Xenophon and the Silver Mines

For those who don't know, Xenophon was the first Philosopher that could be considered the first free-trade economist; as well as the first with an understanding of returns to scale and optimising the use of capital.
His proposition for the nation of Ancient Greece was as follows:

Ancient Greece was primarly an agrarian society in the times of the writings of Xenophon, which is the basis for his entire argument. In an agrarian society, there are constant, and sometimes decreasing returns to scale of capital and labour, which Xenophon saw to be an inefficient allocation. There are great risks associated with agrarian production, mostly yield risk and price risk. He also saw that there was fixed amount of land (limited supply) that could be used for agrarian production, and and even more limited amount of land that would yield enough of a harvest to be considered an efficient investment. He saw that maximising the amount of capital and labour invested into the silver mines would create at least constant, if not increasing returns to scale, guaranteed.
These are the details he outlined:
The first step that needed to be taken was that the nation needed to go out and accumulate 10,000 foreign slaves that were to be branded as state property. In ancient Greece, it was almost against the law for a native to lift a finger in any way, and thus slaves were an extremely popular way of acquiring a labour force. These slaves would be, as I mentioned before, branded as state property with the sole purpose of being rented out to any capitalist willing to invest in silver mine extraction (production). Xenophon saw this as a primary need as if you asked any silver mine capitalist, he was always short of labour to meet his desired level of production, which was infinite. The secondary argument for the use of state-branded slaves was that it would be a form of constant and steady revenue for the state, as the slaves were rented out on contract for a "market price". He saw that regulating the supply of labour in the sense of making the supply more than sufficient to meet demand would create an incentive for all capitalists to venture into the idea of producing silver. Xenophon also proposed having a few (or numerous, depending on the need) government owned and operated firms to decrease the possible fluctuations in production, thus decreasing the fluctuations in the price of silver; as a fluctuation in the price of silver would drive capitalists in and out of the market, making it unstable and inefficient, in the eyes of Xenophon. He knew that there needed to be a steady expectation as to the amount of silver that would be produced in a given period to create a stability in the market place, or an added incentive for even more capitalists to "make the switch".
Xenophons argument for this re-allocation of the nations public and private resources to the production of silver was both a supply-side and demand-side argument. The above was the meat of the supply side, and the demand side of the argument was quite simple; it's infinite. He saw the demand for silver to be so great that its price would never fall to a level in which the cost of producing a given amount of silver would ever rise above the market price of that same given amount. In his argument, he went so far as to say that the demand for silver is so high due to the fact that most are happy burying their silver as if they had spent it. In other words, man's greed has no bounds.

The implications of his propostion are quite interesting. He saw that allocating the resoucres of Greece towards the production of silver would increase the nations wealth, both internally and externally. They would, as a result, become the worlds "leader" in terms of silver reserves and yearly silver production. It would be unecessary for Greece to farm and create the subsitence for its people, as all it needed to do was produce silver and buy subsistence from the market of international trade. Now, I doubt that he was proposing a 100% switch from agrarian to silver, but sufficient enough of a switch to create a negative balance of trade in terms of finished goods. For this reason, Xenophon is considered to be one of the first proponents for international free trade, as well as the first with a recognition of the notion of competitive advantage and the mutual gains from trade. He saw that there was a certain level of learning by doing, or possibly original endowment, that created a bias towards a particular type of production. And that optimising your capital involved finding projects which yielded the highest returns of capital and labour. So long as silver yielded the highest return, all of the people in the nation would necesarily be better off, as their individual marginal products of labour will increase, thus creating a higher standard of living and allowing each individual to consume more of any goods they did desire by way of purchasing it with their silver. All the while, the nation itself (the public purse) will grow as it is receiving cash flows from the renting out of slaves. For anyone who is thinking that Xenophons vision was short-sighted, it was, but another point for how thorough his thought process was, is that he saw the possible costs of exploration. He did accept that the market price of silver would have to cover both the costs of production, as well as all the costs of exploration as well. In other words, he did have an understanding of the risks associated with entering the silver production market and that there is a need for exploration, which can be costly.

More on Xenophon to come as I read more....


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