Physiocrats
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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 18th century. 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. This is in contrast to earlier schools, in particular mercantilism, which often focused on the ruler's wealth, accumulation of gold or the balance of trade. A chief weakness from the viewpoint of modern economics is that they only considered agricultural labor to be valuable. Physiocrats viewed the production of goods and services as consumption of the agricultural surplus, while modern economists consider these to be productive activities which add to national income.
Historian David B. Danbom explains, "The Physiocrats damned cities for their artificiality and praised more natural styles of living. They celebrated farmers." [1]
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".
[edit] Origins
[edit] 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. (3, p. 189) The model Quesnay created consisted of three economic movers. The "Proprietary" class consisted of only landowners. The "Productive" class cconsisted 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 started with the Proprietary class because they own the land and they buy from both of the other classes. The process has these steps (consult Figure 1).
1. The farmer produces 1500 food on land leased from the landlord. Of that 1500, 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, p. 189)
2. 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 not net profit.
3. 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.
4. 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.
Figure 1 Production Flow Diagram for Quesnay's Tableau (4)
The Tableau shows the reason why the Physiocrats disagreed with Cantillon about exporting food. 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 is not a source of wealth, however. The Physiocrats believed that “neither industry nor commerce generates wealth.” (5, p. 858) A “plausible explanation is that the Physiocrats developed their theory in light of the actual situation of the French economy…” (5, p. 858) France was an absolute monarchy with the land owners constituting 6-8% of the population and owning 50% of the land. (5, p. 859) Agriculture contributes 80% of the country’s wealth (5, p. 858), and the non-land owning segment of the population “practises a subsistence agriculture that produces the essential minimum, with virtually all income being absorbed by food requirements.” (5, p. 859) Additionally, exports consisted mostly of agricultural-based products, e.g. wine. (5, p. 859) Given the massive effect of agriculture on France’s economy, it was more likely they would develop an economic model that used it to the king’s advantage.
The Physiocrats are at the beginning of the anti-mercantilist movement. Quesnay’s argument against industry and international trade as alternatives to his doctrine is two fold. 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 (i.e. India) or Holland (i.e. North America, Africa, South America). It’s main colonial presence was in the Caribbean, southern North America, and southeast Asia, and like France, the colonies had agricultural-based economies. The only good which 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. (6, p. 153) Quesnay believed “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.” (6, p. 153) Anything above that amount should be purchased through trade.
Individualism and Laissez Faire
The Physiocrats, especially Turgot, believed that self-interest was the motivating reason for each segment of the economy to play its role. Each individual was best suited to determine what goods he wanted and what work would provide him with what he wanted out of life. While a person might labor for the benefit of others, he will work harder for the benefit of himself; however, each person’s needs are being supplied by many other people. The system works best when there is a complementary relationship between one person’s needs and another person’s desires, and trade restrictions place an unnatural barrier to achieving one’s goals.
Private Property
None of the theories concerning the value of land could work without strong legal support of ownership private property. Combined with the strong sense of individualism, private property becomes a critical component of the workings of the Tableau.
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” (3, p. 195) This was a recognition that the productivity gains required to increase national wealth had an ultimate limit, and, therefore, wealth was not infinite.
Investment Capital
Both Quesnay and Anne Robert Jacques Turgot, Baron de Laune 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 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.” (3, p. 196)
