PHYSIOCRACY

1. PHYSIOCRACY François Quesnay

2. Physiocracy • Introduction to Physiocracy • The Environment of Physiocracy • Main Points of Physiocracy • Precursors • François Quesnay • Anne Robert Jacques Turgot • Conclusion

3. 1.Introduction to PhysiocracyWhat is Physiocracy? • Physiocracy was the first systematic school of economics, represented a reaction to mercantilism.

4. The Physiocrats represented a an "alliance of persons, a community of ideas, andacknowledged authority and a combination in purpose, which banded then into asociety apart." • They held in common the idea that all things are part of aninterconnected system that is rational and comprehensible to the human mind.

5. The main document of Physiocratic doctrine was Quesnay's Tableau conomique. • A key idea of Physiocracy was that agriculture was the productive sector of an economy.

6. The Physiocrats represented a an „alliance of persons, a community of ideas, andacknowledged authority and a combination in purpose, which banded then into asociety apart.“ • They held in common the idea that all things are part of aninterconnected system that is rational and comprehensible to the human mind.

7. The ideas of the Physiocrats lay the foundation for Adam Smith and the ClassicalEconomists. • It was the Classical Economists who provided the intellectual map andthe justification for capitalism and market economies. • The core of the system describedby the Physiocrats is one of the "power of nature," a system based on a naturalorder.

8. Together the two groups developed the concept oflaissez faire, laissez-passer. • They believed that a natural system, free from theintrusions of an improper man made law, would result in a harmony andimprovement of the human condition.

9. Adam Smith characterized the system of the Physiocrats, • The "system with all its imperfections, is perhaps the nearest approximation to the truththat has yet been published upon the subject of political economy, and is, upon account,well worth the consideration of every man who wishes to examine with attention theprinciples of that very important science."

10. When? • 1756-1776 • 1756, François Quesnay published his first article on economics in Grande Encyclopedie • 1776, Turgot lost his position in the French government and Adam Smith publishes Wealth of Nations

11. Where? Only France

12. 2. The Environment of Physiocracy • Feudal system (like England) but • All-powerful king • Feudal lords concentrated at Versailles: absentee landlords, no interest in farming • Taxes used to extract surplus for consumption by lords/King • Rural sector dominated by small peasant-owner farms (unlike rural estate England) • Few capitalist farmers, investment discouraged by taxes; many feudal/mercantilist imposts on trade (like England) • Stagnant agriculture, vs England which had been transformed into capitalist farming system

13. ThePhysiocratsaroseinreaction to Colberg and wereled by Franscois Quesnay. • ThePhysiocrats represented a reaction against the policies of JeanBaptiste Colbert [1619-1683].

14. Colbert was served as a minister in the Court of LouisXIV. • Colbert advocated strict regulation of commerce, protective tariffs and isregarded as a archetypical “Mercantilist.”

15. As a reaction against the extreme mercantilist policies of Colbert, the Physiocratsadvocated laissez faire policies. • The believed that if the order positiv (positive orderor rule of man) could be made consistent with order naturel (the order of naturenot to be confused with the state of nature), the well being of society could beincreased.

16. Given the complex and high levels of taxation of Louis XIV, one of theproposals was a single tax on land.

17. The historical background of the Physiocrats would be a socialhistory of France. • Years of wars and extravagance of the monarch left a societyready for a new perspective that the Physiocrats provided. • While they lasted only abrief time, their ideas were powerful and left a permanent influence on the development of economicthought

18. Regulations • Under Colbertism, detailed regulations were imposed on prices and quality of manygoods. • There were subsidies, tax exemptions, and protection against imports. • Encouragement of large families and a variety of other regulatory techniqueswere prevalent. • While many industries were regulated, an example is textiles. • There were controls on lengths, widths, threads, dyes, colours, etc.

19. Taxes • The Court of Louis XIV was extravagant and relied heavily on taxes to finance themonarchy. • A variety of taxes were imposed and contributed to the frustrationsof the writers and people.

20. A few features of the taxes under Colbertismincluded: • tax collectors paid King for right to collect taxes • Taille- was a tax on land, house and presumed wealth. The taxwas levied on peasants, craft and bourgeois while the clergy andnobility were exempt. The tax took as much as 50% of theearnings of the non-privileged class. • Gabelle - every person over age 7 was required to buy 7 lb. salteach year from the state owned salt monopoly

21. Aides - tax on goods when manufactured, transported or sold,“douanes” - a general sales taxes • Traites - customs or duties on goods imported or exported • Peasants were required to pay for the use of roads, bridges etcand to provide labor (corvéeroyale) to build and maintain thesefacilities.

22. Conditions: The regulative apparatus created to enforce Colbertism became corrupt and anexcessive burden. By the mid 18th century, • The Population of France was about 25 million. Of this number 600,000were members of the clergy and nobles. • Approximately 1/5 to 2/3 of land was owned by clergy in each province

23. 9/10 [about 21 million] of population was engaged in agriculture • 1 million serfs, about 500,000 owned land, some worked forsubsistence and small “wage,” some were share croppers (Metayers),some paid a perpetual rent

24. England was “ahead” of France in industrial revolution and output. Theagrarian revolution in England [farming on a larger “scale”] was moredevelopedthanin France. • Under policies of Colbertism the French economy was highly regulated,there were excesses by both Louis XIV and XV [wars, extravagances inthecourt, etc.] • Industry/commerce added little to nat’l income due to regulation andprotection. There was a desire for reform.

25. 3. Main Points of Physiocracy • “Physiocracy” means “rule of nature” • Laissez faire, laissez passer • Emphasis on Agriculture • Only tax landowners • Viewed the macroeconomy as a circular flow of goods and money

26. Key Ideas • Each individual is the best judge of his/her interest • Self-interest leads to common good • Private property • Role of government • Unequal distribution of wealth • Advanced capital theory • Interest is OK • Use of the concept of equilibrium • Focus on distribution

27. Who Benefits? • Peasants avoid taxes • Businesses helped by reduced regulation • Landowners get hurt by taxes

28. The Physiocrats believed in the existence of a “natural order”. • They appealed to rational principles in the tradition of a “Cartesian” perspective. • Thecosmos was seen as a hierarchically and harmoniously arranged order. • There was adistrust of “data,“ “positive” law and human behavior. • The social order should be consistent with the “natural order.” • The Physiocratsdeduced a connected series of doctrines based on premises and endeavored toinclude all social phenomena connected with the production of wealth.

29. The natural order was not to be confused with state of nature. • The naturalorder was founded on law and property rights. • They denied that every onehas a right to everything: A “Bird has a right to a insect that it can catch.” • They believed that liberty and equality were incompatible. • As a societygrows wealthier, inequality increases. • Men in society are subject to naturallawsinthe sameway that the equilibrium of nature is maintained byphysicallaws.

30. The Physiocrats saw the interrelation between physical and social phenomena,but physics and biology were not highly developed in modern sense.

31. There was an emphasis on the individual and individual rights. • It was believedthat the individual knows their interests and will act on those interests. • Theprinciple idea embedded in Physiocracy is that of “self interest” as themotivating force in the economy. • The rights of each individual limited therights of others. • “Freedom of the foolish man must be restricted by the state.”

32. Founder Quesnay, doctor to Royal Court • Underlying concepts of: • “flows”, as in blood in human body • surplus • Economy must produce a surplus for discretionary consumption & growth • Sought to promote capitalist farmers to increase output and available surplus • First systematic analysis of economy • Laid down in tabular form of flows from one sector to another:

33. 4. Precursors • Locke, Decartes and Newton • The work of the Physiocrats was influenced by the philosophy of each of thesewriters. • John Locke's (1632-1704) views on natural rights, natural law, propertyrights and the role of the individual in society influence the views of thePhysiocrats. • Réne Descartes (1596-1650) provides rationalism and belief in asystem or order that can be understood through reason. • The mechanical viewof the natural world is provided by Newton (1642-1727).

34. Jean François Melon (1675-1738) • was a mercantilist but provided some of the rootsofPhysiocracy • was a secretary to John Law. • Mellon believed that the necessaries of life were more important than gold. • And hereactedagainstmonopoly.

35. John Law (1671-1729) • Law was the son of a goldsmith; born and educated in Edinburgh. He shot andkilled A rival in love affair then escaped to Europe. He became a Financier inthe Mississippi Company that collapsed. He escaped, went to Belgium eventuallybecame a professionalgamblerinVenice. • Law believed in the use of money policy to manage the economy, money can becreated by banks. • He identifies the diamond water paradox and saw same solution as Smith.

36. Richard Cantillion (about 1680-1734) • Cantillion created something of a system of economics, he was a model builder andused abstract methods. • A major work was published in 1755, about 20 yearsafter his death.

37. Cantillion was a Paris banker of Irish extraction. • His work in economicsdemonstrated a mechanical, rationalist approach. • According to Hébert andEkelund, Cantillion was seeking basic principles that governed the economy and society.

38. In this effort, his contributions include: • The treatment of population as an integral part of the economic process • A theory to explain the location of cities and manufacturing • That change in velocity are equivalent to changes in the quantity of money. • Show the paths by which changes in the quantity of money influence price. • Explain the adjustment of prices in international trade. • Consideration of the flows among sectors of the economy.

39. He started with land as the source, “matter” of all wealth, labour is the “form” thatproduces it. • He saw the economy and society as ainterconnected, mechanical process that was constantly adjusting throughindividual pursuit of profits in a series of connected markets. • The concept ofthe "entrepreneur" is associated with Cantillion in this regard. • It is theseentrepreneurs who react to markets and generate a loose "generalequilibrium."

40. 5. Francois Quesnay (1794-1774) • Made a fortune as a court physician, came to economics in his 60s • His model of nature was biological • Developed the tableau as analogous to a blood circulation model • Harvey’s theory of the circulation of the blood was understood at that time • Wealth is created and used, circulating through the economy with perpetuating flows • Quesnay wanted to show scientifically the nature of the economy • Believed that nonagricultural production was sterile (“produit net” can occur only in agriculture)

41. Leader - François Quesnay (1694-1774) • Quesnay was a surgeon who turned to medicine as the result of failing eyesight. • AdamSmith sent for Quesnay to treat the 3rd Duke of Buccleuch (a student Smith wastutoring in France). • Quesnay apparently was unable to come, however. Smith wasfavorably impressed (and undoubtedly influenced) by the ideas and ideals of thePhysiocrats.

42. The main document of Physiocratic doctrine was Quesnay's Tableau conomique. • A key idea of Physiocracy was that agriculture was the productive sector of an economy. • The economy was divided into landlords, farmers and artisans. • Quesnay’s Tableau économiqueis a model of the flows of commodities among the three sectors. • Land is seen as the source of the net product that may be regarded as a surplus. • Trade and industry perform an function butwere seen as sterile in that they produce no net product.

43. Explaining this…

44. The “Tableau Economique” Previous harvest Rent to landlord Landlord buys wheat and “carriages” Farmer buys tools to grow wheat Surplus product goes to landlord as rent Process continues... Artisans buy wheat Recoups initial surplus

45. The “Tableau Economique”

46. Basic Features of Physiocracy • Focus on production; trade as component of production • Key aspect of production: the generation of a net surplus (“produit net”) • Agriculture the only source of surplus; farmers “the productive class” • Manufacturing simply transforms agricultural surplus into different forms; workers “the sterile class” • Feudal lords/clerics sustained by share of surplus: “the proprietor class” • Outputs of manufactures needed to generate rural net product: interdependence (multiplier, input-output concepts)

47. Basic Propositions of Physiocracy • Agriculture only source of new value: • Land pre-dates man • For man to survive, food must exist first • Therefore land is the source of value • Agriculture generates a surplus • 1 unit of output requires < 1 unit of input • Sew 1 kilo of wheat as seed, get 10 kilos of wheat as crop • Manufacturing simply converts form • 1 unit of input, 1 unit of output (but in different form) • Surplus key to wealth: Wealth can be increased if gap between inputs and output in agriculture can be increased.

48. Input-Output • Example: • System 1 with 100 hectares of land: • 1 hectare land + 7/10 bushels wheat + 1/10 kilo steel produces 1 bushel wheat • 0 hectare land + 1/10 bushel wheat + 9/10 kilo steel produces 1 kilo steel • 70 wheat + 10 steel -> 100 wheat • 10 wheat + 90 steel -> 100 steel • Net output 20 bushels wheat, 0 kilos steel

49. Input-Output • System 2 with 100 hectares of land: • 1 hectare land + 6/10 bushels wheat + 1/10 kilo steel produces 1 bushel wheat • 0 hectare land + 1/10 bushel wheat + 9/10 kilo steel produces 1 kilo steel • 60 wheat + 10 steel -> 100 wheat • 10 wheat + 90 steel -> 100 steel • Net output 30 bushels wheat, 0 kilos steel • Benefits of improved technology • 16% reduction in necessary inputs • 50% increase in net product

50. Physiocratic Policy • Net produit of contemporary France limited by: • Small landholdings, absentee landlords, primitive techniques • Heavy & arbitrary feudal taxation • Mercantilist restrictions on trade in rural produce • Physiocrats • favoured commercial farmers, • single tax on land rent • High “corn” price, free movement of rural goods, no manufacturing “monopolies” • Object to encourage improved techniques in agriculture, hence higher surplus