This document provides an overview of mercantilism, the American Revolution, and the work of John Maynard Keynes. It discusses how mercantilism used protectionist policies like tariffs and quotas to promote industrial growth and national power. It explains how the Navigation Acts restricted colonial trade for England's benefit and angered colonists. The document also summarizes Keynes' contributions to developing macroeconomics and theories like government spending to stimulate demand and employment during recessions.

1. B416: The Evolution of Global
Economies
Lecture 3 : Bullionism & Mercantilism
Part 2 + John Maynard Keynes

2. Learning Outcomes
By the end of this lecture, you should understand the following:
• Protection of mercantilism (regulation)
• European, American and African trade routes
• American Revolution
• American colonies
• English Navigation Laws
• Mercantilism and industrilaisation
• Enforcement of mercantilism & Taxation
• Arguments for and against mercantilism
• Colonial Vs British perspective
• Work of John Maynard Keynes
2

3. Protection in Mercantilism 1
a) Forms of Protectionism:
• import quotas, or import bans
• export subsidies
• tariffs and excise duties on imported goods:
• Navigation Laws
b) Goals of Protectionism in early-modern Mercantilism
• Ensure a ‘favourable balance of trade’:
• Promote industrial and economic growth
• belief in national gains from ‘value added’
• Promote Δ employment
• Promote national power
• Promote Import Substitution industries
c) Importance of Overseas Colonies:
• potential source of precious metals
• exclusive source of vital raw materials
• guaranteed markets
• promote population growth

4. Protection in Mercantilism 2
The English Navigation Laws:
• Parliamentary legislation on both shipping and foreign trade:
– to exploit overseas colonies for sole benefit of England
– to promote growth of English shipbuilding
– to cut the Dutch out of English trade & shipping
– to promote a ‘favourable balance of trade’
• England’s major Parliamentary legislation:
– 1651: Navigation Act (Cromwell)
– 1660: Navigation Act (Charles II)
– 1663: Staple Act (Charles II)
– 1673: Navigation Act (Charles II)
• Chief provisions of the Navigation Acts
– all trade between England and its colonies
– Enumerated Articles list
– English foreign trade: all imports and exports to be conducted solely on English or colonial ships
• Subsequent series of acts to reserve North American markets exclusively to English
manufacturers
• Consequences of the Navigation Acts:
– success in promoting English shipbuilding and shipping disputed
– my personal view (despite supporting Free Trade)
– these laws, and French navigation laws, etc. , did have a negative impact on Dutch shipping by 18th
century
– Impact on the American colonies: plus and minus

7. The American Revolution (1776-83) 1
• American colonists angered by restrictions on their trade and
industry: wanted to trade directly with French & Spanish colonies
• British enforcement acts: for sugar trade, tea
– Molasses Act of 1733: heavy duties on imports of foreign sugar
– Sugar Act of 1764: banned direct trade with the French
– Tea Act of 1773: gave British East India monopoly on tea sales in North
American markets  Boston Tea Party of 1773
• Taxation: requiring colonists to help pay for their own defence:
i.e., pay for British troops stationed there  Δ American
resistance  revolt
• American Revolution: ended the era of the Navigation Laws
(which remained on the statute books until 1849)
• But North America still remained within British commercial
orbit: took a third of British exports in 1798 : see the table

8. The American Revolution (1776-83) 2

9. Colonies
Colonies helped nations grow rich in
several ways.
• They provided various raw materials
• They provided mines that produced
gold and silver.
• They served as markets for goods made
in the home country.
• Trade expansion enabled English
manufacturing base to grow and it
necessitated an enlarged merchant
fleet.
• Additional bases for the royal navy (i.e.
outposts).
• As suppliers of raw materials only, the
colonists could not compete with
England in manufacturing (unless the
goods could not be produced in
England).

10. Mercantilism and Industrialization
a) Emphasized the key importance of industrial manufactures, but
in full accordance with their belief that foreign trade was the true
source of wealth (bullion) & power
b) “Valued-added”: A country gains more from exporting fully
finished manufactures than from exporting raw materials: e.g.,
England’s shift from being wool exporter to a cloth exporter
c) Specific measures to promote the industrial
manufacturing sector:
– tariff-free imports of all raw materials
– subsides or bounties for some industrial exports
– tariff or import-quota protection against imports of foreign manufactures
d) Create tariff-protected import-substitution industries
– “Infant industries” argument (already seen): tariff protection to allow
industries to grow  achieve sufficient economies of scale to compete
– such industries enabled the country to avoid spending ‘treasure’ on
imports, even if they failed to become competitive abroad

11. Regulations to Support Mercantilism
• To encourage certain types of manufacturing,
the British government subsidized producers of
those products, thus making them more
profitable to sell or more affordable to buy.
• The British government also granted monopoly
status to producers of certain commodities (e.g.
British East India Co.)
• In short, the government’s taxing/spending
authority was used to encourage/discourage
certain behaviors and economic activities.

12. Enforcement of Mercantilism
• Navigation Acts
– Keep colonies dependent on mother country -> maximize
profit
• Restrictions on buying
– Buy only from Britain; duties on foreign goods
• Restrictions on selling
– Could only ship/sell to Britain (enumerated goods)
• Restrictions on shipping
– All trade only on British ships, all goods shipped through
England, crews must be ¾ English
• Restrictions on manufacturing
– Prohibited in colonies: keep colonies dependent on Britain,
prevent competition (monopoly)

13. The Act of 1663 was passed by Parliament.
"No Commoditie of the Growth Production or
Manufacture of Europe shall be imported into any
Land Island Plantation Colony Territory or Place to
His Majestie belonging . . . but what shall be bona
fide and without fraude laden and shipped in
England Wales [and] the Towne of Berwicke upon
Tweede and in English built Shipping."
The intentions behind the act.
Staple Act

14. The Usual method for tax collection
These collectors were susceptible to
a more lucrative kind of graft:
• Violations of the Sugar Act were
punishable by seizure of the
offending vessel and cargo
• Both would be sold and the
proceeds divided into thirds:
o 1/3 to English treasury
o 1/3 to colonial governor
o 1/3 to customs officer
responsible for seizure
• To an enterprising officer bent on
amassing a fortune, the prospect
of making as many seizures as
possible was inviting
• Perceived as a racket to colonists

15. Issues of Taxation
Colonists British
Importance of property:
Source of life (subsistence/food/resources)
Source of liberty (self-reliance, self
subsistence,
Independence of other men)
w/o property, people could be starved into
submission; if liberty rested on property, a
threat to property was a threat to liberty
Locke’s theory: property must not be taken w/o
people’s consent given either in person or by
their representatives.
Taxes were a gift, given by the people through
their representatives; taxes were legitimate
only in a representative system; and even then,
they only apply to those constituents who were
actually represented.
No taxation without representation; they fact
they were not represented in Parliament should
exempt them from “the burden of
ungranted/involuntary taxes
(colonists asserted this as a privilege/right).
Seven Years War against France doubled
English national debt.
British people of the British Isles already
saturated with taxes while colonists taxed
very little (colonists were only paying ¼
taxes the British in the British Isles were
paying during the height of taxation.
(Idea of relieving their own burdens by
taxing the colonists).
During the period of benign/salutary
neglect; the colonies had prospered
(bountiful resources & availability of land)
By 1750’s Avg. American was better off
socio-economically than anywhere in the
world.
If the colonists could afford to bribed the
customs agents, surely they could afford
to pay the miniscule tax (i.e. they could
afford to pay).

16. Issues of Taxation
Colonists British
As a matter of principle, how could property remain
secure if it could be taken away at the pleasure of
another?
Colonists viewed the taxes as a means of collecting in
America $ which would benefit only the constituents of
the Parliament that levied the tax.
The authority to tax was reserved exclusively to
assembly of their own elected representatives;
Parliament had no authority to tax colonists at all.
Colonists pointed out that the British System obviously
reflected this b/c taxes could only originate in the House
of Commons. Theory of virtual representation only
applied to Great Britain b/c there, even though many
people had no right to vote, they were still bound to the
voting population/ representatives by similar interests;
on the other hand, the interests of the colonists (3,000
miles away) were apt to be the opposite of the British
people in the British Isles and wholly incapable of
expression through virtual representation.
Also opposed actual (direct) representation as a matter
of principle; even with actual representation, colonial
representatives would be a minority within Parliament
and therefore would still be out voted on matters where
colonial—British interests came into conflict.
Colonists were not/could not be represented in the
House of Commons
If the colonists were going to benefit from the
protection of the royal navy, they should share in
the burden.
(i.e. they should pay)
Power to tax belonged exclusively to Parliament;
most important feature of its supremacy over the
king and the most important guarantee of English
liberty.
Agreed that English liberty forbade laws/taxation
w/o consent, but asserted that no such thing was
involved in any of the acts (Sugar Act, etc…)
Theory of virtual representation:
British officials pointed out that limited suffrage in
England meant most British subjects in the British
Isles were not actually represented either; both
these home subjects and the colonists were,
however, represented by each and every member
of Parliament which as a collective body
represented the entire empire
(in reality; members of Parliament were generally
provincial)

17. Did mercantilism help the Colonies?
• Protection from foreign competition helped New England's ship
building industry.
• Individual colonies benefited by specializing.
• Various colonial exporters benefited when they exported to
Britain because competing goods from foreign nations were
subject to tariffs theirs were not.
• The colonies were easily made into “international traders”
because of the British Empire.
• Bounties: incentive payments to encourage production of highly
desired goods (tobacco)
• Steady market for raw materials & cash crops
• Defense -> protect colonies
• Shipbuilding industry developed in colonies

18. Arguments against Mercantilism
• The Navigation Act severely restricted colonial trade to
the benefit of England.
• On the other hand, colonists paid more than they
otherwise would have for imports from foreign countries
(Tariffs)
• Southern planters, particularly rice and tobacco planters,
bore much of the burden, because most Southern
exports went there, while smaller shares of the other
two regions' exports went there.
• New Englanders often evaded this cost through trading
with foreign countries illegally (this situation wasn’t
helped by the fact that customs officers were often
bribed to look the other way).

19. Tension Develops
• Limited profits of colonists (threatened
prosperity)
• Foreign goods more expensive (taxes)
• Colonists resentful of restrictions
• Colonists treated as inferiors –
“colonials”

20. Page 20
John Maynard Keynes (1883-1946)
The father of
Macroeconomics.
Wrote “The General
Theory of Employment,
Interest and Money”
during WWII”.
“Ideas shape the course of
history”.

21. Major Achievements
• Helped in the economy’s recovery during
the Great Depression
• Influenced the general economic boom by
Western Nations between 1945-1975
• Formed the basis of Keynesian economics
• Introduced the Macroecomics theory. He
believed that government spending could
pull an economy out of recession.
• His theory still applied and relevant after
the 2008 banking crisis.

22. Key features 1
• Treatise on Money, was published in 1930
in two volumes.
• The core idea - if the amount of money
being saved > the amount being invested ,
then unemployment will rise.
• This is in part a result of people not
wanting to spend too high a proportion of
what employers pay out, making it
difficult, in aggregate, for employers to
make a profit.

23. Key features 2
• Keynesian Economics: Howe does it differ from the
Classical Economics? GDP = the sum of consumption,
investment, government spending and the new export.
• Employment can be enhanced by increased spending
• Total savings of the society are determined by the total
income
• It is essential that the Government stimulate the
demand in times of high unemployment and decrease
spending in times of economic security.
• Control Tools at Government’s disposals. For stimulus –
government spending via public works, defence
spending, entitlement programs etc. For deterrence –
taxation. He also established that if savings > investment
(if interest rates are too high), then unemployment will
rise.

24. Background 1
• The Great Depression - Period of high rates of
unemployment
• He advocated interventionist economic policy
• Urged government to use financial and monetary
measures to reduce the adverse effects of business
cycles, economic recessions, and depressions
• Spend on public works like programs to promote
employment
• He outlined the limitations of Microeconomics theory.
Due to unemployment and poverty, the demand for
good and services dropped. Many workers were
unwilling to accept lower wages
• Studies the individual parts of economy, the household
and the firms, make decisions to allocate limited
resources. How good or services are bought and sold.

25. Background 2
• High unemployment rate greatly influenced the development of
macroeconomics.
• Challenged the established neoclassical economics with the
Introduction of important concepts such as:
– Consumption
– Multiplier
– Marginal efficiency of capital
– Liquidity preference
– End of Government's responsibility is to NEOCLASSICAL
– Reach and maintain full employment THEORIES!
– Regulate markets and free trade such as Laissez-faire
• Keynesian Economics Impact:
– Aid in the formation of the 20th Century’s economy
– Consequences of the Great Depression were lessened
– Government took an active role in the country's economy
(Departure from neoclassical theories)

26. Critique
• Why did the Keynesian theory didn't work?
• Government spend too much money on
post-WWII events. Examples: Vietnam war,
sending the first man to the moon
• The Keynesian solution stopped working
• Unemployment became worst
• It created Inflation
• In conclusion Keynesian theories work best
on economics catastrophes

27. And Now…Work Outside the Lecture
Preparation
For
Padagogic
Style
Preparation
Time Budget
Individual
Task
Group Task Output Week 3 Preparation Activity
Read Chapter 1 to Chapter 4 + Chapter 10 from
Core Text Book: The Age of the Economist
An outline of the history of economic thought by
SCREPANTI & ZAMAGNI, Section 1 to 3 + Section
9
Seminar 3 30 Minutes Read above Material + Seminar material
Workshop 3 1 Hour
Online Collaboration Activities relating Group
Presentation in Week 6
2 HourLecture 3

28. End of presentation
© Pearson College 2013