However, in order to get the goods they require, such people have to exchange their surplus produce for goods that other people have produced. It is differences between people that lead to trade.
North then applied this argument to interest. Some men, he argued, will have much stock (capital) but lack the skill to use it; while others will have the required skills but no stock. Those who have too much stock will lend it to those who have too little, in return for interest. It is exactly the same as with land. Those with too much land allow others to use it in return for rent. Interest and rent are essentially the same. It follows, North continued, that if stock and land are plentiful, interest and rent will be low; if they are scarce, interest and rent will be high. Dutch interest rates were, he claimed, low because stock was plentiful, not the other way round.
If interest were lowered by legislation, North continued, the supply of loans would be reduced. Many lenders would be unwilling to accept a lower rate of interest, for it would not compensate them for the risk involved. They would prefer to hoard their wealth or turn it into plate. Alternatively, people might resort to ‘underhand bargains' to avoid the law. A notable feature of North's argument here, consistent with his underlying premisses, is that not all borrowers and lenders are the same, so the same interest rate will not be appropriate for all transactions. Lenders and borrowers should be free to make their own bargains. Take away interest, North contended, and you take away borrowing and lending.
North's analysis of money followed the same lines. It rested on the premiss that wealth arises not from having money but from ‘land at farm, money at interest, or goods in trade’.13 Gold and silver are ‘nothing but the weights and measures, by which traffick is more conveniently carried on than could be done without them; and also a proper fund for a surplusage of stock to be deposited in’.14 Thus, if someone cannot sell their goods, the reason must be that too much is being offered for sale, overseas sales are wanting, or poverty is keeping down domestic sales. The reason could not be a shortage of coin, for a rich nation could obtain the money it needed through trade.
A consequence of this view was a favourable attitude towards luxury spending. The ‘mercantilist' view was that luxury spending should be curbed by restrictions on imports or by sumptuary laws. Imported luxuries, it was argued, caused money to leave the kingdom unnecessarily. North, on the other hand, saw that spending was necessary if goods were to be sold and if people were to be employed. Perhaps equally important, luxury consumption provided an incentive to work: ‘The main spur to trade, or rather to industry and ingenuity, is the exorbitant appetites of men, which they will take pains to gratifie, and so be disposed to work, when nothing else will incline them to it; for did men content themselves with bare necessaries, we should have a poor world.’15
Though Dudley North did not take his arguments so far, in his preface Roger North argued that any trade that profited individuals was beneficial to the public, and that regulations on trade were always harmful:
That there can be no trade unprofitable to the publick; for if any prove so, men leave it off; and wherever the traders thrive, the publick, of which they are a part, thrives also… That no laws can set prices in trade, the rates of which, must and will make themselves: but when such laws do happen to lay any hold, it is so much impediment to trade, and therefore prejudicial… That all favour to one trade or interest against another, is an abuse, and cuts so much of profit from the public.16
North's pamphlet and Locke's writing on interest illustrate the great change that had taken place in economic thinking since the early seventeenth century. The reason for most writing was still to influence policy, and pamphlets were still written by men actively engaged in trade or with interests to defend. There had, however, been an enormous change in the arguments used. In the writing of Mun and most of his contemporaries, economic thinking was mixed together with advice on how to be a successful merchant: England's Treasure by Forraign Trade was primarily a manual on good business practice. In contrast, though Locke and North certainly had interests to defend, they were attempting to stand back to distance themselves from their material and to analyse it in what they understood to be a scientific way. The influence of thinkers such as Bacon, Descartes and even Hobbes is evident.
Equally important was a profound change that had taken place in attitudes towards economic growth. At the beginning of the seventeenth century the idea that the role of government was to maintain a stable, established order was still strong. Malynes's advocacy of the Royal Exchange followed naturally from such a perspective. This view was challenged by merchants who used the doctrine of the balance of trade as an argument in favour of greater freedom. They promoted a view of the economy in which the objective was growth, fuelled by the money brought in by a balance-of-trade surplus. Resources were to be developed in order to promote exports, and government policy was to be subordinated to this end. Economic growth was seen purely from the producers' and merchants' point of view – it was not based on the goal of increasing consumption.
The merchants' perspective on growth was radically different from the Tudor and early Stuart emphasis on the importance of preserving an established social order. It was, however, unable to explain England's increasing wealth after the Restoration in 1660 – something remarked on by numerous writers, including Petty. London was magnificently rebuilt after the Great Fire of 1666, and the city's prosperity attracted comment from both critics and admirers. There was also, especially from the 1670s, controversy over Indian cottons and silks, imports of which had increased dramatically since the freeing of trade in bullion in 1663. English clothiers began to use the balance-of-trade doctrine to criticize the activities of the East India Company in promoting Indian manufacturing and trade.
The response to this was the emergence, in the works of many writers, including Dudley North, of new ways of thinking about wealth and economic growth. Instead of seeing trade through the eyes of producers, they focused on the role of trade in satisfying consumers' demands. Consumption rather than production came to be seen as the aim of economic activity. It was linked to growth because the only way in which people could satisfy their desires was by increasing their purchasing power. They could do this only by selling more goods in impersonal markets where supply and demand ruled, which meant that producers had to lower their costs and become more competitive. The outcome was a literature in which self-interest was assumed to rule human affairs. This challenged long-established conceptions of society (one reason why Hobbes's ideas were thought so scandalous was his assumption that men formed governments solely because of self-interest) and had potentially radical political implications in its view that the market provided a way of holding society together.
However, not everyone accepted this new view of the market. As trade expanded and commercial relations increasingly dominated economic life, some sectors fell behind. Clothiers and landowners found their incomes rising less rapidly than those of merchants, and they also faced the burden of the rising taxes (levied locally) needed to support those without any means of supporting themselves. Pointing to the problems faced by the poor, such men denied that individual and public interests coincided. Indian manufactures, with which English woollens could not hope to compete, were seen as wrecking businesses, causing unemployment and producing poverty. The solutions offered were to encourage investment and to restrict imports. Whereas in the 1620s the balance-of-trade doctrine had been used as an argument against traditional regulation of the economy, in the 1690s it came to be used to defend manufacturing and landed interests against the threat presented by free trade and commercial expansion.
This conflict came to a head in the recoinage crisis of the 1690s. Since the Restoration, English silver coins had fallen significantly in weight, owing to their edges being clipped as well as to normal wear and tear. It was widely accepted that a recoinage was essential, especially now that milled edges could be used to prevent further clipping. The controversial issue was how much silver should be in the new shillings (the main silver coins in circulation). If their original silver content were restored, there would be fewer coins in circulation and the result would be deflation. So men who emphasized the importance of expanding demand wanted the recoinage to reflect the decline in the shilling's silver content that had taken place during the preceding decades. In contrast, creditors wanted deflation and the restoration of the currency's original silver content. Unlike men in the City of London, where the subject was widely debated, many landowners probably failed to grasp the issues involved in the recoinage crisis, even though they may have understood the balance-of-trade doctrine and the link between trade and employment.
The scheme adopted by the government (and advocated by Locke) involved recoining shillings at their full value. Not only was this in itself deflationary, but the government agreed to accept old shillings at their face value for the first six months. The result was that Gresham's Law went into effect. This law – named after Sir Thomas Gresham (1519-79), a financier under Elizabeth I, though it was known to medieval writers – is usually summarized as ‘Bad money drives out good.’ If someone has a coin containing the full weight of silver and also a badly worn, clipped coin with the same face value, he will choose to spend the bad one and keep the good one. Good coins will therefore be hoarded and bad ones will circulate. In the 1690s this meant that, as old shillings went into the Mint for recoining, the new full-weight coins were largely melted down and exported. Estimates suggest that the value of silver coins in circulation may have fallen from £12 million in December 1695 to only £4.2 million in June 1696. Though there was no corresponding fall in the circulation of either gold coins or banknotes (usable only for large transactions), there was a sharp deflation. Prices fell, and landlords and creditors reaped the benefit. The long-term effect was that England went on to a de-facto gold standard, as silver, now overvalued, began to disappear from circulation. The theory underlying this transition was Locke's. This held that it was gold and silver that were the instruments of commerce. They had an intrinsic value, determined by common consent. The only thing that was different about money was that it contained a stamp confirming its weight and fineness.
Against this, men such as Nicholas Barbon (d. 1698) claimed that it was money (coins), not the silver in them, that drove trade. This meant that when the government coined more (or fewer) shillings from a certain weight of silver it raised (or lowered) the money supply. It was money, not silver, to which people attached value. However, it was Locke's natural-law theory, supported by the self-interest of landowners and creditors, that triumphed. The price established for gold in 1717 – £3 17s. 10½d. per ounce – came to be regarded as an almost magical figure, and was not finally abandoned until 1939. The arguments of the free-traders such as North were able to explain England's prosperity since the Restoration. However, the balance-of-trade doctrine proved better able to serve the needs of the dominant political class.
Seventeenth-century England falls squarely into the so-called ‘mercantilist' era. It produced the balance-of-trade doctrine – arguably the hallmark of mercantilism – and Mun's England's Treasure by Forraign Trade was the book that Adam Smith was later to attack as representative of mercantilist thinking. However, it is clear that such a simple characterization of this period's economic thought is grossly misleading. Even the balance-of-trade doctrine, used to justify protection late in the century, was used by its inventors, Misselden and Mun, to defend economic freedom.
During the seventeenth century, England experienced numerous economic problems that provided merchants and government advisers with an incentive to advocate policies that were in their own interests. In an environment largely free of censorship, and in a political system where reasoned argument might influence policy, they did this in an unprecedented number of pamphlets on economic questions. The manner in which they argued their case was strongly influenced by science, a subject in which men were also passionately interested. At the same time, the century's political turmoil raised fundamental questions about what held society together. Though Hobbes's work fell squarely in the realm of political philosophy rather than economics, the challenge he posed related to the whole of society and was taken up, especially in the eighteenth century, by many writers whose work counts unambiguously as economics.