Mercantilism and Physiocracy

Introduction

The evolution of economic thought is deeply rooted in the political, social, and philosophical transformations of early modern Europe. Among the earliest structured schools of economic thinking are mercantilism and physiocracy, each arising in response to different socio-economic contexts between the 16th and 18th centuries.

Mercantilism, dominant from the late Renaissance through the early Enlightenment, reflected the interests of powerful nation-states as they consolidated power and expanded through colonialism.

Physiocracy, on the other hand, emerged in 18th-century France as a rationalist, Enlightenment-based reaction to both mercantilist policies and the feudal remnants still present in European economic structures.

Both schools are foundational not only for their influence on early national economic policies but also because they paved the way for classical economics and the broader development of political economy.

The context and development of mercantilism

Mercantilism is not a monolithic theory crafted by a single economist, but rather a collection of interrelated policies and ideas practiced and refined by various thinkers and statesmen from the 16th to 18th centuries.

Its origins are intimately tied to the rise of the nation-state, the growth of international trade, and the accumulation of wealth as a means of securing political power. Emerging in an age of exploration, mercantilism flourished in tandem with the expansion of European empires and the exploitation of colonial resources.

Central to mercantilist doctrine was the belief that national wealth and power were best served by a positive balance of trade. Governments sought to maximize exports and minimize imports, thereby accumulating precious metals, particularly gold and silver, as these were seen as the ultimate measure of national prosperity.

Trade was viewed as a zero-sum game in which one nation’s gain was necessarily another’s loss. This competitive worldview justified aggressive commercial policies, protective tariffs, navigation acts, and colonial monopolies.

Mercantilist thinkers such as Jean-Baptiste Colbert in France and Thomas Mun in England did not propose fully systematic economic theories in the modern sense but instead emphasized policies that would strengthen the fiscal and military capacities of the state.

Colbert, for example, implemented a range of measures known as “Colbertism,” which aimed to develop domestic industries, regulate guilds, improve infrastructure, and enforce strict control over colonial trade. This interventionist approach assumed that economic regulation was not only desirable but essential for national strength.

Mercantilism’s intellectual foundations and assumptions

Underlying mercantilism were several philosophical and economic assumptions that framed how proponents understood the economy. First, wealth was largely equated with bullion—the stockpile of gold and silver. This view ignored the broader concept of wealth as productive capacity or utility and instead focused narrowly on specie as the foundation of state power.

Second, mercantilism assumed that trade was adversarial and inherently limited. With the global economic pie viewed as fixed, success depended on outcompeting others, often through state support of favored industries and trading companies. This perspective justified monopolistic practices and imperial expansion as necessary tools of national economic strategy.

Third, the role of the state was conceived as central and directive. The government was not merely a referee in market affairs but an active player guiding production, investment, and commerce. This early form of economic nationalism linked prosperity directly to sovereignty, seeing state power and economic strength as mutually reinforcing.

The emergence of physiocracy

By the mid-18th century, a countercurrent to mercantilist thought developed in France with the rise of the Physiocrats, led by François Quesnay and supported by thinkers such as Anne Robert Jacques Turgot and Pierre Samuel du Pont de Nemours.

Rooted in Enlightenment rationalism, physiocracy marked a significant shift in economic theory by asserting that economic systems, like natural systems, were governed by immutable laws which should be discovered and respected rather than manipulated.

Physiocrats believed that the source of all wealth was found in nature, specifically in agriculture. In their view, only agricultural labor produced a net surplus—termed the produit net—above the costs of production. All other sectors, such as manufacturing and trade, were considered sterile, meaning they merely transformed or redistributed the wealth created by agriculture without adding to it.

Quesnay’s Tableau Économique (1758) was a seminal work in this school and the first serious attempt to model the economy as a system of interdependent flows. It illustrated how the economic surplus generated by the agricultural class circulated through the productive system, sustaining landlords, artisans, and other classes. The Tableau laid the groundwork for later circular flow models and national income accounting.

Key principles and policies advocated by the physiocrats

Physiocracy represented a dramatic departure from the interventionist ethos of mercantilism by emphasizing economic liberty and minimal government interference. Their guiding principle, laissez-faire, laissez-passer (let do, let pass), underscored their belief that the economy functioned best when allowed to follow its natural laws without distortion from tariffs, subsidies, or monopolies.

The Physiocrats argued for a single tax system—l’impôt unique—on land rents, asserting that since land was the only true source of wealth, it alone should be taxed. This notion tied into their broader critique of France’s fragmented and regressive tax system, which they viewed as inefficient and unjust.

Their admiration for agriculture was not merely economic but also moral and political. They saw the agricultural class as the backbone of society, tied to the land and embodying natural virtues, in contrast to the corrupting influence of cities and commerce. This romanticization of rural life was as much a critique of the ancien régime as it was an economic argument.

The debate between mercantilism and physiocracy

The intellectual contest between mercantilism and physiocracy was, at its core, a struggle between two visions of political economy: one grounded in state control and commerce, the other in natural law and agrarianism. Mercantilists prioritized external power and strategic advantage, while Physiocrats emphasized internal order, justice, and efficiency.

Mercantilism’s emphasis on regulation and wealth accumulation through trade ran directly counter to the Physiocrats’ desire for deregulation and focus on land productivity. While mercantilists saw manufacturing as key to prosperity, Physiocrats relegated it to a secondary role. This divergence reflected deeper disagreements about the nature of wealth, the role of the state, and the proper basis for taxation.

Physiocracy’s appeal was largely confined to France and had limited practical application, but it was a powerful critique of existing economic practices and foreshadowed later liberal economic thought. In contrast, mercantilism had immediate policy relevance and remained influential, especially in countries like Britain where commercial dominance was central to imperial strategy.

Influence and legacy in the history of economic thought

Although both schools were ultimately supplanted by classical economics, particularly with the publication of Adam Smith’s Wealth of Nations in 1776, their impact on economic thought was substantial. Smith himself critiqued mercantilist policies as misguided and harmful, particularly their focus on bullion and trade restrictions. Yet, he was influenced by the Physiocrats’ vision of a natural economic order and their insistence on the productive role of labor.

Mercantilism left a legacy of economic nationalism and state-led development that would re-emerge in various forms, from 19th-century protectionism to modern neo-mercantilist policies. Its emphasis on trade balance and strategic industries remains relevant in contemporary discussions of globalization and economic sovereignty.

Physiocracy, although largely discarded as a system, introduced important methodological innovations, including the concept of economic surplus, sectoral analysis, and the circular flow of income. Its emphasis on rational structure and systemic interdependence paved the way for more formal economic modeling in the 19th and 20th centuries.