ECON301: Guide to Responding to Unit 2 Reading Questions
1. How did St. Thomas Aquinas justify the charging of interest on nonreligious grounds?
Notes on responding:
St. Thomas Aquinas writes: “in human affairs justice is determined by civil laws.
Now civil law allows usury to be taken. Therefore it seems to be lawful.”
This is an important development in economic thought because a separation
exists between church and state. St. Thomas’ position helped to enshrine
commercial law and transactions as the province of nations.
2. How did Sir William Petty justify mercantilism as the best economic system
for England?
Notes on responding:
Petty writes: “ The gain which England makes by lead, coals, the freight of
shipping, &c., may be the same, for aught I see, in both cases. But the gain
which is made by manufactures will be greater as the manufacture itself is
greater and better. For in so vast a city manufactures will beget one another,
and each manufacture will be divided into as many parts as possible, whereby
the work of each artisan will be simple and easy. As, for example, in the making
of a watch, if one man shall make the wheels, another the spring, another shall
engrave the dial-plate, and another shall make the cases, then the watch will be
better and cheaper than if the whole work be put upon any one man. And we
also see that in towns, and in the streets of a great town, where all the
inhabitants are almost of one trade, the commodity peculiar to those places is
made better and cheaper than elsewhere. Moreover, when all sorts of
manufactures are made in one place, there every ship that goeth forth can
suddenly have its loading of so many several particulars and species as the port
whereunto she is bound can take off. Again, when the several manufactures are
made in one place, and shipped off in another, the carriage, postage, and
travelling charges, will enhance the price of such manufacture, and lessen the
gain upon foreign commerce. And lastly, when the imported goods are spent in
the port itself, where they are landed, the carriage of the same into other places
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will create no further charge upon such commodity; all which particulars tend to
the greater gain by foreign commerce.”
In other words, England was like the hub of a giant wheel, with the colonies
providing raw materials so that manufactured goods could be created in England
to maximize the wealth of the nation.
3. Who did Adam Smith consider “the winners” under mercantilism? Who
were the losers?
Notes on responding:
Smith writes: “It cannot be very difficult to determine who have been the
contrivers of this whole mercantile system; not the consumers, we may believe,
whose interest has been entirely neglected; but the producers, whose interest
has been so carefully attended to; and among this latter class, our merchants
and manufacturers have been by far the principal architects. In the mercantile
regulations which have been taken notice of in this chapter, the interest of our
manufacturers has been most peculiarly attended to; and the interest, not so
much of the consumers, as that of some other sets of producers, has been
sacrificed to it.”
Consumers were forced to pay high monopoly prices which benefited producers
(merchants).
4. According to Adam Smith, what was the hidden cost of mercantilist
policies? Who paid that cost?
Notes on responding:
Smith writes: “But in the system of laws which has been established for the
management of our American and West Indian colonies, the interest of the home
consumer has been sacrificed to that of the producer, with a more extravagant
profusion than in all our other commercial regulations. A great empire has been
established for the sole purpose of raising up a nation of customers, who should
be obliged to buy, from the shops of our different producers, all the goods with
which these could supply them. For the sake of that little enhancement of price
which this monopoly might afford our producers, the home consumers have been
burdened with the whole expense of maintaining and defending that empire. For
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this purpose, and for this purpose only, in the two last wars, more than two
hundred millions have been spent, and a new debt of more than a hundred and
seventy millions has been contracted, over and above all that had been
expended for the same purpose in former wars. The interest of this debt alone is
not only greater than the whole extraordinary profit which, it never could be
pretended, was made by the monopoly of the colony trade, but than the whole
value of that trade, or than the whole value of the goods which, at an average,
have been annually exported to the colonies.”
The cost of maintaining the colonies through war exceeded the economic value
of the manufacturing benefits. Consumers (tax payers) eventually paid that bill.
5. According to Smith, how did the mercantilist system encourage risk
taking?
Notes on responding:
Smith writes: “Such poor countries as Sweden and Denmark, for example, would
probably have never sent a single ship to the East Indies, had not the trade been
subjected to an exclusive company. The establishment of such a company
necessarily encourages adventurers. Their monopoly secures them against all
competitors in the home market, and they have the same chance for foreign
markets with the traders of other nations. Their monopoly shows them the
certainty of a great profit upon a considerable quantity of goods, and the chance
of a considerable profit upon a great quantity. Without such extraordinary
encouragement, the poor traders of such poor countries would probably never
have thought of hazarding their small capitals in so very distant and uncertain an
adventure as the trade to the East Indies must naturally have appeared to them.”
The lure of monopoly profits encouraged outsized risks.
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