ECONOMIC SCHOOLS OF THOUGHT: AN HISTORICAL OVERVIEW
A school of economic thought consists of economists who share common ideas about how scarce resources should be used to achieve society's goals. Numerous schools of economic thought have arisen since the 1700s. Some schools of thought have stressed economic freedom and the value of private incentives to allocate society's resources. Others have advocated the abolition of private property and profits to create economic equity and justice. Competing schools of thought have evolved over time, have challenged wellestablished economic doctrines, and have instigated monumental changes in how societies answer the basic economic questions of what, how, and for whom to produce.
Mercantilism is the belief that a country's wealth is derived from its ability to accumulate specie—mainly gold and silver. Mercantilism is not a school of economic thought in the traditional sense, mainly because there is no unified body of writing that mercantilists accept. Instead, the viewpoints expressed by the mercantilists represented the interests of the merchant and business classes during the sixteenth, seventeenth, and eighteenth centuries. The most eloquent mercantilist spokesman of the era was Thomas Mun (1571– 1641), a merchant from London, England. The mercantilists generally agreed that accumulating bullion was vital to the survival the nation but stressed the value of international trade rather than conquest to acquire these riches.
The mercantilists encouraged the government to create trade policies that would result in a favorable balance of trade, a condition in which the value of a country's exports is greater than the value of its imports. A favorable balance of trade ensured that more wealth, including specie, flowed into the nation than flowed out. This prescription for prosperity was supported in Mun's England's Treasure by Foreign Trade (1664). In this treatise, Mun argued that England must “sell more to strangers yearly than we consume of theirs in value.” To achieve a favorable balance of trade, countries such as England, France, and Spain adopted mercantilist policies during the 1600s and 1700s. Central to the mercantilists was the creation of trade barriers such as import tariffs and quotas to discourage or prohibit certain foreign imports. Governments subsidized domestic industries and granted trade monopolies to leading shipping companies. Governments also built vast colonial empires, and restricted trade and business activity within these empires to favor the mother country.
History has shown that the mercantilists viewed the world through a selective lens that invariably catered to the narrow interests of the commercial class and the monarchy. The mercantilist approach to creating national wealth, which equated wealth with a speciefilled treasury, failed to give proper attention to other growth factors such as agricultural production, the quality of the labor force, or technological advances. The common people were often viewed as little more than a source of cheap labor, a market for industrial output, and an endless supply of soldiers to carry out the monarch's global ambitions. The mercantilists also embraced a narrow view of trade, seeing international exchanges in terms of winners and losers rather than as business transactions from which both parties could benefit.
The Physiocratic School
The physiocratic school, or physiocracy, is generally viewed by economists as the first true school of economic thought. This school focused on the dominance of agriculture, the agricultural class, and free markets to guide the use of society's resources. The physiocrats emerged in 1760s France, drawing their economic theories from Francois Quesnay, and their political clout from allies in the royal court of King Louis XIV and King Louis XV. Quesnay's The Economic Table laid the philosophical foundations of the physiocratic school.
In The Economic Table, Quesnay proclaimed the existence of a natural order in the economic life of nations, a natural order that stressed the primacy of agriculture and the agricultural class over the less productive classes of proprietors, craftsmen, industrialists, and merchants. To the physiocrats, agricultural land enabled farmers to produce enough output to satisfy domestic demand and have surpluses to sell in foreign markets. The central goal of economic activity was to increase the nation's net product, which was measured by the value of agricultural output above and beyond the costs of production. Given the physiocratic school's emphasis on a natural economic order, it is appropriate that this economic school of thought took its name from the term “physiocracy,” or “rule of nature.” Laissez-faire was another important feature of the physiocrats' natural order. Laissezfaire is the belief that market forces should determine the use of society's scarce resources and that the government should not interfere in business activities. Laissez-faire was a direct attack on prevailing mercantilist doctrine, which favored many types of government intervention in business activity, including the use of trade barriers to restrict free trade, subsidies to protect weak businesses, and state monopolies to bolster business profits.
The rise of the physiocrats was an important step in the development of economic science. This early school of economic thought recognized that participants in an economy such as farmers, merchants, and manufacturers functioned in an interdependent system. These insights underpin today's circular flow model, which illustrates the exchanges of goods and resources for money payments in the product market and factor market. Despite its splash in academic circles and at the French royal court, the physiocratic school had little impact on government policies in France or elsewhere. Their preoccupation with agriculture led the physiocrats to vastly underestimate the role of merchants and manufacturers in building the country's wealth.
-  Thomas Mun, England’s Treasure by Foreign Trade (1664 original electronic text held by the Department of Economics, McMaster University), Chapter 2, par. 1