The economic ideas and policies which were
followed by European governments from the 15th century until the
second half of the 18th century may be described as mercantilism. The mercantilists thought
that the wealth of a nation could be increased by trade. And they wanted to
have more wealth by increasing the stock of gold and silver.
After feudalism came to an end, strong nation
states emerged in England, France, Germany and Spain. And each country
considered the other country as its potential rival. So the mercantilists
regulated the economic activity of the State in order to create a strong and
powerful State. Mercantilism was only economic means for the creation of a
If a country has mines, it can get gold and
silver. Otherwise, it can get gold and silver only by means of trade. They
wanted favourable balance of trade. That is, exports should be more than
imports. As Alexander Gray put it, 'it was thus a primary principle of the
typical mercantilist to maximize exports while minimizing imports'.
According to mercantilists, trade was the most
important occupation. Industry and manufacture were ranked second in importance.
And agriculture was considered the least important occupation.
The State played a very important and powerful
role during mercantilism. It encouraged exports and discouraged imports by a
number of policies. Sometimes it is said that mercantilists confused money with
wealth. But Keynes praised them saying that more money would promote business
expansion. If each country wanted maximum exports and almost zero imports, then
who would import ? In short, mercantilism was a 'policy of power'.
The physiocrats developed a body of economic
theory in the 18th century in France. Adam Smith, who is regarded as
the Father of Economics was greatly influenced by the physiocrats. The term 'physiocracy' means 'Rule of Nature'.
Physiocracy was essentially a revolt
by the French against mercantilism.
The physiocrats developed the concept of natural order.
According to them, the natural order is an ideal order given by God. They
believed that individual interests were identical with the interests of the
society. They advocated laissez-faire.
It means 'let things alone, let them take their own course'. According to this
policy, the State will have a minimum role to play. The main functions of
government is to protect life, liberty and property. And they believed that
agriculture was a productive occupation. It alone produced 'net product'. And
they considered other occupations as sterile. Quesnay, chief representative of
physiocratic school explained how circulation of wealth took place in an economy
in his 'Tableau Economique' (The Economic Table) among different classes : the
productive class (farmers); the proprietory class; and the sterile class (all
those engaged in non-agricultural occupations, e.g., merchants, domestic
The physiocrats were great believers in the
institution of private property. And they favoured free trade.