Economıc Growth and Development (ENG) — Ünite 2 Soru-Cevap

Mercantilism is “an economic system developing during the decay of feudalism to unify and increase the power and especially the monetary wealth of a nation by a strict governmental regulation of the entire national economy usually through policies designed
to secure an accumulation of bullion, a favorable balance of trade, the development of agriculture and manufactures, and the establishment of foreign trading monopolies.

The economic theories and practices that emerged between 1500 and 1750 are collectively referred to as mercantilism.

All of Western Europe’s developing economies generated mercantilist literature; however, the English and the French made the biggest contributions

The mercantilists worked on the assumption that the amount of wealth in the world was fixed

As a result, to increase a nation’s strength and prosperity, mercantilists strongly valued international trade and gave special attention to the balance of trade between states

The meaning of bullion is gold or silver considered as so much metal; specifically, uncoined gold or silver in bars or ingots.

Around the middle of the 18th century, just before the publication of Adam Smith’s An Inquiry into the Nature and Causes of the Wealth of Nations, an important school of economic thought called Physiocracy was developed in France

François Quesnay, the leader of the Physiocratic School, strongly opposed French kingdom’s economic policy which he labeled the “merchant’s system,” as being too closely aligned with commercial interests and which included monopolies, chartered firms, and other
similar entities

Laissez-faire is a doctrine opposing governmental interference in economic affairs beyond the minimum necessary for the maintenance of
peace and property rights. The French phrase laissez faire literally means “allow to do,” with the idea being “let people do as they choose.”

Five basic tenets of Classical Economics, according to Eltis (2000) are as follows:

1. Two conditions necessary for the efficient operation of an economic system are the existence of competitive markets and property owners’ initiative as the determinant of investment and production decisions. Entrepreneurs need to be certain that they will be granted legal ownership of the wealth they generate in order for these to be effective.

2. Population will continue to grow indefinitely in order to meet the demand for labor at a real wage that keeps families at a standard of living where enough children survive.

3. A net surplus could be produced by certain productive economic activities. Others, particularly those associated with the government, are unproductive and “can only be sustained from the surpluses of productive activities.”

4. Reinvestment of surpluses from productive activity is what drives economic growth. A country’s output will stagnate or decrease if these are consumed by unproductive economic activities.

5. Market prices that are determined by the competitive process will converge on the long-term production costs that serve as the foundation for determining the value of output.

Adam Smith is regarded as the founder of Classical Economics, hence economics as a social science

Adam Smith and mercantilists differed clearly with regard to the nature of a country’s wealth. Unlike mercantilists who measured wealth with gold and silver accumulated by a monarch, a nation’s wealth depends on the volume of goods and services produced within the country according to Smith.

Figure 2.1 shows the significance of capital accumulation and division of labor in Adam Smith’s analysis. These two factors are two main determinants of the wealth of a nation.

Smith claims that there are three main ways in which division of labor increases labor productivity:

(i) workers’ increased dexterity as a result of specialization in tasks and production processes;
(ii) time savings as a result of not having to switch between different types of production activities;
(iii) the division of labor facilitates innovations, particularly the development of machines that can replace labor power

In his treatise, Malthus argued that population growth will always tend to exceed the food supply and because of the differences between the growth rates of population and the food supply, poverty and misery are unavoidable.

Stationary state is a condition taken as an operational concept in economic analysis in which economic processes merely reproduce
themselves with no changes

David Ricardo (1772-1823) was a British political economist and politician. He is recognized as the first person to systematize economics and was a major figure in the creation of classical economics.

Capitalism was a mode of production for Marx, which means that the capitalist system had its own specific combination of dynamic “forces of production” and static “relations of production”. The forces of production are technology and basic factors of production, namely land, labor and capital. These forces change in quantity or quality as a result of changes in factors such as population, innovation or education.


The relations of production are relations between people (human relations) or between people and things (property relations). The sum of these relations, according to Marx, forms the economic structure of society, called the infrastructure. A legal and political superstructure, consisting of literature, philosophy, art, religion, jurisprudence and society’s other cultural forms, is built on this economic structure.

Proletariat is the class of industrial workers who lack their own means of production and hence sell their labor to live.

Joseph A. Schumpeter is famous for his ideas on economic cycles, the growth of capitalist economies, and the idea of entrepreneurship. For him, innovation is the engine that propels a capitalist economy, and the entrepreneur is the cornerstone of capitalism.

“Creative destruction”, a term coined by Werner Sombart, became popular thanks to the work of Schumpeter.