1. Mercantilism and Physiocracy.pdf

Evolution

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
1 Dpt of Economics, TMJM Government College Manimalakunnu
Module III
MODULE III: Major Schools of Economic Thought
Mercantilism (Thomas Mun, William Petty) and Physiocracy (Francis Quesnay
and
Turgot), Basic postulates of Classical and Neo-Classical economic thought (Adam
Smith, Ricardo, J.B. Say, Malthus, J.S. Mill, Jeremy Bentham, Alfred Marshall,
A.C. Pigou and Walras,) Socialist and Marxist Economic Thought (Saint Simon,
Sismondi and Karl Marx,
Keynesianism (Keynes as a critique of classical Economics and Monetarism
(Milton Friedman). Contribution of Indian Economists-Kautilya, Dadabhai
Naoroji, Amartya Sen and J.N. Bhagawathi).

A. Mercantilism
Mercantilism was the earliest school of thought in economics that
prevailed in Europe between 1500 and 1750 AD. Although mercantilism was
visible in Western Europe, it had strong presence in England and throughout
France. The unique feature of mercantilism as an economic philosophy was that
it argued for accumulation of wealth through promotion of exports. The ideas
of Thomas MunWilliam Petty, Gerard de Malynes laid the foundations of , etc.
mercantilism.
Relevance of mercantilism
The contribution of mercantilism is that it provided the early thinking in
economics in Western Countries. It was with mercantilism that thinkers and
countries started making an approach to economy building. In this context, it
served as the earliest school of thought to economic policies.
Another significaof mercantilism is that it triggered or started new nce
ideas in economics including and the classical economics. Physiocracy But

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
2 Dpt of Economics, TMJM Government College Manimalakunnu
mercantilism’s major contribution is that it created a widely criticized but
secretively followed policy of export promotion and import restriction to maximize
national wealth. Even now, several countries and economic policy makers stick
on to mercantilist approach of ‘beggar thy neighbor policies’.
Important mercantilist thinkers
Mercantilism rose to prominence with the rise of nation states. Several
thinkers who provided early and perhaps primitive ideas for nation making were
considered as mercantilists. The main mercantilist thinkers are: Thomas Mun,
Gerard de Malynes, William Petty and Jean Baptiste Colbert.
Thomas Mun (1571-1641)
Thomas Mun was a successful businessman and a director of East India
Trading Company. He provided the basic trading principles for the Company and
the trade related policies of the British period.
Mun’s work “A Discourse of Trade from England into the East Indies,” -
(1621), was a remarkable explanation about the way in which trade can be used
to promote wealth of England.
Mun advocated the doctrine of “favorable balance of trade” that can be
described as the best example for mercantilist ideology. The doctrine argued
favorable balance of trade as the only means of increasing the wealth of England.
William Petty
William Petty who advocated mercantilists policies was the major
contributor to the philosophy. Petty was described as a self-made man, born as
son to poor clothier. He is considered to be the first proper . His first economist
work – ‘Treatise on Taxes and Contributions’ provided tax reforms and trade
policy reforms in England. His attempts to quantify economic and demographic
characteristics and to apply empirical methods helped lay the foundation for to
Classical Economics. Petty’s contributions were supposed to be superior to other
mercantilists.

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
3 Dpt of Economics, TMJM Government College Manimalakunnu
Major features of mercantilist philosophy
Mercantilism, as the earliest school in economic thought, has contributed
significantly to the development of the subject. The Mercantilists had certain
unique principles:
• Maximise exports and minimize imports to create national wealth
• A country’s wealth depends upon the amount of gold it has
• Beggar thy neighbor policy is needed to accumulate wealth
• Government policies should be aggressively made to enhance national
wealth
• Encourage domestic production and restrict consumption
1. Importance to exports and trade surplus
At the heart of mercantilism is the view that maximising net exports is the
best wayto national prosperity. Mercantilists were keen on foreign trade
especially exports.
For them, the best way of ensuring a country’s prosperity was to minimize
imports and . This will generate gold inflows and the country’s maximise exports
gold stocks. This gold indicates its wealth.
Accumulating gold was thought to be necessary for a strong, powerful
state. Countries such as Britain implemented this policy in the colonial period
to protect its traders and maximise national income. The Navigation Acts passed
in Britain severely restricted the ability of other nations to trade between England
and its colonies.The British trade policy in India was based on the mercantilist
policy.
2. Believers of bullionism: a country’s wealth depends on the quantity of
gold it has
Mercantilists are known in history as believers of “bullionism”. The belief
that a country’s wealth is stored in gold was the main notion of the mercantilists.
For them, gold is wealth and gold creation process through more production,

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
4 Dpt of Economics, TMJM Government College Manimalakunnu
more exports and less imports is the way to create wealth. Later, Adam Smith
corrected this by that wealth depends upon the quantity of goods and proving
services produced and not on gold.
3. Beggar thy neighbor policy
For the Mercantilists, for a country to be wealthy, it has to reduce gold
outflow to other countries. Ensuring gold inflow and restricting the outflow will
make the country better off. This idea had important consequences for economic
policy. As a result, countries adopted policies to discourage imports and income
flows to other countries, thereby reducing neighbor’s welfare.
According to the mercantilists, total wealth in the world remains constant.
Here, one country’s d y wealth can be increaseonly bdecreasing some other
country’s wealth. This is possible only through more exports and restriction on
imports. Such import restriction will reduce the wealth or gold of the partner
countries. In this way, making other countries beggars is the way one country
can attain wealth. This approach of the mercantilists is known as beggar thy
neighbor policy.
The policy was followed by Britain and France during the Napoleonic Wars.
The warring governments tried to block opponent’s exports. Fewer exports would
supposedly result in economic chaos as gold supplies Blocking gold declined.
supply was supposed to be the most devastating way to defeat the enemy.
4. Encourage domestic production and reduce domestic consumption
The main theme of mercantilism was to encourage domestic production. Once
production is enhanced, maximum of that should be exported. This means that
domestic consumption has tobe restricted. Given imports are restricted, a
country can ensure gold inflows and wealth.
Role of strong government policies
A basic principle of mercantilism was strong government policies and
interventions to wealth accumulation.allow Tax policies should be designed to

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
5 Dpt of Economics, TMJM Government College Manimalakunnu
encourage maximum production and minimum consumption. Similarly, trade
policies should be designed to maximize exports and minimize imports.
All these mercantilist ideas to wealth creation and trade advocated strong
government policies. In Western Europe several countries tried the mercantilist
policies to promote national welfare.
Criticism of Mercantilism
As the earliesphilosophy, the mercantilist principles suffered from several t
faults.
1. Gold is not wealth: It is not gold thatis wealth, rather is the quantity of it
goods and services.
2. Beggar thy neighbor policies are not good to enhance national welfare: Making
other countries poor is neither desirable nor needed to achieve prosperity.
Actually, countries can achieve prosperity by increased production and trade.
3. Mercantilist philosophy is colonial: The mercantilists prescriptions were
practicable in the colonial world and not in the open world like today.
4. Too much government control will spoil the economic system: The
mercantilists advocated high level of government policies to regulate the
economy. This type of controls will misguide the economy by discouraging
entrepreneurship.
5. Mercantilists believed in implicit conflict of interest among international
community: The impact of mercantilist thinking on economic policies were
irreversibly damaging. Now, several countries are trying to block imports from
others whereas making several ways to promote exports. Hence, the protectionist
trade policies were one of the undesirable contributions of mercantilism.
Mercantilism is thought to have begun its intellectual eclipse with the
publication of Adam Smith’s "Wealth of Nations" in 1776. A simple interpretation
of the economic history suggests that Smith’s ruthless advocacy for free markets
was squarely opposed to regulation-heavy mercantilist doctrine. Still,

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
6 Dpt of Economics, TMJM Government College Manimalakunnu
mercantilism contributed to the development of the economics science in later
periods.
B. Physiocracy
Physiocracy was an early school of economic doctrine prevailed in France
in the middle of the 18th century. Physiocrats are considered as the first school
of economic thought and is considered as the founders of economic science. They
were supposed to be the first to understand the general principles in economics.
Based on that, they developed a theoretical system in economics.
Francois Quesnay, R.J. Turgot and Marquis de Condorcet were the major
proponents of physiocracy.
Physiocracy means rule of nature. They believed in the natural law and
thus advocated no-intervention by the government. Physiocracy believed that
only agriculture has productivity.
For them, productivity in agriculture depends on nature, and hence the
government hast to tax agriculture.
Importance to agriculture
Physiocracy is also known as the ‘Agricultural System’. Physiocracy was a
theory of wealth and it argued that only agriculture has productivity. Economic
thinkers who contributed to the growth and development of physiocracy have
been called as physiocrats. Their emphasis on agriculture has earned them the
name - agricultural school.
According to Karl Marx, "the Physiocrats insist that only agricultural
labour is productive, since that alone, they say, yields a surplus-value".
The "Tableau Economique", a single page illustration, prepared by
Quesnay shows how an entire economy function. Quesnay adopted a scientific
approach in developing early economic ideas.

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
7 Dpt of Economics, TMJM Government College Manimalakunnu
Believers in natural law
The physiocrats, like many other thinkers of the eighteenth century,
subscribed to the idea of a "natural order". Physiocrats believed in the existence
of natural law which governs the universe. They showed that unchanging laws
governed all economic processes.
Physiocracy was against mercantilism
Physiocracy may be defined as a reaction against Mercantilism and its
concepts. The physiocrats believed that the mercantile policies instead of doing
any good have done great harm to the nations. So, they revolted against the
mercantile policies.
According to Gide and Rist,“Physiocrats must be credited with a
foundation of the earliest school of economists in the fullest sense of the term.
The entrance of this small group of men into the arena of history is a most
touching one”.
The factors that gave rise to Physiocracy:
In 1750, France provided a favourable climate for the emergence of
physiocratic ideas. There were many economic, political and social factors that
were responsible for the rise of physiocracy. Firstly, physiocracy was essentially
a revolt of the French against Mercantilism. Under Colbert the famous Finance
Minister of France, Mercantilism was carried to an extreme degree.
The mercantilists were ordinary people who emphasised only foreign trade.
But the physiocrats realised the importance of various economic activities and
their relation. In the physiocratic system all social factors like production and
distribution are connected. In short, the physiocrats were reformers. Following
are the main ideas of physiocrats.

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
8 Dpt of Economics, TMJM Government College Manimalakunnu
1. Natural Order:
The physiocrats had firm faith in the philosophy of natural order.
According to Gide and Rist, “The essence of physiocratic system lay in their
contribution of natural order”.
Natural order has been defined by the physiocrats as the providential order
made by God for the welfare of mankind. It is universal and unchangeable.
The classical economists’ invisible hand has its origin in the physiocratic
idea of natural order.
2. Net product
In the doctrine of net product, the physiocrats introduced the fundamental
idea of . In the physiocratic system, agriculture has been given economic surplus
a dominant place because of its important role in the economic development of
a country. Agricultureis the only sector which yields net product or surplus
produce.
Several economic theories of the Physiocrats went useless with time. But
their approach to the study of economics was an invaluable
contribution. Classical economists modified several of the physiocratic
principles.
3. Tableau Economique or the Circulation of Wealth
Physiocrats illustrated how wealth produced by the agriculturists gets
circulated among the different classes of the society. Here, the tableau
Econoicque prepared by Quesnay shows wealth distribution in the society. The
physiocrats must be credited with being the first school of economists who
analysed the problem of distribution.
The Tableau Economique is based on the existence of a social structure;
land is owned by the landlords but cultivated by the farmers who became the
productive class. The net product or surplus produced by the productive class
is used for the satisfaction of sterile and proprietary classes. The tableau

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
9 Dpt of Economics, TMJM Government College Manimalakunnu
economique assumes constant prices for the commodities. Further, it assumes
that the harvest is 100 percent and the expenses of the productive and
unproductive classes are equal.
The tableau economique is not relevant today as agricultural is not the
sole productive activity. Similarly, its wealth distribution technique is outdated.
Still it is important to understand the importance of growth models.
Major economists of physiocracy
Physiocracy is often described as Quesnay and Turgot school because of
the dominance of these two thinkers in developing physiocratic ideas.
RJ Turgot
Turgot is considered as the FrenchAdam SmithTurgot subscribed to the .
idea that free trade in grains was the best way of resolving scarcity. His book -
Reflections on the Production and Distribution of Wealth, which published ten
years before Smith’s . Both have same set of ideas like non- The Wealth of Nations
intervention by the government natural order etc. Turgot recognized the function
of the division of labor, investigated howprices were determined, and analyzed
the origins of economic growth. Turgot advocated the laissez fare policy.
Turgot’s major contribution was the importance he given to capital. Since
then, economic ideas have given a vital place to capital. He argued that the only
way to accumulate capital is for people not to consume all they produce.
Francois Quesnay
Francois Quesnay was a French intellectual who laid the foundations of
the first school of thought in economics – Physiocracy. Quesnay produced several
ideas in managing the economy and advocated laissez fare policy. He criticised
mercantilism and proved that restriction of trade reduced the welfare of masses.
Quesnay advocated reducing taxes, eliminating regulations on trade and
argued for freeing the economy from the government’s tough controls.

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I SEM METHODOLOGY OF ECONOMICS I SEM 2021
10 Dpt of Economics, TMJM Government College Manimalakunnu
A major contribution of Quesnay was the Tableau economique. It was a
short diagram that systematically illustrated the flow of economic activities in an
economy.
In this zigzag diagram, a circular flow in the economy showed the
producers, consumers and other classes. The defined three classes: Tableau
landowners, farmers, and others—called “sterile” classes—who consumed
everything they produced and left no surplus for the next period.Significance of
Tableau Economique is that it pioneered a methodology of illustrating economic
activities in graph or table.
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