Mercantilism and the Physiocracy

Individual economic activity was less controlled by the custom and tradition of the feudal society and the authority of the church. Production of goods for market became more important and land, labor and capital began to be bought and sold in markets. This laid the groundwork for the Industrial Revolution in the second part in the 18th century. However, we have to remember, that still we are talking about pre-industrial world, where agriculture is the most important sector of the economy.

During this period from 16th to the half of 18th century, economic thinking developed from simple applications of ideas about individuals, households and producers to a more complicated view of the economy as a system with laws and interrelationships of its own. Mercantilism. Mercantilism is the name given to the economic literature and practice in Europe of the period between 1500 and 1750. Although mercantilist literature was produced in all the developing economies of Western Europe (and I should add some Eastern European, for example in Poland, economies too), the most significant contributions were made by the English and the French.

Whereas the economic literature of scholasticism was written by medieval churchmen, the economic theory of mercantilism was the work of secular people, mostly merchant businessmen, who were privately engaged in selling and buying goods. The literature they produced focused on questions of economic policy and was usually related to a particular interest the merchant and writer (in one person) was trying to promote. For this reason, there was often considerable skepticism regarding the analytical merits of particular arguments and the validity of their conclusions.

Few authors could claim to be sufficiently detached from their private issues and offer objective economic analysis. However, throughout the mercantilism, both the quantity (there were over 2000 economic works published in 16th and 17th century) and quality of economic literature grew. The mercantilist literature from 1650 to 1750 was of distinctly higher quality, these writers created or touched on nearly all analytical concept on which Adam Smith based his Wealth of Nations, which was published in 1776.

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 evelopment 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 rade 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 snare 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 nation’s 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 igh level of production, high level of export and low domestic consumption.