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Pre-Classical and Early Modern Economic Thought

Before the formalization of economics as a distinct academic discipline by Adam Smith in the late 18th century, early philosophers and statesmen debated the nature of wealth, money, and state power. This era laid the groundwork for modern debates over inflation, currency, and trade.

Early Understandings of Inflation and Money

In the 17th century, philosophers began grappling with the nature of money and its relationship to the state and the broader economy, setting the stage for modern monetary theory.

Thomas Hobbes (1588–1679)

In his masterwork Leviathan (1651), English philosopher Thomas Hobbes famously compared money to the "blood" of the commonwealth. He argued that just as blood must circulate to keep a body alive, money must circulate to keep a nation strong. Hobbes viewed the value of money as entirely dependent on the sovereign (the state). In his view, the state had the absolute right to define what constituted money and determine its value, a philosophical precursor to modern fiat currency.

John Locke (1632–1704)

Unlike Hobbes, philosopher John Locke argued that money derived its value from social consensus and the intrinsic value of the precious metals (gold and silver) it contained, rather than mere state decree.

Locke was an early proponent of the Quantity Theory of Money. He observed that if the supply of money in an economy increases while the supply of goods remains the same, the result is inflation (prices go up). During a major English coinage crisis in the 1690s, the government debated whether to devalue the currency (lower the silver content) to create more coins. Locke vigorously opposed this, arguing that doing so would simply cause prices to rise proportionally, effectively acting as a hidden tax on the public and destroying trust in the currency.

Mercantilism

From the 16th to the 18th centuries, the dominant economic framework in Europe was mercantilism.

Mercantilism viewed the global economy as a zero-sum game: for one nation to get richer, another had to get poorer. Wealth was not measured by the standard of living of the citizens, but by the amount of gold and silver hoarded in the national treasury.

To maximize this hoard of bullion, nations employed strict policies:

  • Exporting as much as possible while importing as little as possible (maintaining a positive trade balance).
  • Heavily taxing foreign goods (tariffs) to protect domestic industries.
  • Creating state-sponsored monopolies (like the East India Company) to dominate trade routes.
  • Exploiting colonies solely for cheap raw materials.

It was precisely this system of strict government control and hoarded wealth that Adam Smith would violently attack in The Wealth of Nations, arguing instead that wealth is created by free trade and the division of labor, not by stockpiling gold.

Mini-Quiz

Question 1

How did Thomas Hobbes describe the role of money in his book Leviathan?

  1. As the "invisible hand" guiding the market
  2. As the "blood" of the commonwealth that must circulate
  3. As a "barbarous relic" that should be abolished
  4. As the sole cause of class warfare

Hint: He compared the economy to a biological organism. Correct Answer: B Explanation: Hobbes compared money to blood, arguing that it must constantly circulate to nourish the state and keep the economy functioning.

Question 2

What was John Locke's view on the relationship between the money supply and prices, an early version of the Quantity Theory of Money?

  1. Increasing the money supply without increasing goods leads to higher prices (inflation).
  2. Increasing the money supply always lowers interest rates permanently.
  3. The amount of money in circulation has no effect on prices.
  4. The state can arbitrarily set prices regardless of the money supply.

Hint: He argued against devaluing the currency because it would just act as a hidden tax. Correct Answer: A Explanation: Locke understood that if you simply create more money (or devalue the coinage) without expanding the actual goods in the economy, prices will rise proportionally.

Question 3

Which of the following best describes the core belief of mercantilism?

  1. Free markets and unhindered global trade create the most wealth for everyone.
  2. Wealth is created by the division of labor and specialized factories.
  3. Global wealth is a zero-sum game, and nations should hoard gold and maximize exports.
  4. The government should aggressively print paper money to fund public works.

Hint: Think about how European empires operated before Adam Smith. Correct Answer: C Explanation: Mercantilism was built on the belief that a nation's wealth was determined by its hoard of gold, leading to strict trade barriers, monopolies, and the aggressive pursuit of a trade surplus.