Monday, 18 July 2016

Mercantilism and the firm

As is well known the classical economists had no serious theory of the firm. For them economics was more orientated towards marcoeconomic issues than microeconomic ones such as the firm. This situation is one they largely inherited from the mercantilists.

There were at times, in the mercantilist literature, much discussion of firms but it was a limited discussion. Limited in the sense that it dealt not with issues to do with firms per se but with the effects of firms on more macro issues such as the balance of trade. It was also limited in that it largely dealt only with the regulated companies and their monopolies.

When discussing the period 1640-1690, Magnusson (1994) argues that several mercantilist writes attacked the regulated companies. Some authors argued for the adoption of measures to end the monopoly position that regulated companies such as the Merchant Adventurers, the Russian Company, the Levant Company and the East India Company held. There were also debates about the effects of companies like the East India Company on the balance of trade. Gerrad Malynes, for example, argued that the East India Company was exporting money “beyond the seas” and thus hurting England’s balance of trade.

But other voices where added to the chorus against the regulated companies as the seventeenth century progressed. In 1645, for example, an anonymous writer, in a pamphlet entitled “A Discourse Consisting of Motives for the Enlargement and Freedome of Trade”, attacked the Merchant Adventurers. The author argued that there is nothing more “ … pernicious and destructive to any Kingdom or Common-wealth than Monopolies”.

But regulated companies also had their defenders. In 1602 John Wheeler defended the Merchant Adventurers saying that its traffic in cloth led to that “ … a number of labouring men are set to work and gain much monie, besides that which the Merchant gaineth”. That is, what’s good for the Adventurers is good for the country! In 1641 Lewell Roberts recommended that more regulated companies should be set up. He was of the opinion that “ … joyn one with another in a corporation and Company, and not to kase their Traffike by themselves asunder, or apart” would lead to increased strength and maximum benefits for a trading nation. In addition, Thomas Mun, Edward Misselden and Sir Josiah Child had all defended the East India Company from attack at different times.

It should be noted, however, that much of these debates were partisan rent seeking with each side just dressing up their position in terms of the public good. But as Magnusson notes for " ... at least one scholar, Thomas, the controversies around this company [The East India Company] was an overall  important factor propelling the economic discussion as such during most of this century".

Importantly for our purposes such a discussion is more policy orientated than economics orientated. One point is that although such arguments involve firms they do not require a theory of the firm. Just accepting that the firms do exist is enough for policy evaluation, there is no need for an explanation of what a firm is, what its boundaries are or what its internal organisation is.

So what we see here is much like the situation with the classical economists, a largely macroeconomic originated outlook with no need for a serious theory of the firm.

  • Magnusson, Lars (1994). Mercantlitism: The Shaping of an Economic Language, London: Routledge.

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