Mercantilists and Physiocrats BARIŞ SERKAN KOPURLU

The basic questions of international trade What is the basis of trade? Absolute Advantage Comparative Advantage

The basic questions of international trade What is the basis of trade? What are the gains from trade? The models of Absolute and Comparative Advantage show that the gains from trade are increased consumption gained through specialization in production and trade.

The basic questions of international trade What is the basis of trade? What are the gains from trade? What is the pattern of trade? What determines the pattern of specialization that drives international trade?

The Mercantilists What is wealth? The Mercantilist answer was the stock of precious metals possessed by a country.

The Mercantilists What is wealth? How can precious metals be obtained? Extraction from naturally occurring stocks This option is available to few countries

The Mercantilists What is wealth? How can precious metals be obtained? Extraction from naturally occurring stocks Earn precious metals through exports of goods and services Since payment for exports is made with precious metals, exporting causes precious metals to flow into a country Similarly, since payment for imports is also made with precious metals, importing causes precious metals to flow out of country

The Mercantilists What is wealth? How can precious metals be obtained? The natural conclusion – exports must exceed imports for a country to become wealthy!

The Mercantilists What is wealth? How can precious metals be obtained? The natural conclusion – exports must exceed imports for a country to become wealthy! Can this condition hold for all countries? No! Therefore, the wealth of one country must come at the expense of another country.

The Mercantilists What is wealth? How can precious metals be obtained? The natural conclusion – exports must exceed imports for a country to become wealthy! Can this condition hold for all countries? Mercantilist policy Strict government control over economic activity to ensure a positive trade balance

The Mercantilists There must be a trade surplus to obtain precious metals. Colonies serve as suppliers of raw material and markets for exports. Manufacturing is forbidden in colonies, mother country holds a monopoly power over economic activities.

The Mercantilists Domestic Measures Domestic prices tried to be kept low especially for export prices Lower prices also maintains lower wages Population increase is encouraged by high birth rates and migration. Low cost labor force Military power

The Mercantilists Foreign Measures Encourage exports, ban on imports. Import of raw materials were allowed only for re-exported products. Export of raw materials is banned.

Are precious metals “wealth”? To the Mercantilists, yes. Modern measures of wealth are based on a country’s ability to produce the goods and services that improve quality of life. Hence, the Mercantilist conclusion is based on a definition of wealth that differs significantly from modern notions of wealth. This distinction leads to very different conclusions about how to become a wealthy nation.

Physiocracy XVIII. Century France «Rule of Nature» Laissez faire, Laissez passer Criticized Mercantilism for its economic regulations and their focus on manufacturing and foreign trade. Wages and trade should be free.

Physiocracy Wealth consisted solely of the products of the soil. «…the Physiocrats insist that only agricultural labour is productive, since that alone, they say, yields a surplus-value."(Karl Marx, Das Kapital) Manufacturing and trade are are not productive Only land is productive so they argued a single tax only on land.

Physiocracy Price-specie flow mechanism (David Hume) The ideas of the Physiocrats lay the foundation for Adam Smith and the Classical Economists. It was the Classical Economists who provided the intellectual map and the justification for capitalism and market economies.