Mercantilism

Mercantilism, economic policy prevailing in Europe during the 16th, 17th, and 18th centuries, under which governmental control was exercised over industry and trade in accordance with the theory that national strength is increased by a preponderance of exports over imports. Mercantilism was characterized not so much by a consistent or formal doctrine as by a set of generally held beliefs. These beliefs included the ideas that exports to foreign countries are preferable both to trade within a country and to imports; that the wealth of a nation depends primarily on the possession of gold and silver (Bullionism); and that governmental interference in the national economy is justified if it tends to implement the attainment of these objectives. The mercantilist approach in economic policy first developed during the growth of national states; efforts were directed toward the elimination of the internal trade barriers that characterized the Middle Ages, when a cargo of commodities might be subject to a toll or tariff at every city and river crossing. Industries were encouraged and assisted in their growth because they provided a source of taxes to support the large armies and other appurtenances of national government. Exploitation of colonies was considered a legitimate method of providing the parent countries with precious metals and with the raw materials on which export industries depended. High tarrifs were imposed on imported manufactured goods and low tarrifs on imported raw materials. All types of internal taxes were also imposed. Mercantilist policy was to increase the demand and the supply of labor in order ultimately to increase national power. A large number of population was required to people the colonies. Mercantilism, by its very success in stimulating industry and developing colonial areas, it mostly benefited Monarchs, Merchant capitalists, Joint-stock companies, Government officials but it soon gave rise to powerful antimercantilist pressures. The use of colonies as supply depots for the home economies, and the exclusion of colonies from trade with other nations produced such reactions as the American Revolution, in which the colonists asserted their desire for freedom to seek economic advantage wherever it could be found. At the same time, European industries, which had developed under the mercantile system, became strong enough to operate both without mercantilist protection and in spite of mercantilist limitations. Accordingly, a philosophy of free trade began to take root. Economists asserted that government regulation is justified only to the extent necessary to ensure free markets, because the national advantage represents the sum total of individual advantages, and national well-being is best served by allowing all individuals complete freedom to pursue their economic interests. This viewpoint received its most important expression in The Wealth of Nations (1776) by the British economist Adam Smith. Mercantilist regulations were steadily removed over the course of the Eighteenth Century in Britain, and during the 19th century the British government fully

embraced free trade and Smith's laissez-faire economics. On the continent, the process was somewhat different. In France economic control remained in the hands of the royal family and mercantilism continued until the French Revolution. In Germany mercantilism remained an important ideology in the 19th and early 20th centuries, when the historical school of economics was paramount.

The free-trade system, which prevailed during the 19th century, began to be curtailed sharply at the beginning of the 20th century in what has been called a revival of elements of mercantilist philosophy, or neomercantilism. High protective tariffs were reintroduced, and for political and strategic reasons, great emphasis was put on national self-sufficiency as opposed to national interdependence and a free flow of trade.

Physiocracy

In the 1750s there developed in France a school of economic thought which had as its first principle that natural resources, and fertile agricultural land in particular, were the source of material wealth. The founder and leader of physiocracy was Franois Quesnay. His most ardent disciple, Victor de Mirabeau, was the author of the physiocratic tax doctrine; Pierre Samuel Du Pont de Nemours and Mercier de la Rivire elaborated on Quesnay's and Mirabeau's ideas. Among the antecedents of physiocracy the single-tax schemes of the marquis de Vauban and the sieur de Boisguilbert and the free-trade ideas of Vincent de Gournay may be cited. However, Quesnay's original contribution, and the basis of the doctrine, was the axiom that all wealth originated with the land and that agriculture alone could increase and multiply wealth. The Physiocrats argued that the economic process was subject to certain objective laws which operated independent of human free will. They called such forces Natural Law, which had two components, physical and moral laws. Quesnay defined physical law as "the regular course of all physical events in the natural order which is self-evidently the most advantageous to the human race." Moral law was "the rule of human action in the moral order conforming to the physical law which is self-evidently the most advantageous to the human race." Physical laws determined important economic parameters such as rainfall and soil fertility, and embodied the Newtonian view of the physical world which dominated scientific thought at that time. The Physiocrats argued that Natural Law operated independent of human free will, and that if humans accurately deduced the proper economic behavior implied by Natural Law, social welfare would be maximized. Industry and commerce, according to the physiocrats, were basically sterile and could not add to the wealth created by the land. They did not advocate that industry and

commerce be neglected in favor of agriculture, but they tried to prove that no economy could be healthy unless agriculture were given the fullest opportunity. Agricultural methods had to be scientifically improved, andabove allfair prices had to be maintained for agricultural production; according to Quesnay's maxim, only abundance combined with high prices could create prosperity. This could be obtained only if the "economic law," which the physiocrats envisaged as being as immutable as the law of gravity, was allowed to act untrammeled. Absolute freedom of trade was necessary to stabilize prices at a fair level, and laissez faire was to restore the economic process to its natural course, from which all further benefits would flow. To tax anything but the land was futile because only the land produced wealth and because manufacturers and traders pass their tax burden on to the farmer; only taxation at the very source of wealth was reasonable and economicalan argument not without charm for industrialists. Physiocracy recognized three economics classes : 1. Proprietary class - landlords. 2. Productive class - agricultural laborers. 3. Sterile class industrial workers and artisans, merchants. The beneficiaries of physiocratic policies would surely be every economic class except the landlords. A chief weakness from the viewpoint of modern economics is that the theory only considered agricultural labor to be valuable. While sources translate the term laissez-faire variouslyas "allow to do," "leave it alone," "let things alone," and "let go and let pass," among other thingsmost agree that the expression originated with a 17th century French merchant, Franois Legendre, who was protesting his government's overregulation of commerce and industry. Subsequently, a group of late 18th century French economists known as the Physiocrats developed and popularized laissez-faire as a principle. In essence, the Physiocrats believed that the laws of nature, and not of governments, would foster economic and social prosperity. Their efforts and formulations represented a reaction against the widespread practice of mercantilism, a system in which the state exerts significant controls over industry and commerce, particularly foreign trade. Pervading much of Western Europe from the 17th to the 19th centuries, mercantilism manifested itself in the form of a host of navigation laws, tariffs, and other measures constraining merchants' activities. The concept of laissez-faire was further boosted in the 18th century when the Scottish economist Adam Smith (1723-1790), published The Wealth of Nations in 1776. In this pathbreaking volume Smith advocated a free enterprise system that was grounded in private ownership, driven by individual initiative, and unencumbered by governmental bureaucracy. In

the same work, Smith argued that the "invisible hand" of naturally arising competition would monitor and regulate individual enterprise far more effectively than governmental restrictions would; he, like the Physiocrats, believed in a natural harmony that, if allowed to operate free of institutional restraints, would lead to a beneficent economy and promote the welfare of individuals and communities alike. As a formal and widely accepted economic and political doctrine, laissez-faire came into full flower during the 19th century, especially in the United Kingdom, where it served to embody the ideas propounded by the English classical school of economists. In his 1828 work Principles of Political Economy, the British economist and political philosopher John Stuart Mill (1806-1873) argued vigorously for a society ruled by natural law. Espousing the individual's right to be free of governmental interference in economic pursuits, Mill asserted that "laissez faire should be the general practice: every departure from it, unless required by some great good, is a certain evil." During the 20th century, especially in the wake of the Industrial Revolution, laissez-faire lost much of its force, giving way to policies and philosophies favoring collective action, as evidenced by the growth of trade associations and trade unions. With the rise of big business, state controls were increasingly seen as a way of breaking up monopolies, advancing international trade, and promoting "the good of all." Resulting from these developments was a multitude of antitrust and other legislation, as well as numerous government policies and regulations addressing such issues as worker safety, the environment, and employment discrimination. While President Ronald Reagan and others initiated a variety of deregulatory actions in the latter part of the 20th century, laissez-faire became just one of several doctrines influencing western economic thought.

Conclusion On Mercantilism

The age of mercantilism has been characterized as one in which every person was his own economist. Since the various writers between 1500 and 1750 held very diverse views, it is difficult to generalize about the resulting literature. Furthermore, each writer tended to concentrate on one topic, and no single writer was able to synthesize these contributions impressively enough to influence the subsequent development of economic theory. Secondly, mercantilism can best be understood as an intellectual reaction to the problems of the times. In this period of the decline of feudalism and the rise of the nation-states, the

mercantilists tried to determine the best policies for promoting the power and wealth of the nation, the policies that would best consolidate and increase the power and prosperity of the developing economies. What is especially important here is the mercantilistic assumption that the total wealth of the world was fixed and constant. These writers applied the assumption to trade between nations, concluding that any increase in the wealth and economic power of one nation occurred at the expense of other nations (the rest of the world). Thus, the mercantilists emphasized international trade as a mean of increasing the wealth and power of a nation. Using some modern game-theoretic language, we may say, that they perceived economic activity and international trade in particular as a zero-sum game, that is a game, where it is impossible for both players to win (In a two-person zero-sum game, the payoff to one player is the negative of that going to the other player). So according to mercantilists, it is impossible to increase a global wealth of the world in effect of international trade. It is a very sad assumption, and modern economists do not share it. The goal of economic activity, according to most mercantilists, was production, not consumption, as classical economists would later have it. They advocated increasing the nations wealth by simultaneously encouraging production, increasing exports and holding down domestic consumption. Thus, in practice, the wealth of nation rested on the poverty of the many members of society. One again, they advocated high level of production, high level of export and low domestic consumption. In addition, they proposed low wages in order to give the domestic economy competitive advantages in international trade. Most of the mercantilists held that wages (of the workers) should be set on the subsistence level, allowing workers to preserve their lives, but not to consume more than it is required to continue their lives. Higher wages would cause laborers

to limit their work supply and national output; national wealth would fall, according to mercantilists. Thus, when the goal of economic activity is defined in terms of national output and not in terms of national consumption, poverty for the masses benefits the nation. This is another sad consequence of mercantilist economic theory. Third general point about mercantilism is their insistence on the notion of balance of trade. Balance of trade figures, also called net exports, are the sum of the money gained by a given economy selling exports, minus the cost of buying imports. A positive balance of trade is known as a trade surplus and consists of exporting more (in financial terms) than one imports. A negative balance of trade is known as a trade deficit and consists of importing more than one exports. As we know today, neither positive nor negative balance of trade is necessarily dangerous in modern economies, although large trade surpluses or trade deficits may sometimes be a sign of other economic problems. According to mercantilists a country should increase exports and discourage imports by means of tariffs, quotas, subsidies, taxes and the like in order to achieve a so-called favorable or positive balance of trade. Production should be stimulated by government interference in the domestic economy and by the regulations of foreign trade. Protective duties should be placed on manufactured goods from abroad; and the state should encourage the import of cheap raw materials to be used in manufacturing goods for export.

Conclusion On Physiocracy In the economy of 18th century, more goods were produced than were needed to pay the

real costs to society of producing those goods. Therefore, a surplus was generated. The physiocratic search for the origin and size of this surplus led them to the idea of natural or net product. The agricultural production process provides a good example of a net product. After the various factors of production seed, labor, machinery, and the like are paid for, the annual harvest provides an excess, a surplus. The physiocrats regarded this as resulting from the sole productivity of nature. Labor, according to them, could produce only enough goods to pay the costs of labor, and the same held true for the other factors of production, with the exception of land. So all other factor of production, beside land, are not productive, they do not produce any surplus over the costs of their use. Only land is productive factor of production and only agriculture is a productive sector of the economy. All other sectors (trade, manufacturing) are therefore not productive; they are sterile. They are (other factors of production and other sectors of the economy), but they are essential for other purposes in the economy, they are necessary in the economy, but they do not produce wealth. Manufacturing covers subsistence and the costs of the inputs used up but does not produce a surplus. Land is productive in physiocratic meaning of the term, in that that it produces a surplus over the necessary costs of production, only land and agriculture yield a net product, a surplus. Once more, production from land created the surplus that the physiocrats called the net product. Manufacturing, trade and other nonagricultural economic activities were considered non-productive, because they created no net product. The belief that only agricultural production was capable of returning to society an output greater than the social costs of that output (cost of production) may seem very strange today. We know today that other factors of production (capital, labor and others) are productive in the sense also.

The physiocratic view about the unique productivity of land may be explained by the fact that the physiocrats focused on physical productivity (that is a measure of physical quantity of output produced) rather than value productivity (a measure of money equivalent of the products). And physical productivity is best physically visible in agriculture, where plants grow, animals are raised and the like.

In addition, because large-scale industry had not yet developed in France in the middle of 18 th century, the productivity of industry was not apparent in the economy of the physiocrats. The small employer with only a few employees did not seem to be making any surplus of revenues over the costs of production, and his standard of living was not significantly higher from that of his employees. Therefore, they could not see that the industry was productive in the same sense as agriculture was.