The genesis of macroeconomics new ideas from sir william petty to henry thornton

The Genesis of Macroeconomics This page intentionally left blank The Genesis of Macroeconomics New Ideas from Sir William Petty to Henry Thornton Antoin E Murphy Great Clarendon Street, Oxford ox2 6dp Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Cape Town Dar es Salaam Hong Kong Karachi Kuala Lumpur Madrid Melbourne Mexico City Nairobi New Delhi Shanghai Taipei Toronto With offices in Argentina Austria Brazil Chile Czech Republic France Greece Guatemala Hungary Italy Japan Poland Portugal Singapore South Korea Switzerland Thailand Turkey Ukraine Vietnam Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York # Antoin E Murphy 2009 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2009 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose the same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by SPI Publisher Services, Pondicherry, India Printed in Great Britain on acid-free paper by CPI Antony Rowe ISBN 978–0–19–954323–6 (Pbk.) 978–0–19–954322–9 (Hbk.) 10 Preface This book builds on some of my previous work published by Oxford University Press: Richard Cantillon: Entrepreneur and Economist (1986) and John Law: Economic Theorist and Policymaker (1997) It aims to bring the reader into the excitement of the discovery of macroeconomic ideas by pioneers of the discipline writing between the late seventeenth and early nineteenth centuries It is hoped that, by acquainting readers with the ideas and reasoning of these writers, they will discover that many of our ideas on macroeconomics have a long lineage and are not recent discoveries I wish to express my gratitude to the Arts, Humanities, and Social Sciences Benefactions Fund of Trinity College Dublin for providing financial assistance to research for this book in both the United Kingdom and France I would like to thank the European Journal of the History of Economic Thought for permission to reproduce some parts of my paper on Henry Thornton in the penultimate chapter I would also like to thank Ms Sarah Caro and the editorial team at Oxford University Press for the care and attention that they have devoted to book Mr Michael Curran was of invaluable assistance through his reading of the text and his help with the presentation of diagrams I am also indebted to the two anonymous referees for their suggestions on how to improve the text The usual disclaimer applies A.E.M v This page intentionally left blank Contents List of Plates List of Figures ix x Introduction: The Genesis of Macroeconomics Sir William Petty: National Income Accounting 21 John Law: A New Monetary System 43 Richard Cantillon: Macroeconomic Modelling 73 David Hume: The Classical Theory of Money 95 Franc¸ois Quesnay: The Circular Flow of Income 119 Anne Robert Jacques Turgot: The Importance of Capital 133 Adam Smith: Land, Labour, Capital, and Social Cement 155 Henry Thornton: The Lender of Last Resort 189 10 Conclusion: New Ideas from Fascinating People 215 Index 227 vii This page intentionally left blank List of Plates Sir William Petty by and published by John Smith, after John Closterman Mezzotint, 1696 National Portrait Gallery, London 20 John Law by Leonard Schenk, after unknown artist Line engraving, 1720 or after National Portrait Gallery, London 42 Speculation on the rue Quincampoix in 1720 Dutch engraving published in Het Groote Tafereel der Dwaasheid (1720) 72 David Hume by and published by David Martin, after Allan Ramsay Mezzotint, 1767 National Portrait Gallery, London 94 Franc¸ois Quesnay Engraving by J G Will (1747) from the original painting by Chevallier (1745) 118 ˆ leur Ge´ne´ral des Finances by Ducreux Anne Robert Jacques Turgot, Contro Reproduced with kind permission of Madame Ysabel de Naurois-Turgot, Chaˆteau de Lantheuil, Normandy 132 Adam Smith The Kress Library of Economic Literature, Harvard Business School 154 Henry Thornton Engraving by T Blood (1815) Reproduced with kind permission of Lambeth Archives Department 188 ix Conclusion production process in the Wealth of Nations Men and machinery would drive the wealth of the nation The optimal environment for such growth was one in which competition flourished and the price mechanism invisibly did its allocative work Underpinning this ring of competition, so necessary in the Smithian vision for progress to occur, there was a second ring that produced the social cement in which economic society could flourish This was the ring of social behaviour, based on the empathy of the ‘impartial spectator’ of the Theory of Moral Sentiments, a ring that produced appropriate rules of moral behaviour along with institutions embodying such behaviour The behaviour of Smith’s ‘impartial spectator’ has very strong parallels with that of the ‘reasonable man’ so central to the formulation of the common law system that underpins legal behavioural relations in the Anglo-American world Henry Thornton, our last author, was quick to identify Smith’s weaknesses in monetary economics He attacked his definition of the money supply and criticized his lack of understanding of the velocity of circulation of money As a practising banker, he showed up the artificiality of Smith’s distinction between real and fictitious bills This enabled him to be highly critical of Smith’s followers’ advocacy of a strict type of monetary rule involving decreasing the money supply when the gold reserves of the Bank of England fell In many respects Thornton re-examined the issues that Law had attempted to analyse a century earlier Law wanted to replace the metallic money system of the period with one based on paper money and bank credit The Napoleonic wars had forced Britain to abandon gold convertibility, leaving Thornton with the task of literally analysing the paper credit of Great Britain In this new monetary habitat Thornton forced economists to become two-handed by destructuring what would later become known as the equation of exchange in the form MV ¼ PY Economics writers traditionally had viewed this from the left-hand side, contending that problems arose if there was too much or too little money on the left-hand side Thornton asked how this equilibrium quantity of money could be identified, given that velocity could be changing Furthermore, who was to know that it was the left-hand side that was causing the problem? Look at the right-hand side, where exogenous shocks in the form of harvest failures, outbreaks of war, etc could play havoc with prices and output The strong implication of Thornton’s analysis, at least in the first half of Paper Credit, was that it was dangerous to have a monetary rule linking paper credit to some quantity of metallic money so that paper credit varied according as the quantity of metallic money rose or fell Thornton described how there were different layers of paper credit stretching from the Bank of England to the London banks and then on to the country banks Interferences in the Bank of England’s credit, the base of the paper credit system, could cause widespread banking failures and financial contagion To counter such a possibility Thornton envisaged the Bank of England, which by this stage had become a quasi central bank, acting as a lender of last resort to the banking system in order to prevent 220 New Ideas from Fascinating People panic and contagion from spreading through the banking system and then spilling over to the real economy Thornton the professional banker knew from experience that the Bank of England, if committed to some dogmatic rule linking the money supply to metallic monetary reserves, could produce all sorts of damaging consequences both for the financial economy, in the form of bankruptcies and loss of confidence, and for the real economy, in the form of reduced output He provided the template for the emergence of the central bank as a lender of last resort Weaknesses and Wrong Directions The macroeconomic legacy of the authors outlined in this book is very significant, but, in admiring these discoveries, it would be wrong not to recognize that they were also accompanied by weaknesses and wrong directions Hindsight is always perfect, and it is unfair to look for too much from writers who, with the exception of Adam Smith, were not academics and had full-time day jobs to occupy their minds With that caveat, there are still regrets Sir William Petty showed his extraordinary ability to provide ways of measuring the national income and analysing the macroeconomy It has to be regretted that he did not go further and present his ideas to his fellow members of the Royal Society to initiate further research into macroeconomic phenomena He appears to have been interested in the issues he raised only from his own perspective of a private landowner threatened with the possibility of further heavy taxation It is no coincidence that his two major works on economics, A Treatise on Taxes and Contributions and Verbum Sapienti, with its title referring to the need for a more equal distribution of taxes, were specifically geared to producing a strong policy message on taxation With respect to John Law, it is to be regretted that, even though he was the first writer to conceptualize the price-driven market system in terms of supply and demand, he abandoned his market principles when the Mississippi System started to encounter financial turbulence Rather than analysing the primary problems in terms of market behaviour, he forced people to accept the System through a variety of restrictive measures such as the prohibition on holding specie and bullion, forced devaluations of silver and the demonetization of gold, guaranteeing the price of Mississippi stock, and the overuse of the printing presses of the Royal Bank In 1723 Law was nearly given the opportunity to reshape the French economy a second time when the duc d’Orle´ans, the Regent of France, decided to invite him to return Unfortunately, the Regent died before Law could accept this new invitation Richard Cantillon, though producing a very powerful analytical work, suffered from a lack of faith in the potential of the economy As shown, he perceived economic activity in the aggregate as basically a zero sum game 221 Conclusion There were winners and losers But there were no net long-term winners Nations could gain at the expense of others, but all this was occurring around a horizontal line Franc¸ois Quesnay, developing Cantillon’s work on the circular flow of income, presented the possibilities of economic growth occurring through shifts in consumption and investment expenditure This moved economics out of the zero sum mindset but, unfortunately, owing to his blinkered emphasis on the exclusively productive powers of agriculture as against the so-called sterility of the industrial and services sectors, Quesnay was unable to perceive economic growth as emanating from any sector but agriculture The use of the term ‘sterile’ to sum up the economic activities of these sectors was unfortunate in the extreme and meant that, apart from its brief marketing success in the 1760s and early 1770s, his Physiocracy could not attract long-term adherents Ironically, Quesnay appears to have lost interest in his economic doctrine towards the end of his career, switching to the study of mathematics Another author who switched away from economics and, in this case, the move was even quicker, was David Hume Hume’s Political Discourses was probably the most successful book that he had published up to that point in his career Prior to the publication of this book in 1752, though writing works which would be regarded as classics by later generations, Hume had been unable to produce a commercial success that would enable him to live from the income of his writings The Political Discourses solved this problem It was a book that went into many editions and many translations After its publication Hume was recognized as an author who could sell books He was encouraged to write further books through attractive advances from his publishers Alas, these advances were not for economics works but for a series of books on the history of England Advances of £400 for the first volume and £700 for the second were sufficient to attract him to writing history for the rest of his life History’s gain was economics’ loss, for, aside from an additional chapter, ‘Of the Jealousy of Trade’, for the second edition of the Political Discourses, Hume would not write any more books on economics However, he did attempt to persuade Smith in his correspondence that the collapse of the Ayr Bank, which had produced a financial crisis not just in Scotland but also in London, might cause Smith to think again on these issues He wrote: Do these events any-wise affect your theory? Or will it occasion the revisal of any chapters On the whole, I believe that the check given to our exorbitant and ill grounded credit will prove of advantage in the long run, as it will reduce people to more solid and less sanguine projects, and at the same time introduce frugality among the merchants and manufacturers: What say you? Here is food for your speculation (Hume 1932: ii 263–4) One wonders if, in writing further economics books rather than history, Hume would have solved some of the ambiguities that he produced on money and 222 New Ideas from Fascinating People financial innovation As has been shown, he was a metallist at heart and feared the use of paper money He was strongly opposed to financial innovation as manifested in capital markets and the products of such markets, namely, shares and bonds His weaknesses in this area, at least from my own perspective, were part of this great monetary fault running through the works of not only Hume but also his great friend Adam Smith and their French friend Turgot Anne Robert Jacques Turgot made the critical breakthrough with his analysis of capital However, owing to his opposition to paper money and financial innovation, his work was stuck in the time warp of eighteenth-century France, one where notaries acted as proxy banks and where entrepreneurs had not access to the capital market In such an environment Turgot could only foresee investment financed by savings, which in turn arose through abstention from current consumption He could not see the potential for the banking system and the capital market to provide alternative channels to finance investment He was not alone with this fixation on savings constituting the sole channel for the financing of investment His theory was accepted, as Schumpeter (1954) has remarked, ‘hook, line and sinker’ by subsequent generations of economists The division between economics and the corporate financing of investment has had a long and unsatisfactory history Indeed, it was Schumpeter who attempted to force a reconsideration by the profession on this issue The great monetary fault line continued through Adam Smith in the Wealth of Nations There is some evidence from the Lectures on Jurisprudence that Smith had a more liberal view on money in the early 1760s than in 1776 It has been surmised that Smith changed his views on money after the collapse of the Ayr Bank in 1772, this collapse showing him the dangers of excessive financial innovation The financial system, in Icarian style, had flown too close to the sun, supported on the wings of paper credit The collapse of the Ayr Bank suggested to Smith that it was better to anchor the financial system on the solid ground of metallic money His distinctions between productive and unproductive expenditure and real bills and fictitious bills brought him into troubled waters Henry Thornton advanced a positive role for the Bank of England, quickly emerging as a central bank, to pursue a lender of last resort approach when there were real shocks to the economy But, having opened up this new vista for a central bank to follow, Thornton, in the latter half of Paper Credit, became a great deal more conservative when invoking the spectre of inflation This conservatism would spill over into his subsequent recommendations on the Bullion Committee, where he would show a strong metallist streak This was a pity, because he had effectively shown in Paper Credit that it was possible for Great Britain to function without metallic money The suspension of convertibility in 1797 had produced this changed monetary environment Thornton recognized that the monetary system did not need metallic 223 Conclusion money Furthermore, he recognized that, if the usury laws were abolished, the Bank of England would be able to use the interest rate in place of contractions of the money supply so as to achieve external balance The pieces were in place for a modern monetary system However, the conservative in Thornton took over, and he reverted to recommending the restoration of convertibility It would take Great Britain another 130 years to break away from the gold standard This book has tried to present elements from the lives and conceptualizations of the first macroeconomists from Petty to Thornton At the theoretical level these people are worthy of inclusion in the pantheon of the early discoverers of economics Despite their theoretical brilliance, many of them had serious defects at a personal level Petty, obsessed by his desire to increase his wealth, had little sympathy for the Irish population with whom he lived for a considerable part of his life He had been the key administrator in designing and implementing the Down Survey, which facilitated the transplantation of sizeable sections of the Irish from their native lands to the barren wastes of the west of Ireland Although not all of this plan was implemented, the personal costs of this transplantation did not weigh heavily with Petty Indeed, later on in his career he devised a further plan, this time to transplant the native Irish across the Irish Sea so that England would have a more compact population capable of competing with the Dutch, and also to end Ireland as a seedbed for revolution against the Crown (see Goodacre 2005) John Law’s killing of his fellow ‘beau’ Edmund Wilson in the duel on Bloomsbury Heath may have been an eighteenth-century contract killing Law may have been induced by well-placed politicians to challenge Wilson to a duel to rid a ‘noble lord’ of an embarrassing lover When developing the Mississippi System, he did not cover himself in glory by implementing policies that resulted in the enforced transplantation of beggars, prostitutes, drunks, etc from France to French Louisiana Some of the companies that he took over, such as the Company of Africa and the Company of Senegal, were primarily slave companies exporting unfortunate Africans in the most horrific conditions to the Americas Richard Cantillon started his career by doctoring the account books of James Brydges, the Paymaster-General to the Forces Abroad, so as to mislead parliamentary watchdogs of the time Brydges, who would later become the duke of Chandos, made so much money out of war profiteering that he became one of the richest men in London—rich enough to employ Handel as his private kapellmeister Cantillon helped him to build up his fortune through his adroit manipulation of monies destined for the troops abroad in the Iberian peninsula during the War of the Spanish Succession Cantillon’s creditors, such as Joseph Gage, Lady Mary Herbert, and the Carol brothers, maintained that he sold their shares at the height of the Mississippi boom and did not credit their accounts with the proceeds The strange events surrounding his apparent 224 New Ideas from Fascinating People demise in Albemarle Street in London in 1734 raise further questions about this enigmatic Irishman (see Murphy 1986) In contrast, Quesnay, Hume, Turgot, and Smith presented a more humanistic approach by the standards of their time Henry Thornton has claims to have been the most humanistic of this group of economic writers Powered by his deeply felt evangelicalism, he championed, alongside his great friend William Wilberforce, the anti-slavery legislation that ultimately resulted in the banning of the slave trade by the British Parliament in 1807, a development captured on screen in the film Amazing Grace (dir Apted, 2007) Thornton would no doubt have regarded the anti-slavery legislation achievement as ranking far higher than his book Paper Credit However, his reluctance to provide real freedom for the former black slaves transported from Nova Scotia to Sierra Leone shows a certain flaw in his personality He appeared to take the view that slavery was wrong but that full democratic freedom for the former slaves was inappropriate He wanted the Sierra Leone company that he chaired to exercise considerable control over the freed people of Freetown Furthermore, unfortunately for Thornton, his parliamentary activities, along with his fervour in designing ways of propagating his religious views, meant that he took his eye off his banking business, which was in a bankrupt state by the time of his death These writers, combining very different backgrounds and motivations, left a rich legacy of economic theory In this book we have concentrated on their contributions to macroeconomics It is hoped that this book has shown that macroeconomics was not a twentieth-century invention, and that readers wishing to examine the roots of macroeconomic theory and policy need to move back through time to see the rich tapestry of contributions that were made by Sir William Petty, Richard Cantillon, John Law, David Hume, Franc¸ois Quesnay, Anne Robert Jacques Turgot, Adam Smith, and Henry Thornton New ideas from fascinating people References Blaug, Mark (1962), Economic Theory in Retrospect (Cambridge) Goodacre, Hugh (2005), ‘The Spatial-Economic Logic of William Petty’s Final Scheme’, Paper presented to the European Society for the History of Economic Thought, Stirling, June Hume, David (1932), The Letters of David Hume, ed J Y T Greig (Oxford) Murphy, Antoin (1986), Richard Cantillon: Entrepreneur and Economist (Oxford) Schumpeter, Joseph (1954), A History of Economic Analysis (London) 225 This page intentionally left blank Index Acaster, E J T 195 advances 128–9, 144, 145, 218 agricultural sector 125–30 Ahmad, S 166 algebra 143 Annandale, marquess 98 Anti-Slavery Act 195 Antin, duc d’ 65 arbitrage, international 57 Archimedes 27 Aristotle 27 Arthur, Sir Daniel 74 Aspromourgos, T 30 Aubrey, John 23, 24, 26, 32 Bacon, Francis 27 balance of payments 105–12 and inflation 68 and money supply 58–62 balance of trade: deficit 204–5, 209 and money supply 87 Bank of England 5, 16–18 banknote issue 202–6 directors 192–3 lender of last resort 17, 191, 214, 220 banking: modern system 15 role 150 banknotes 183 banks: central and exchange rates 90–1 land 39, 46, 47–8, 61, 177 regulation 183–4 role 38–9, 108–9, 149 Barbon, Nicholas 46 Barfoot, M 157 barter 52, 53–4, 79, 161 Beaugrand, P 190 Bentham, Jeremy 184 Bernard, Samuel 62 Bevan, W L 23 bills of exchange: as money 200 real and fictitious 180–1, 182, 184, 199 Blacklock 99 Blaug, M 86, 218 Boisguilbert, Pierre de 6, 16, 78–9, 122–3, 137 Bonar, J 16 x1 Bordo, M 78 Boswell, James 176 Bourbon, duc de 69 Braddon 170 Bre´tognoles, Franc¸oise-Madeleine Martineau de 136 Brewer, A 78 Brienne, Lome´nie de 136 Briscoe, John 46 Brown, J 114 Brydges, James 74, 224 Buccleuch, duke of 8, 13, 156, 177–80, 184 Buffon 136 Butel-Dumont 137 Butler, R 121 Caernarvon, Lord 74 Cantillon, Bernard 75 Cantillon Effect 86 Cantillon, Philippe de 77 Cantillon, Richard 7, 9, 13, 36, 50, 73–92, 103, 107, 159, 215, 217 background 74–7 227 Index Cantillon, Richard (Cont.) Essai 3, 4, 78, 105–6, 123–4, 137, 144, 161, 168 limitations 221–2, 224–5 motivation 11 speculator 2, 50, 73 capital: advances concept of 77 factor of production 135, 219–20 formation 145–51, 170–1 growth 160–1 inflows 87 intensity 128, 144 marginal efficiency of 203 role of 143, 159, 160, 169, 215 the term 14, 134, 144, 219 Carol brothers 224 Cary, John 46 cash balance effect 89, 106 cash-in-advance requirement model 53 Castel de Saint-Pierre 114 Cesarano, F 78, 105 Chalmers, George 31 Chamberlen, Dr Hugh 46 Chandos, Lord 74–5 Charles, L 124 Charles I cheapness or plenty 160 Checkland, S G 177 Child, Sir Joshua 39 Choiseul-Romanet, comtesse de 121 Churchill, Winston 167 Cice´, abbe´ de 135, 139, 151 Cicero 27, 97 circular flow of income 2, 10–11, 50–3, 125, 215, 216, 218 Clapham, J 193 Clarkson, Thomas 193–4 Clarkson, John 194 Cochin, Maıˆtre 90 Colbert 129 Colquhoun, J C 196 Company of the West 63–4, 75 consumption 171 contertibility 16–18, 191, 198, 207, 210 228 Craigie, Thomas 98 credit: creation 46 versus money 49–50 Cromwell, Oliver 4, 24–5 Crozat, Antoine 62, 63 d’Alembert 4, 13, 122, 136, 165 Dangeul 137 d’Argenson 123 Dauphin, Jeanne-Catherine 120 deflation 201–6 Descartes, Rene´ 27, 136 Diderot 4, 13, 122, 136, 165 Donne, John 27 Douglas, Sir Robert 156 Douglas, Hugh 157 Douglas, Margaret 157 Du Pont de Nemours 1314, 119, 133, 137, 140, 143–4 Du Tot, Nicolas 11, 66, 69, 103, 111, 140, 151, 159 Dubois, abbe´ 69 Dumfries, duke of 178 Eagly, R V 50 East India Company 179, 184–5 Eatwell, J economic growth 127, 215, 218 and interest rates 148 and savings 149 in Wealth of Nations 159, 168–71 economic model 78–9 economics, the term 29, 78, 99 economists 137, 155 Edinburgh 45–6, 95, 96 Eltis, W 128 employment 50–3, 54 Enlightenment 218, 219 French 3, 121–2, 136, 164 entrepreneurs 2, 80–2, 129, 144–5, 217, 219 equation of exchange 220 equilibrium, the term 144 Estrades, comtesse d’ 121 exchange rates 90–1 exchange reciprocity 82 Index expenditure: circular flow of 125 and income 2, 215, 216 productive and unproductive 175–6 Faccarello, G 122 Falconer, Sir David 96 Faure, Edgar 45, 69 Fausten, D K 105 financial innovation 198 financial revolution 5, 101 financial system and the real economy 68 Fisher, I 216 Forbonnais 137 France 4, 12, 61 banking system 75, 135 bureau d’achat et de vente 67 Chamber of Justice 62–3 financial architecture 141–3 financial crisis 62 manufacturing 59 national debt 63, 65, 67 note issue 64 usury laws 142, 147 Free, Peter 195 free trade 114–15 see also international trade French Enlightenment 3, 121–2, 136, 164 French Louisiana 63, 75, 217 French Revolution 4, 5, 70, 122, 198, 212 Friedman, M 48, 104, 208 Frisch, R Gage, Joseph Edward 75, 90, 224 Galbraith, J K 116 Galileo 27 Gay, John 139 Gee, Joshua 159, 172–3 Ghandhi, Mahatma 167 Glover, Richard 178 Godolphin, Lord 46 gold: demonetization 210–11 versus paper credit 198, 210–14 Goodacre, H 224 Gournay, Jeacques-Claude-Marie Vincent de 12, 122–3, 136–7, 138, 144 government securities 111 Grampp, W D 166 Graunt, Captain John 24–5, 31–2, 33, 34, 216 Greene, Anne 21, 24 Gresham’s Law 109 Grollier, G 124 Gyles, Fletcher 77 Hamilton, H 177 Handel 74 Harris 170 Harsin, Paul 140 Hartlib, Samuel 23 Haughton, Revd Samuel 22 Hayek, F von 78, 105, 106, 190, 196, 211 He´bert, R F 78 Hecht, J 120 Herbert, Lady Mary 90, 224 Hertford, earl of 115 Hicks, J R 190, 203, 207, 216, 218–19 Higgs, Henry 77 Hippocrates 27 Hobbes, Thomas 23, 27 Hoffman, P T 142 Holland 39 Hollander, S 157 Home, Henry 158 Homer 27 Horner 213 Hull, Charles 30 Hume, David 5, 15, 89, 95–116, 147, 159, 164, 175, 180, 190, 191, 197, 210, 214, 215, 219, 225 background 8, 96–9 friend of Adam Smith 13, 98, 101, 115, 155, 157, 185 limitations 222–3 motivation 11–12 Political Discourses 88, 99–101, 115–16, 199, 211 Hume, John 96 Huskisson 213 Hutcheson, Francis 98, 157, 159 229 Index income: circular flow of 2, 10–11, 50–3, 83–4, 125, 215, 216, 218 and expenditure 2, 215, 216 from labour 33–4, 35 and wealth 2, 215 infant industries 61 inflation 55–7, 68, 206–9, 216 interest rates 144 controlled 184, 211, 212 determination of 3, 101, 112–14, 149 and loanable funds 148 market and natural 211–12 and the money supply 113–14 and profits 211–12 role of 145–6 international trade 38, 55, 88, 90, 101, 219 see also free trade investment see advances investment model: loan 147, 219 self-financing 146–7, 149 invisible hand 81–2, 163, 166–7, 168 Ireland: Cromwell in 24–5 Down Survey 25–6, 25–6, 28, 32 mapped and surveyed 25–6, 25–6 Treaty of Limerick 74 James II 4, 39 Jevons, Stanley Johnson, Samuel joint stock companies 184–5 Julius Caesar 27 jurisprudence, definition 160 Kames, Lord 158 Kelly, P 47 Keynes, J M 2, 3, 29, 30, 116, 192–3, 216, 218 Keynes, G 32 King, Gregory 31 King, Martin Luther 167 Ko 143 Kuczynski, M 119, 125, 128, 129–30 Kuznets, S 230 labour: division and specialization 3, 159, 160–1, 170, 173 role of 159, 169–70, 215 Laidler, D 3, 17, 175, 190, 208 laissez-faire 13, 29, 123, 137, 155, 162, 168 land: as collateral 177 see also banks landlords 9, 28, 31, 36, 79–80, 125–30, 163 Lansdowne, marquess of 32, 40 Largillie`re 76 Law, John 7, 18, 36, 39, 43–70, 75–6, 78, 88, 90, 103, 107, 111, 133–4, 159, 177, 198, 200, 215, 216, 220 background 43–5 ˆ leur Ge´ne´ral des Finances 44, Contro 67, 133 ‘Essay for a Land Bank’ 46, 47–8, 54 limitations 221, 224 Money and Trade 48–57, 58, 68, 84, 112, 140, 182 motivation 10 as policy-maker 62–70 Leontief 130 level, the concept 108–9 liquidity preference 203 Locke, John 47, 85, 122, 136, 140, 159, 191, 197, 208, 209 Louis XIV 4, 62, 69, 74, 75 Louis XV 8, 13, 75, 119, 120, 136 Louis XVI 4, 15 Louvigny, chevalier de 76–7 Macauley, Thomas Babington 194 Macauley, Zachary 194 McCulloch 192 Macfie 163 Magens 159 Malthus, T Mandela, Nelson 167 Mandeville 159, 161, 170 manufacturing 52, 59 Mao 171 market system 80–2 Marx, Karl 30, 169 Index Massie, Joseph 113, 170, 211 Maupertius 136 Mayer, T 104 Meacham, S 189, 190 Meek, R L 119, 124, 125, 128, 129–30, 159 Melon, J.-F 111, 151 merchants 112–13 Middleton 98 Millar, John 158–9, 162, 163 Mirabeau 123–4, 125 Mississippi Company 10–11, 63–8, 75–6, 135 Mississippi System 2, 4, 44, 73, 91, 139, 173, 182, 217 model-building 217–18 Molie´re 9, 27 monetary theory money: bills of exchange as 200 broad 200–1 circulation 174 definition 46, 217 demand for 2, 10, 38, 47, 48, 54, 85, 215 and division of labour 173 equilibrium quantity 84–5, 220 intrinsic value 140 neutrality 100–1, 102–4 quantity of 199 quantity theory of 206–7 role of 145–6, 150 state role in 173–4 transmission mechanism 85–6 velocity of circulation 2, 36–7, 199, 200–1, 207–8 versus credit 49–50 and wealth 36 whole paper 200 see also paper money money supply: and balance of payments 58–62 and balance of trade 87 and capital inflows 86 and employment 50–3, 54 from gold and silver mining 86–7, 89 and interest rate 113–14 and output 59, 103–4, 107–8 short- and long-term effects 103–4 Montchre´tien, Antoine de 43, 78 Montesquieu 4, 110, 122, 134, 158–9, 191, 197, 201, 210 More, Hannah 196 More, Sir Thomas 27 Morellet, Andre´ 136, 137 Mossner, E C 96, 99 motivations 166 multiplier 30, 215 Mun, Sir Thomas 159, 172–3, 199 Murphy, A E 44, 62, 68, 69, 74, 134, 189 Napoleon 4, 16 national debt, France 63, 65, 67 national economic accounting 31 national expenditure 34, 35 national income 35, 174 national income accounting 1–2, 215 Newton, Isaac 139 North, Sir Dudley 6, 114 O’Mahony, Count Daniel 76 O’Mahony, Mary Anne 76 Orle´ans, Philippe duc d’ 10 Oswald, James 106–7, 108, 158 output: circular flow of 125 and money supply 59, 103–4, 107–8 overdrafts 109 Oxford 21–2 Pack, S J 166 paper credit: effects of 191 versus gold 198, 210–14 paper money 2, 108–10 benefits of 171–2, 174–5, 181–2 in France 11, 18, 55 with land as collateral 46 opposition to 140–1 see also money Paris-Duverney, Joseph 111, 159, 173 Pascal 27 Paterson, William 43, 46 Persky, J 166 231 Index Petty, Sir William 2, 3, 7, 21–40, 46, 78, 81, 85, 162, 170, 208, 215, 216 ‘A Treatise of Ireland’ 39–40 A Treatise of Taxes and Contributions 28, 30 anatomist 21–4 background 22–8 intellectual influences 27 knighthood 26 limitations 221, 224 Political Arithmetick 36–8 Verbum Sapienti 9–10, 28, 30–4, 36, 37, 84 Petyt, William 57 Philippe, duc d’Orle´ans 75, 136 Physiocrats 2, 14, 16, 123, 124, 137, 144, 176 pin factory 13, 160, 170 Poirier, J.-P 136 political arithmetic 27 politicians 167 Pompadour, Madame de 119, 121, 155 population, measurement of 27–8, 32–3, 34 Portugal 89, 102, 113 Postlethwayt, Malachy 77, 83 Potter, William 46 Prendergast, R 78 price specie flow mechanism, selfregulating 101, 105–12 price-making process 80 prices: internationally traded goods 55 and intrinsic value 81 law of one 2, 56, 107, 216 natural and market 161–2, 168 relative 89, 106 Pringle, Dr John 98 profit rates 113, 211–12 public debt 101, 111–12 Pulteney, William 180, 184 Queensberry, duke of 177, 178, 179 Quesnay, Franc¸ois 9, 14, 36, 82, 119–30, 137, 155, 159, 160, 168, 169, 170, 215, 219, 225 background limitations 222 232 motivation 12–13 ‘Tableau e´conomique’ 2, 3, 50, 92, 119–20, 124–30, 145, 218 Raphael 159, 163 rates of return, and risk 150 reasonable man 162–3, 220 Reisman, D A 190 Rembrandt 21 Rengger, N 114 Ricardo, David 12, 167 Rieter, H 124 Rist, C 190 Robbins, L 130 Ross, I S 157 Rothschild, E 166 Rotwein 100 Royal Economics Society 77 Royal Society 10, 22, 23, 24, 32, 36, 221 St Clair, General 98 Sankey, Sir Hierome 26 savings: and capital formation 145–6 and economic growth 149 and loanable funds 148 Say, Jean-Baptiste 82 Schama, S 193, 194 Schelle 141, 151 Schumpeter, J 2, 30, 82, 151, 223 Scotland Ayr Bank 156, 171, 176–9 banking system 15, 110 land bank 61 low economic activity 48–9, 60 money supply 54, 56 Scott, Hew Campbell 165 self-financing model 170 self-interest 162, 166, 167 Shakespeare 27 Sharpe, Matthew 98 short- and long-term 219 Sierra Leone 194–5 Sierra Leone Company 193–4 silver 54–6 Skaggs, N 17, 209 Slack, P 31 Index Smith, Adam 5, 9, 98–9, 106, 115, 155–85, 214, 215, 225 background 8, 157–8 criticised by Thornton 16–17, 197–210 influence on Bank of England 202–6 Lectures of Jurisprudence 159–60, 171, 219–20 limitations 223 on money 6, 15–16, 101, 171–6, 191 motivation 13–14 Theory of Moral Sentiments 162–5 Wealth of Nations 7, 47, 81–2, 122, 130, 135, 155–6, 159, 165–70, 220 South Sea Bubble 11, 91, 185 South Sea Company 68, 76, 135, 139 Southwell, Sir Robert 27 Spain 89, 102, 113 specie flow, self-regulating 88–90 specie money: and wealth 36 see also money Spengler, J 78 Spinoza 136 statistics, English medical 31–2 Stein 159 Steuart, Sir James 6, 197 stock market 18, 185 Stone, R 30–1 Strauss, E 24 Sua´rez, Francisco 27 Sunday School Society 195 supply and demand analysis 2, 47–8, 56–7 surplus product 30 sympathy 162–3, 166 Tacitus 27 tax base 9–10, 31 taxation 138, 141 income 33–4, 36 on landowners 28, 31, 36 Terrasson, abbe´ Jean 139–40 Thornton, Henry 7, 189–214, 215 background 8, 192–6 criticism of Adam Smith 16–17, 197–210 limitations 223–4 motivation 16–18 Paper Credit 3, 5, 101, 184, 190–1, 196–214, 220–1, 225 Thornton, John 192 Thornton, Marianne 196 Thornton, Robert 193, 196 Thornton, Samuel 16–17, 196, 207 Thweatt, W O 47 Townshend, Charles 156, 164 Tulp, Dr Nicolaes 21 Turgot, Anne Robert Jacques 5, 13, 82, 123, 133–51, 159, 168, 169, 170, 215, 219, 225 background 8, 135–9 on capital formation 145–51 ˆ leur Ge´ne´ral des Finances 15, Contro 133, 138, 139, 151 limitations 223 motivation 14–15 Reflexions 2–3, 77, 134–5, 143–5, 161, 165 Turgot, Michel-E´tienne 135–6, 151 unemployment 29–30, 49, 133 United States of America usury laws 18, 142, 147, 211, 212, 213 utility, the term 144 Varro 27 velocity of circulation 2, 36–7, 199, 200–1, 207–8 Vigne, Jean de la 120 Villebarre, Jametz de 136 Villeroy, duc de 121 Villiers, Betty 43–4 Virgil 97 Voltaire 138 wages: flexible 53 sticky 203 Walras 82 wars and revolutions 4–5, 212–13 see also French Revolution wealth: and income 2, 215 non-human 34–5 233 Index wealth: (Cont.) or opulence 160 and specie money 36 Wennerlind, C 101 Wicksell, K 190, 211 Wilberforce, William 8, 193, 194, 195, 225 234 William of Orange 4, 5, 74 Willis, Dr Thomas 22 Wilson Edward 43–4, 224 Xenophon 170 Yang 143 .. .The Genesis of Macroeconomics This page intentionally left blank The Genesis of Macroeconomics New Ideas from Sir William Petty to Henry Thornton Antoin E Murphy Great Clarendon... adopted by Thornton to warn of the folly of increasing the money supply For my own part, I not believe that this type of genre was part of the literary bag of tricks of the serious-minded Thornton Intriguingly,... many cases the authors were not seeking to create macroeconomics, and their contributions to macroeconomics were by-products of the pursuit of other goals Because of these other goals and the fact