Mercantilism, Physiocratic View - Essay Example

Mercantilism; Physiocratic View Mercantilism a. Explain mercantilism Mercantilism was a prevailing economic trend in England from the 15th-18th centuries. It contended that a nation’s power is directly contingent on its wealth, so that to increase the power the nation should build wealth through exporting goods.; as a result, the concept was the primary motivation in British colonial impulses throughout the period. Mercantilism has taken on many forms and must be explored in-depth to gain a true understanding of its tenants. A History of Economic Thought: A Reader characterizes mercantilism as, “generating a favorable balance of payments, for the purposes of business profit, royal revenue, and economic prosperity (p.30).” It argues it achieved these ends through, tariff protection against imports; selective subsidies of production and exports; the acquisition of colonies, which provided raw materials and a workforce of settlers and native peoples at low cost, a market for the mother countrys finished goods, a monopoly of colonial trade and shipping, and a direct contribution to the power and prestige of empire; the development of naval power; and measures to minimize the cost of maintaining the domestic population, such as low agricultural prices, low wages, fisheries for cheap food, and so on. Doctrinal emphases on the utility of poverty and on the importance of gold holdings served instrumental purposes for those seeking power and profit. In considering the implications of trade in a mercantilist economic structure Thomas Mun urged industrialists in specific means of exportation. He argued that they must not only heed attention to their own needs, but develop a keen awareness of the needs of neighboring states, as this would give them a decided advantage when attempting export goods. He also urged exporters to attempt to sell their goods as cheap as possible, as this would undercut competing nations and cause the nation purchasing the goods to become further dependent on the imports; referring to this idea he wrote, “we must in this case strive to sell as cheap as possible we can, rather than to lose the utterance of such wares. For we have found of late years by good experience, that being able to sell our Cloth cheap in Turkey, we have greatly encreased the vent thereo (p.32).” He argued that exporting nations should export their goods in their own ships, as this would further increase the nation’s financial capital as the funds would not have to be spent on foreign vessels, likely increasing the price of the export. He believed that trade in far away nations should be encouraged as the value of the export would increase with its rarity. When considering the implications mercantilism holds for the domestic capital Mun had a number of specific ideas. He believed that by encouraging exportation, manufacturers would increase their business, resulting in increased employment among the nation’s population. While he encouraged imports, he believed that they should be taxed more heavily as this would increase the sales of domestic goods. He also urged that domestic policy should make great use of its inland capital and resources, as this would reduce reliance on foreign imports. Mun also encourages domestic purchases of imports as a means of contributing to the country’s overall economic wealth; he writes, “if our consumption of forraign wares be no more yearly than is already supposed, and that our exportations be so mightly encreased by this manner of Trading…It is not then possible but that all the over-ballance or difference should return either in mony or in such wares as we must export again (p. 37).” This is a complicated concept as Mun believes the importation of goods can affect the domestic economy in a number of regards. He believes that the importation of goods is often necessary for the production of new goods that can then be exported abroad. He also understands imports to be a natural element of the trade process, and that if a country hopes to prosper through exportation they have to engage in importation. He writes, “we see that the current of Merchandize which carries away their Treasure, becomes a flowing stream to fill them again in a greater measure with mony (p.38).” This last concept indicates that the very flow of trade created by imports will engender future exports. 2. Physiocratic View a. Explain the physiocratic view Physiocracy was the economic philosophy that a country’s capital would be increased through the development of domestic natural resources through farming. This is differentiated from the mercantilist view that argued that a nation’s wealth should be built on exportation of goods. Writers such as Francois Quesnay and Anne-Robert-Jacques Turgot were highly influential in the physiocrat movement and no thorough understanding of the physiocratic view can be developed without considering their insight. Francois Quesnay argued that by focusing on agricultural farming and the development of natural resources domestically, France would best increase their net wealth. In his Tableau Economique he set out to demonstrate that, “only agriculture creates a net product; and a circular flow of spending and income, and thereby reproduction, takes place (Quesnay 96).” He believed that as farmers old their goods, the money they received would then be reinvested, or spent on outside products, and as this occurred the wealth would circulate throughout society. He wrote that, “This circulation and mutual distribution are continued in the same way by means of sub-divisions down to the last penny of the sums of money which mutually pass from the hands of one expenditure class into those of the other (Quesnay, p.98).” Anne-Robert-Jacques Turgot had a similar understanding of the economic process and was greatly influenced by Quesnay. Both Quesnay and Turgot viewed society as divided into classes through which wealth was circulated for labor or other means. Also similar to Quesnday, Turgot viewed capital as a surplus derived from agriculture, “The earth was ever the first and the only source of all riches; it is that which by cultivation produces all revenue; it is that which has afforded the first fund for advances, anterior to all cultivation (Turgot 105).” One of the examples he gives for this argument is that at one point in history humanity hadn’t yet accumulated any wealth or resources, so they had to live off the capital of the earth. Now that man has saved money from labor and production, it is still the earth that is the cornerstone of this capital surplus. He also wrote that while wealth originates from such agriculture, individuals can accumulate wealth through saving as capital is circulated throughout society. Turgot also argues that it’s necessary to promote the development of agriculture through lending, as without the borrowing of capital fertile resources will go untapped. He states that, “those who with industry and the love of labour are destitute of capital, and have not sufficient for the undertaking they wish to embark in, have no difficulty in resolving to give up to the proprietors of such capital or money, who are willing to trust them, a portion of the profits which they are in expectation of gaining, over and above their advances (Turgot 112)”. That is, such lending occurs out of motivation for profit through interest. b. Difference from mercantilism The physiocratic view differentiated from mercantilism in significant ways. While both Economic theories emphasized the production of goods, the physiocrats believed that agricultural production would produce a surplus. This idea differentiated from the mercantilist philosophy as the mercantilists emphasized manufacturing production and trade as the primary builders of capital. Essentially, the difference between the two theories is that mercantilism the accumulation not as a product of domestic production, but contingent on gaining advances in trade with regard to outside nations; conversely, the physciocratic view understand the development of capital as predominantly a domestic matter, which is achieved through agricultural production – the only true means of gaining surplus. Read More