Mercantilism and Physiocracy
Chapter 3
January 26, 2007
Mercantilism
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The word comes from the Latin word mercari,
which means "to run a trade"
Name coined by later economists, including
Adam Smith
Mercantilist writers were businessmen, people
engaged in commerce
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(16th – mid 18th centuries)
Keep in mind that there is not really any one
“mercantilist” theory
Individual writers were usually seeking some sort
of policy that would help them in their businesses
Most Mercantilists were British
Mercantilism
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(continued)
What are the questions that
mercantilists ask?
How can a nation gain economic and
political power?
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Mercantilism represented the elevation of
commercial interests to the level of
national policy
Mercantilism
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(continued)
What are the assumptions that
mercantilists make?
Total wealth of the world is fixed –
economics is a zero sum game.
Wealth is measured by the amount of
precious metals in the country
The goal is a positive trade balance –
exports exceed imports
Mercantilism
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(continued)
What is the economic/political/
cultural/social environment of the
mercantilists?
Emergence of nation-state – move
away from feudalism
Colonization by European states
Mercantilism
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(continued)
What is the role of the market?
Individual mercantilist writers were
usually advocating some type of policy
in order to increase their own
gain/profit
Limited role for free markets
Mercantilism
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(continued)
What is the role of government?
Restrict imports of manufactured goods via
tariffs/quotas
Encourage imports of raw materials (colonies)
Encourage exports of manufactured goods via
subsidies
Encourage production, discourage
consumption (taxes on imports of finished
products)
Keep workers uneducated and poor
Mercantilism
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(continued)
How are scarce resources allocated?
Again, generally, Mercantilists
advocated specific government
programs that would benefit them (give
them scarce resources)
Advocated government intervention,
tariffs, charters for trading companies,
etc.
Mercantilism
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(continued)
What is the most important contribution made by
mercantilists?
According to your textbook, “Possibly the most
significant accomplishment of the later mercantilists
was the explicit recognition of the possibility of
analyzing the economy.”
In mercantilist thought, the main focus was on the
economy and economic policy, not other
social/political/cultural ideas. There was more of a
“scientific” approach developing with respect to
economics and other social sciences
Mercantilism
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(continued)
How did the ideas of "liberal mercantilists" pave the
way for classical writers like Adam Smith?
The case can be made that mercantilism was an early
form of capitalism. According to The European
Enlightenment Glossary at Washington State
University, “Capitalism is based on the same principle
as mercantilism: the large-scale realization of a profit
by acquiring goods for lower prices than one sells
them.” http://www.wsu.edu:8080/~dee/GLOSSARY/
CAPITAL.HTM
Mercantilism
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(continued)
How did the ideas of "liberal mercantilists" pave the
way for classical writers like Adam Smith?
David Hume – price specie-flow mechanism
While the textbook includes Hume as a mercantilist,
other sources find him to be “virulent antimercantilist.” http://cepa.newschool.edu/het/profiles
/hume.htm He believed that a nation’s welfare was
measure by how many goods and services it had
rather than its stock of precious metals. Also, he did
not believe international trade to be a zero-sum
game, rather he believed that all countries could
gain.
Mercantilism
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(continued)
How did the ideas of "liberal mercantilists"
pave the way for classical writers like Adam
Smith?
William Petty is credited with developing
some aspects of measurement and
methodology
Richard Cantillon developed a supply and
demand model for the determination of short
run prices. He also developed a quantity
theory of money.
Physiocracy
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The Physiocrats were a group of French
Enlightenment thinkers of the 1760s
Led by François Quesnay, the physician
of the French court
The term “physiocracy” literally
translates into “the rule of nature”
Their ideas were in direct opposition to
the Mercantilists
Physiocracy
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(continued)
What are the questions that physiocrats
ask?
How do we make the economy strong
and encourage economic growth?
Physiocracy
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What are the assumptions that Physiocrats make?
Only agriculture yields a surplus
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(continued)
Agricultural laborers and farmers were the "productive class“
Industrial workers, artisans and merchants were the "sterile"
class
Landowners were the "proprietor" class, who appropriated
the net product as rents
Manufacturing takes up as much value as inputs into
production as it creates in output, and consequently
creates no net product
Physiocracy
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What is the economic/political/ cultural/social
environment of the mercantilists?
French agriculture at the time was still trapped in
Medieval (feudal) regulations which shackled
enterprising farmers
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(continued)
Latter-day feudal obligations -- such as the corvée, the
yearly labor farmers owed to the state -- were still in force
The monopoly power of the merchant guilds in towns did
not permit farmers to sell their output to the highest bidder
and buy their inputs from cheapest source
Long conflict between Britain and France, especially
over colonization
Physiocracy
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(continued)
What is the role of the market?
Believed that self interest and competition led
to best situation for the economy, especially
since it would promote growth in agricultural
sector
Self interest and competition is a hallmark of
classical and neoclassical economics
Physiocracy
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(continued)
What is the role of government?
Government is a parasite - It lives off the
economy and society, but it is not part of
it. It is not part of the natural order
They argued for removal of restrictions on
internal trade and labor migration, the
abolition of the corvée, the removal of statesponsored monopolies and trading privileges,
the dismantling of the guild system, etc.
Physiocracy
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(continued)
What is the role of government? (continued)
If there is any tax, it should be a tax on landed
property
Any taxes levied throughout the economy will just
passed from sector to sector until they fall upon the
net product. As land is the only source of wealth,
then the burden of all taxes ultimately bears down on
the landowner. So instead of levying a complicated
collection of scattered taxes, which are difficult to
administer and can cause temporary distortions, it is
most efficient to just go to the root and tax land
rents directly.
Physiocracy
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(continued)
How are scarce resources allocated?
The market – very limited role for
government
Physiocracy
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(continued)
What were some of the "natural laws" that the
physiocrats believed to operate with regard to
economics?
Only land creates value added
Incomes flow from sector to sector, and thus class to
class. A "natural state" of the economy emerges
when these income flows are in a state of "balance",
i.e. where no sector expands and none
contracts. Once the "natural state" was achieved,
the economy just continued humming along,
reproducing itself indefinitely.
Physiocracy
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(continued)
How did the Physiocrats differ from the
Mercantilists?
Agriculture v. manufacturing
Laissez-faire v. government regulation
Welfare based on output rather than
accumulation of precious metals