Mercantilism vs. Physiocracy — What's the Difference?

Mercantilism, prevalent in Europe from the 16th to the 18th centuries, focuses on strengthening a nation's economy by maximizing exports and minimizing imports to create a trade surplus. This economic policy believes in accumulating precious metals as a sign of wealth and supports government intervention in the economy to achieve these goals. On the other hand, Physiocracy, emerging in the 18th century as a reaction to mercantilism, posits that agriculture is the primary source of wealth and that economic success comes from land productivity. Physiocrats argue for minimal government interference, believing that an economy should follow natural laws of supply and demand.

Under mercantilism, nations often exploited colonies for raw materials, processed these materials domestically, and then exported finished goods for precious metals. This approach led to protective tariffs, subsidies for domestic industries, and strict colonial trade policies. In contrast, Physiocracy championed free trade and the efficient use of land, arguing that only agricultural production could increase a nation's wealth genuinely. They advocated for a single tax on land as the most equitable and efficient form of taxation.

Mercantilist policies frequently led to wars over resources and trade routes, as nations sought to expand their wealth and power through aggressive trade practices and colonization. Physiocrats, however, promoted peace and prosperity through free trade and agricultural development, believing that wealth could be increased through cooperation and efficient resource use.

While mercantilism places significant importance on the role of the state in managing the economy and protecting domestic industries, Physiocracy emphasizes the importance of letting natural economic laws dictate market outcomes without excessive government intervention. This difference reflects a fundamental shift in the understanding of how wealth is generated and the best ways to manage an economy.

Mercantilists viewed the world's wealth as finite, leading to policies aimed at securing the largest portion of that wealth for one's own nation, often at the expense of others. Physiocrats introduced the concept that wealth could be expanded through agricultural innovation and the efficient use of land, offering a more optimistic view of economic progress and potential.