|Schools of economics|
Institutional economics · Stockholm school
The Physiocrats were a group of economists who believed that the wealth of nations was derived solely from agriculture. Their theories originated in France and were most popular during the second half of the eighteenth century. The term "Physiocracy" itself, introduced by Dupont de Nemours (1767) literally translates to "the rule of nature." Physiocracy is perhaps the first well developed theory of economics. It immediately preceded the first modern school, classical economics, which began with the publication of Adam Smith's The Wealth of Nations in 1776.
The most significant contribution of the physiocrats was their emphasis on productive work as the source of national wealth. The cornerstone of the Physiocratic doctrine was François Quesnay's (1759 - 1766) axiom that only agriculture yielded a surplus. Manufacturing, the Physiocrats argued, took up as much value as inputs into production as it created in output, and consequently created no net product. Contrary to the Mercantilists, the Physiocrats believed that the wealth of a nation lies not in its stocks of gold and silver, but rather in the size of its net product. The policy measures advocated by the Physiocrats went very much against the interests of the nobility and the landed gentry (however much they claimed to have their interests at heart). Nevertheless, because Quesnay was the private physician to Madame de Pomapadour, the mistress of Louis XV, the Physiocratic clique enjoyed a good degree of protection in the French court. And it is undeniable that the Physiocrats provided the foundation for the future development of economics, and the vision that such study would lead to greater stability and opportunities for prosperity not only for society as a whole but for all people.
Characteristics of Physiocratic Movement
They called themselves économistes, but are generally referred to as Physiocrats in order to distinguish them from the many schools of economic thought that followed them. Physiocrat is derived from the Greek for "government of nature."
Disenchanted with regulation on trademarks inspired by mercantilism, a Frenchman named Vincent de Gournay (1712-1759) is reputed to have asked why it was so hard to laissez faire, laissez passer (free trade, free enterprise). He was one of the early physiocrats, who held that agriculture was the source of wealth. As historian David B. Danbom (1997) wrote, the Physiocrats "damned cities for their artificiality and praised more natural styles of living. They celebrated farmers."
At the end of the seventeenth and beginning of the eighteenth centuries advances in natural science and anatomy were being made, including the discovery of blood circulation through the human body. This concept was mirrored in the physiocrats' economic theory, with the notion of a circular flow of income throughout the economy. This was first expressed in François Quesnay's Tableau Économique (1759). Others who developed the Physiocratic ideas include Anne Robert Jacques Turgot, Baron de Laune, Victor de Riqueti, marquis de Mirabeau, and Pierre Samuel du Pont de Nemours.
Quesnay's Tableau Économique
The foundation of the Physiocrats’ economic theories was first described in François Quesnay's Tableau Économique, which was published in 1759, on p. 189) The model Quesnay created (shown in Fig. 1) consisted of three economic movers:
- The Proprietary class consisted of only landowners.
- The Productive class consisted of all agricultural laborers.
- The Sterile class is made up of artisans and merchants.
The flow of production and/or cash between the three classes starts with the Proprietary class because they own the land and they buy from both of the other classes. The process, seen in Fig. 1, has these steps:
- The farmer produces 1,500 food on land leased from the landlord. Of that 1,500, he retains 600 food to feed himself, his livestock, and any laborers he hires. He sells the remaining 900 in the market for $1 per unit of food. He keeps $300 ($150 for himself, $150 for his laborer) to buy non-farm goods (clothes, household goods, etc) from the merchants and artisans. This produces $600 of net profit, to which Quesnay refers as produit net. (3, 189)
- The artisan produces 750 units of crafts. To produce at that level, he needs 300 units of food and 150 units of foreign goods. He also has subsistence need of 150 units of food and 150 units of crafts to keep himself alive during the year. The total is 450 units of food, 150 units of crafts, and 150 units of foreign goods. He buys $450 of food from the farmer and $150 of goods from the merchant, and he sells 600 units of crafts at the market for $600. Because the artisan must use the cash he made selling his crafts to buy raw materials for the next year’s production, he has no net profit.
- The landlord is only a consumer of food and crafts and produces no product at all. His contribution to the production process is the lease of the land the farmer uses, which costs $600 per year. The landlord uses $300 of the rent to buy food from the farmer in the market and $300 to buy crafts from the artisan. Because he is purely a consumer, Quesnay considers the landlord the prime mover of economic activity. It is his desire to consume which causes him to expend his entire lease income on food and crafts and which provides income to the other classes.
- The merchant is the mechanism for exporting food in exchange for foreign imports. The merchant uses the $150 he received from the artisan to buy food from the market, and it is assumed that he takes the food out of the country to exchange it for more foreign goods.
The Physiocrats were the beginning of the anti-mercantilist movement. Quesnay’s argument against industry and international trade as alternatives to his doctrine was twofold. First, industry produces no gain in wealth; therefore, redirecting labor from agriculture to industry will in effect decrease the nation’s overall wealth. Additionally, population expands to fill available land and food supply; therefore, population must go down if the use of land does not produce food.
Second, the basic premise of the Mercantilists is that a country must export more than it imports to gain wealth, but that assumes it has more of a tradeable resource than it needs for internal consumption. France did not have a colony with the ability to produce finished or semi-finished goods like England (namely India) or Holland (namely African and South American colonies). Its main colonial presence was in the Caribbean, southern North America, and southeast Asia, and like France, these colonies had agricultural-based economies. The only commodity that France had in enough excess to export was food; therefore, international trade based on industrial production would not yield as much wealth.
Quesnay was not anti-industry, however. He was just realistic in his assessment that France was not in good position to incubate a strong industrial market. His argument was that artisans and manufacturers would come to France only in proportion to the size of the internal market for their goods:
A country should concentrate on manufacturing only to the extent that the local availability of raw materials and suitable labor enabled it to have a cost advantage over its overseas competitors.(Quesnay, 153)
Anything above that amount should be purchased through trade.
Individualism and Laissez Faire
The laws which the Physiocrats discovered operating in the economy were the following:
- the natural tendency of mercantilism is to produce wealth, so that mercantilism left to its own devices would increase the wealth of a nation;
- the natural tendency of merchants is to serve their self-interest, but in pursuing their self-interest everyone benefits from the excess wealth they create;
- mercantilism naturally results in increasing the productivity of labor.
Government interference in mercantilism—through taxes, regulations, price controls—hinders the activities of merchants and so prevents these natural laws of economics to take place; none of the benefits—increased wealth, increased productivity—will be realized by regulated mercantilism.
The Physiocrats argued, then, that government leave the economy alone and allow individuals within the economy to do as they please in attempting to realize their own selfish interests; this doctrine they called laissez faire, or "let them do."
None of the theories concerning the value of land could work without strong legal support for the ownership of private property. Combined with the strong sense of individualism, private property becomes a critical component of the Tableau's functioning.
Jacques 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” (Quesnay, 195) This was a recognition that the productivity gains required to increase national wealth had an ultimate limit, and, therefore, wealth was not infinite.
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. Capital was also needed to sustain the laborers while they produced their product. Turgot recognized that there is opportunity cost and risk involved in using capital for something other than land ownership, and he promoted interest as serving a “strategic function in the economy.” (Quesnay, 196)
Unlike the Mercantilists, the Physiocrats did not concern themselves with whether maximizing the net product was a "good" idea (did it enhance the power of the sovereign, did it produce general happiness, did improve general morality and so forth). The "friend of mankind," Marquis de Mirabeau (1756) declared that the true wealth of a nation is its population, ergo the greater the net product the greater the sustainable (and presumable happier) population. Generally, though, the Physiocrats focused on the fact that maximizing net product was the "natural" thing to do. And anything that was "natural," according to the spirit of the age, was the "good" thing to do.
The Physiocrats, based on Quesnay's analysis, had identified three classes in the economy: the "productive" class (agricultural laborers and farmers), the "sterile" class (industrial laborers, artisans, and merchants) and the "proprietor" class (who appropriated the net product as rents). Incomes flowed from sector to sector, and thus class to class.
A "natural state" of the economy emerged when these income flows were in a state of "balance," that is, where no sector expanded and none contracted. Once the "natural state" was achieved, the economy would just continue, reproducing itself indefinitely. Described and defined in his famous La philosophie rurale, Mirabeau's (1763) text is considered the best statement of this early Physiocratic doctrine.
The Physiocrats, unlike many of their contemporaries, continued to view the state as a parasitical entity, living off the economy and society, but not part of it. According to this view, government has no prescribed place in the ordre naturel. Its only role is to set the laws of men in a way that permits the God-given laws of nature to bring the natural order about. They regarded any attempt by the government to influence the economy against these natural forces as leading to imbalances which would postpone the arrival of the natural state and keep the net product below what it would otherwise be. A general laissez-faire policy and the "single tax" were the speediest, least distortionary, and least costly ways of arriving at the natural state.
However practical many of the Physiocrats' policy measures were, they wrapped their arguments in metaphysical clouds. They differentiated between the ordre naturel (natural order, or the social order dictated by nature's laws) and the ordre positif (positive order, or the social order dictated by human ideals). They charged that social philosophers had confused these two orders. The ordre positif was wholly about man-made conventions. It was about how society should be organized to conform to some human-constructed ideal. This, they argued, was what the "natural law" and "social contract" philosophers, like John Locke and Jean-Jacques Rousseau, were concerned with.
However, there was, the Physiocrats argued, nothing "natural" in them at all. By contrast, the ordre naturel were the laws of nature, which were God-given and unalterable by human construct. They believed that the only choice humans had was either to structure their polity, economy, and society in conformity with the ordre naturel or to go against it.
Physiocratic system: mysticism or science?
Although the Physiocratic system was accused of being "mysticism parading as science," the truth was perhaps quite the opposite. Physiocracy can be better understood as "science parading as mysticism." For this reason, the Physiocrats still exerted a considerable amount of influence on the development of economics. Of particular interest are the modifications introduced by Jacques Turgot and taken up by the Turgotian sect (which included, at one step removed, Adam Smith). They were the first to argue that industry, and not only agriculture, could produce a net product. The modified system, in the hands of Adam Smith, yielded up the "labor theory of value," which was later taken up by the Classical School.
Physiocrats’ damaging of their case
The Physiocrats' own style did not help their case. Their pompousness, their mysticism about the ordre naturel, the affected, flowery way in which they wrote their tracts, their petty "cliquishness," their unrestrained adulation and worship of Quesnay and Mirabeau—whom they referred to as the "Confucius of Europe," and the "modern Socrates"—irked just about everybody around them.
Even those who ought to be their natural allies, such as Voltaire, Diderot, Rousseau, and de Mably, despised the Physiocrats with a passion. In a letter to Morellet regarding his upcoming Dictionnaire, the otherwise good-natured David Hume expressed his disdain for them thus:
I hope that in your work you will thunder them, and crush them, and pound them, and reduce them to dust and ashes! They are, indeed, the set of men the most chimerical and most arrogant that now exist, since the annihilation of the Sorbonne. (Hume, Letter to Morellet, July 10, 1769).
And Adam Smith killed them with faint praise, arguing that the Physiocratic system "never has done, and probably never will do any harm in any part of the world" (Smith, 1776).
Theories and thinkers supporting and commenting on Physiocrats
The Tableau shows the reason why the Physiocrats disagreed with Richard Cantillon about exporting food, even though, among others, they also owed to Cantillon their "land theory of value." The economy produces a surplus of food, and neither the farmer nor the artisan can afford to consume more than a subsistence level of food. The landlord is assumed to be consuming at a level of satiation; therefore, he cannot consume any more. Since food cannot be stored easily, it is necessary to sell it to someone who can use it. This is where the merchant provides value.
The merchant was not thought to be a source of wealth, either. Karl Marx in Theories of Surplus Value wrote:
Hence for the Physiocrats agricultural labour is the only productive labour, because it is the only labour that produces a surplus-value, and rent is the only form of surplus-value which they know. The workman in industry does not increase the material substance; he only alters its form. The material—the mass of material substance—is given to him by agriculture.
Turgot’s comments in Réflexions sur la formation et la distribution des richesses (1766); (Turgot, 1844, 9-10) are quite clear:
What his (i.e., agricultural labourer) labour causes the land to produce beyond his personal wants is the only fund for the wages which all the other members of the society receive in exchange for their labour. The latter, in making use of the price of this exchange to buy in their turn the products of the husbandman, only return to him (as matter) exactly what they have received from him. We have here a very essential difference between these two kinds of labour.
How then does surplus-value arise? It does not arise from circulation, but it is realized in circulation. The product is sold at its value, not above its value. There is no excess of price over value. But because it is sold at its value, the seller realizes a surplus-value. This is only possible because he has not himself paid in full for the value which he sells, that is, because the product contains a portion of value which has not been paid for by the seller, which he has not offset by an equivalent. And this is the case with agricultural labor. The seller sells what he has not bought.
Turgot at first presented this unbought element as a pure gift of nature. We shall see, however, that in his writings this pure gift of nature became imperceptibly transformed into the surplus-labor of the laborer which the landowner has not bought, but which he sells in the products of agriculture.
Agriculture is the first of all branches of industry to use the forces of nature on a considerable scale. Their use in manufacturing industry becomes apparent only at a higher stage of industrial development. The following quotation shows how, in this connection, Adam Smith still reflected the prehistory of large-scale industry and for this reason upheld the Physiocratic point of view, and how David Ricardo answered him from the standpoint of modern industry.
Adam Smith in An Inquiry into the Nature and Causes of the Wealth of Nations ( Vol. II, 1828, 147) wrote:
It is the work of nature which remains after deducting or compensating every thing which can be regarded as the work of man. It is seldom less than a fourth, and frequently more than a third of the whole produce. No equal quantity of productive labour employed in manufactures can ever occasion so great a reproduction. in them nature does nothing; man does all; and the reproduction must always be in proportion to the strength of the agents that occasion it.
Ricardo, on the other side, was more cautious and in On the Principles of Political Economy, and Taxation, 2nd edition, 1819, 61-62, commented:
Does nature nothing for man in manufactures? Are the powers of wind and water, which move our machinery, and assist navigation, nothing? The pressure of the atmosphere and the elasticity of steam, which enable us to work the most stupendous engines—are they not the gifts of nature? to say nothing of the effects of the matter of heat in softening and melting metals, of the decomposition of the atmosphere in the process of dyeing and fermentation. There is not a manufacture which can he mentioned, in which nature does not give her assistance to man, and give it too, generously and gratuitously.
ReferencesISBN links support NWE through referral fees
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