MERCANTILIST AND PHYSIOCRATES

Content

• Mercantilism

• Physiocrates

• Comparison

MERCANTILISM (16-MID 18 CENTURIES)

• The word comes from the Latin word mercari, which means “to run a trade”

• It was dominant in Europe from the 16th to the mid 18th century.

• It promoted governmental regulation of a nation's economy for the purpose of augmenting state power.

• Bullionism, was a term referred to the economic policies pursued by the mercantilists, such as governmental control over the use and exchange of precious metals.

• ADAM SMITH coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports.

• Major regions affected by this thought were Portugal, France, Spain, and great Britain.

• Its use was favored by writers such as jean-Baptiste Colbert, who at that time serves as the French finance minister.

THE BASIC CONCEPT OF MERCANTILISM IN TERM OF TRADE• The approach assumes that the wealth of a nation

depends primarily on the possession of previous metals such as gold and silver.

• By exporting goods, the countries could earn therefore maximize the amount of gold and silver.

• Conversely, importing goods from other countries resulted in an outflow of gold and silver to those countries thus reducing the government reserves.

THREE MAIN ASSUMPTIONS OF MERCANTILISAMThere is a finite amount of wealth in the

world–trade is a zero sum game.A nation can grow rich only at the expense

of another country.Wealth is measured by the amount of

precious metals in the country.The goal is a positive trade balance –

exports exceed imports.

ROLE OF GOVERNMENT

• This theory suggests that the government should play an active role in the economy by encouraging exports and discouraging imports, through the use of tariffs.

• A wide range of government subsidies on export industries to promote the country’s export based policy.

• Prohibition of private accumulation , use and exports of gold and silver.

• One-way trade with colonies.

THE USE OF COLONIES IN MERCANTILIST VIEWS• The colonies should provide cheap raw materials

to the mother country and create market for the manufactured goods.

• In return, the mother country provides military security and political administration to the colonies.

• The colonies should be restricted to trading only with each other or with the mother country.

CRITICISM OVER MERCANTILIST SCHOOL OF THOUGHT

• Adam smith and David Hume were the founding fathers of mercantilist thoughts; this practice was strongly attacked by Adam smith in his work “the wealth of nation”.

• They argued that trade should be a positive some game instead of zero sum game.

• Nonsensical and untenable idea of wealth.• The working class was exploited.

CRITICISM OVER MERCANTILIST SCHOOL OF THOUGHT• The mercantilist policies were designed to benefit

the government and the commercial class, rather than the entire population.

• The mercantilists assumption that the colonies existed for the benefits of the mother land was not a sound economic proposition.

• Colonial expansion and war in European countries were frequently the results of mercantilists thoughts.

MERCANTILIST POLICIES

• Exchange for paying levies and taxes to support the armies of the nation-states.

• induced governments to enact policies that would protect their business interests against foreign Competition

• Domestically, governments would provide capital to new industries, exempt new industries from guild rules and taxes, establish monopolies over local and colonial markets, and grant titles and pension to successful producers.

• Adam Smith made a number of important criticisms of mercantilist doctrine.

• First, he demonstrated that trade, when freely initiated, benefits both parties.

• Second, he argued that specialization in production allows for economies of scale, which improves efficiency and growth.

• Smith argued that the collusive relationship between government and industry was harmful to the general population.

• While the mercantilist policies were designed to benefit the government and the commercial class.

PHYSIOCRATESTHE PHYSIOCRATS WERE A GROUP OF ECONOMISTS WHO BELIEVED THAT THE WEALTH OF NATIONS WAS DERIVED SOLELY FROM AGRICULTURE. THEIR THEORIES ORIGINATED IN FRANCE AND WERE MOST POPULAR DURING THE SECOND HALF OF THE 18TH CENTURY. PHYSIOCRACY WAS PERHAPS THE FIRST WELL DEVELOPED THEORY OF ECONOMICS.THE PHYSIOCRATS SAW THE TRUE WEALTH OF A NATION AS DETERMINED BY THE SURPLUS OF AGRICULTURAL PRODUCTION OVER AND ABOVE THAT NEEDED TO SUPPORT AGRICULTURE (BY FEEDING FARM LABOURERS AND SO FORTH).

KEY CONCEPTS

• There are several key concepts that lay the foundation of physiocrates

• Individualism and Laissez Faire

• Private property

• Diminishing returns

• Investment capital

FRANCOI QUESNAY

• Born in 1694 a French surgeon born in family of mere to a family of labourer

• His interest in economics arose in 1756• He developed economic table which consist three classes .

• 1. The “Proprietary” class, which consisted of just the landowners2. The “Productive” class, which contained all agricultural labourers3. The “Sterile” class, which contained artisans (craftsmen) and merchants

FAMOUS PHYSIOCRATES• Richard Cantillon• François Quesnay• Anne Robert Jacques Turgot• Jean Claude Marie Vincent de Gournay• Victor de Riqueti, marquis de Mirabeau• Count de Mirabeau• Pierre Samuel du Pont de Nemours• Stanisław Staszic

COMPARISON

MERCANTILISM

• The word comes from the Latin word mercari, which means “to run a trade”

• It was dominant in Europe from the 16th to the mid 18th century.

• It is economic nationalism for the purpose of building a wealthy and powerful state.

PHYSIOCRATES

• Physiocracy (from the Greek for “Government of Nature” – Physio = Natural – Crat = rule or Rule of Nature or Natural Law)

• Their theories originated in France in mid 18th century

• Trade is zero sum game • Agriculture class was

ignored• Major wealth of nation is

silver and gold • Government

intervention was encouraged

• More taxes were imposed on working labor

• Trade is Positive sum game

• Agriculture class was encourage

• Major wealth of nation is the working class i.e labors

• Government intervention was discouraged

• Higher tax rate on landlords and land owners

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