Early mercantilist writings on value theory.

First, the "value" or "natural value" of

commodities was simply their actual market price. Second, the forces of supply and
demand determined market value. Third, mercantilist writers frequently discussed
"intrinsic value" or use value as the most important factor determining demand, and,
hence, as an important casual determinant of market value.
Profits came from 2 sources –
1. Between the time at which the merchants purchased commodities and the
time at which merchants sold them, the increases in the prices of these
commodities resulted in windfall profits.
2. Differing conditions under which production took place in various regions of a
country or various parts of the world, combined with the fact that there was
very little mobility of resources, technology, and labor between these regions ,
resulted in substantially different relative prices of commodities in the various
regions or countries. Merchants would buy a commodity in a region or
country in which it was relatively inexpensive and sell it in a region or country
in which it was relatively expensive.
The 'Mercantilist' policy formula was quickly devised: Export as much as possible and
import as little as possible. Make sure your exports are high-value goods – luxuries,
manufactures – which will bring in a lot of money. If you must import, import only
essential low-value goods that are absolutely necessary for your industries – that is,
only raw materials and other basic necessities you simply cannot  find at home.

The Mercantilists expected - or demanded - that the government take an active role
in this, and make "protectionism" a central part of government policy.  The
government was at various times by different authors called upon to forbid or
restrict anybody from taking money out of the country by all sorts of controls and
laws,  impose tariffs and quotas to discourage imports and  hand out export subsidies
('bounties') to domestic exporters.

Mercantilists also recommended that the government actively help out domestic
private businessmen set up high-value import-substitution and export-oriented
industries. The crown was urged to subsidize these industries

Mercantilists did not believe there were mutual gains from trade, where both
exporters and importers benefited. Rather they saw it as a zero-sum game -
exporters always win, importers always lose, so export as much as possible, import
as little as possible. Trade was to be conceived as a kind of war -- a war of every
nation against every other nation -- to see who could export the most and import the
least
England enacted new laws during the 16th and 18th centuries, putting tariffs on imports of foreign goods and
restricting shipping through English channels. As such, mercantilism became the key economic model of the
time. It encouraged the colonists to purchase goods from England rather than rival nations. The colonies sent
raw materials to England where they were manufactured into finished products and sold to the colonists. This
allowed Britain to monopolize the slave trade, transporting slaves from English ports to America. High inflation
and heavy taxation on the colonies caused a rift between the colonists and the British.

The Physiocrats were a group of French social reformers who were intellectual
disciples of Fran􀃧ois Quesnay - -- ideas came directly or indirectly from
Quesnay ' s Tableau economique.

The Physiocrats were interested in reforming France, which was experiencing

economic and social disorder caused primarily from combination
of many of the worst features of feudalism and merchant capitalism.

Taxation was disorderly, inefficient, oppressive, and unjust. Agriculture still

used feudal technology, was small-scale and inefficient, and remained a source
of feudal power that inhibited the advance of capitalism.

The government was responsible for an extraordinarily extensive and complex

maze of tariffs , restrictions, subsidies , and privileges in the areas of industry
and commerce.

The results were the social and economic chaos that culminated in the French
Revolution.

The Physiocrats advocated political reform: the abolition of guilds and the
removal of all existing tariffs , taxes , subsidies , restrictions, and regulations
that hindered industry and commerce.

They proposed substituting large-scale, capitalist agriculture for the inefficient

small-scale farming that prevailed

Recommendation that all government revenue be raised with a single,

nationwide tax on agriculture.

The Tableau economique is basically a model of an economy.

The model shows the processes of production, circulation of money and

commodities , and the distribution of income .

The model assumes that production takes place in yearly cycles and that
everything produced in one year is either consumed in that year or becomes the
necessary inputs for the next year ' s production.
The central focus is on agriculture . As an example, in one year the agricultural
sector produces an output of 5 milliards. The manufacturing sector produces
an output of 1 milliard. Gross output is 6 milliards. One milliard immediately
goes to replace the durable agricultural assets used up in production, leaving
a net output of 5 milliards.

Agricultural output of 2 milliards is retained by the cultivators. This includes

the seed grain for the next period as well as the wages of management (profit)
for the capitalist farmers and wages for farm laborers.

The entire stock of money (2 milliards) is in the hands of the capitalist farmers
at the beginning of the period. They pay the 2 milliards of money to the landlord
class as rent. This is the surplus income in the system. The landlords perform no
economic function for which this is a payment.

These 2 milliards represent a surplus produced in the agricultural sector in

excess of the consumption of the cultivators and the replacement costs of the
assets used up in producing the agricultural output.

The Physiocrats saw this surplus as a gift of nature and believed that only in
dealing directly with nature in extractive or agricultural production could human
labor produce a surplus.

Cultivators were therefore referred to as the productive class. Producers

of manufactured commodities were referred to as the sterile class.

Three classes : the productive class (capitalists and workers eng aged in
agricultural production), the sterile class (capitalists and workers engaged in
manufacturing), and the idle class (the landlords who consumed the surplus
created by the productive class ) .

Charachteristics
Natural Order -Individualism and laissez faire-The Physiocrats' unique idea
concerned the role of natural law in the formulation of policy. They maintained
that natural laws governed the operation of the economy and that, although
these laws were independent of human will
• Agriculture- Diminishing returns- Turgot was one of the first to recognize
that “successive applications of the variable input will cause the product to
grow, first at an increasing rate, later at a diminishing rate until it reaches a
maximum”.
• They did not advocate that industry and commerce be neglected in favour of
agriculture, but they tried to prove that no economy could be healthy unless
agriculture was given the fullest opportunity

Investment capital - Both Quesnay and Turgot recognized that capital was
needed by farmers to start the production process, and both were proponents of
using some of each year’s profits to increase productivity. Turgot recognizes
that there is opportunity cost and risk involved in using capital for something
other than land ownership, and he promotes interest as serving a “strategic
function in the economy.”

• Taxation - Absolute freedom of trade was necessary to stabilize prices at a

fair level, and laissez faire was to restore the economic process to its natural
course, from which all further benefits would flow.

• The physiocrats made no contribution to purely political thought

except the idea of "legal despotism," by which the king and his
government were to enforce the "economic laws of nature."

Factors Shaping Mercantilism:

Some economic, political, religious and cultural factors were responsible for the
emergence of mercantilism.
1. Economic Factors:
Towards the end of the 15th century changes were taking place in the economic
life of the people. Domestic economy was giving way to an exchange economy.
Agriculture was giving place to industry. Trade became very important and it
changed the foundation of socio-economic set-up of the middle ages.
Trade necessitated the use of money which was available in the form of gold
and silver. Along with the expansion of commerce there were improvements in
transport, agriculture, population, etc., so the Mercantilist thought was the
outcome of these developments.
2. Political Factors:
Towards the end of the middle ages nationalism became the strong force.
Europe changed greatly due to Renaissance. As a result, there was a
fundamental political change. It resulted in the emergence of strong nations like
England, France, Spain, etc., Feudalism came to an end and the King became
more powerful. Each nation wanted to preserve its independence and considered
other nations as enemies. In order to create a strong and powerful state the
Mercantilists tried to regulate the political and economic activities of the people.
3. Religious Factors:
The Reformation Movement was revolt against Roman Catholic Church. It
challenged the authority of Pope. Initially the Roman Catholic Church
controlled the political and economic activities of the nation. But after the
Reformation the authority of the Pope was challenged.
4. Cultural Factors:
Culturally also Europe was undergoing a sharp change. Renaissance gave a new
light of learning to the people. People were made to realise that this worldly life
was more important than the heavenly life. As a result, money came to occupy
an important place in human activities.
5. Scientific Factors:
In the field of science and technology great improvements and inventions were
made. The discoveries of compass and printing press were of great importance,
with the help of compass navigation became easier and it led to the discovery of
new countries. Thus new countries opened the gates to a variety of raw
materials and markets. The invention of printing press helped the spread of new
ideas and knowledge.