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 strong State.
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 servants).
The physiocrats were great believers in the
institution of private property. And they favoured free trade.