MERCANTILISM AND PHYSIOCRACY

Mercantilism
□ banked on the principle that the world's wealth was static, and consequently, many European
nations attempted to accumulate the largest possible share of that wealth by maximizing their
exports and by limiting their imports via tariffs

History
□ First popularized in Europe during the 1500s, mercantilism was based on the idea that a
nation's wealth and power were best served by increasing exports, in an effort to collect
precious metals like gold and silver.
□ Under mercantilism, nations frequently engaged their military might to ensure local markets and
supply sources were protected, to support the idea that a nation's economic health heavily relied
on its supply of capital. Mercantilists also believed that a nation's economic health could be
assessed by its levels of ownership of precious metals, like gold or silver, which tended to rise
with increased new home construction, increased agricultural output, and a strong merchant
fleet to provide additional markets with goods and raw materials.

Criticisms
□ the wealth of the world is not fixed, but is created by human labor (Locke)
□ impossibility of the mercantilists' goal of a constant positive balance of trade (Hume)

Physiocracy
□ Physiocracy was a theory of wealth. The physiocrats, led by Quesnay, believed that the wealth
of nations was derived solely from the value of agriculture.
□ This is in contrast to earlier schools, in particular mercantilism, which often focused on the
ruler's wealth, accumulation of gold, or the balance of trade.
□ For the physiocrats, only agricultural labor created this value in the products of society. All
"industrial" and non-agricultural labors were "unproductive appendages" to agricultural labor.
□ The physiocrats, like many other thinkers of the eighteenth century, subscribed to the idea of a
"natural order". They showed that unchanging laws governed all economic processes.
Consequently, it is generally thought that the physiocrats were opposed to government
intervention. The dead hand of the state would only corrupt the natural evolution of the
economy.