Physiocracy
Physiocracy (from the Greek for "Government of Nature") is an economic theory developed by the Physiocrats, a group of economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development." 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.
The movement was particularly dominated by François Quesnay (1694–1774) and Anne-Robert-Jacques Turgot (1727–1781).[1] 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. At the time the Physiocrats were formulating their ideas, economies were almost entirely agrarian. It is presumably for this reason that the theory considered only agricultural labor to be valuable. Physiocrats viewed the production of goods and services as consumption of the agricultural surplus, since the main source of power was from human or animal muscle and all energy was derived from the surplus from agricultural production.
The perceptiveness of the Physiocrats' recognition of the key significance of land was reinforced in the following half-century, when fossil fuels had been harnessed through the use of steam power. Productivity increased manyfold. Railways, and steam-powered water supply and sanitation systems, made it possible for viable cities to grow up with populations of several million, with land values orders of magnitude greater than those of land in agricultural use. Thus, whilst modern economists rightly consider manufacturing to be productive and wealth-creating, the underlying principles laid down by the Physiocrats remain valid. Physiocracy also has an important contemporary relevance in that all life remains dependent on the productivity of the raw soil and the ability of the natural environment to renew itself.
Historian David B. Danbom explains, "The Physiocrats damned cities for their artificiality and praised more natural styles of living. They celebrated farmers."[2] 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.
Precursors
Physiocracy is an agrarianist philosophy which may trace its origins to various sources. During the latter period of the Roman Republic, the dominant senatorial class was not allowed to engage in banking or commerce[3] but relied on their latifundia, large plantations, for income. They circumvented this rule through freedmen proxies who sold surplus agricultural goods.
After the decline of the Roman Empire, de-urbanization led to commerce and trade ceasing to exist throughout most of western Europe. Economies became centered around agricultural manors where warrior-landlords, the Medieval nobility, collected rent from their serfs in the form of their produce. This was the dominant economic system until trade began to return in the Late Middle Ages leading to the rise of the merchant class.
Another inspiration came from China's economic system, then the largest in the world. Most Chinese were divided into four occupations with scholar-bureaucrats, who were also agrarian landlords, on top and merchants on the bottom because they did not produce but only distribute goods made by others. Leading physiocrats like François Quesnay were avid Confucianists that advocated China's agrarian policies.[4]
History
Pierre Le Pesant, sieur de Boisguilbert served as a member of Louis XIV's local administration of Paris, and wrote pamphlets and booklets on subjects related to his work; taxation, grain trade, and money. Le Pesant asserted that wealth came from self-interest and markets are connected by money flows (i.e. an expense for the buyer is revenue for the producer). Thus he realized that lowering prices in times of shortage – common at the time – was dangerous economically as it served as a disincentive to production. Generally, Le Pesant advocated less government interference in the grain market, as any activity by the government would give birth to "anticipations" which would prevent the policy from working. An example would be that if the government bought corn abroad, there would be people who realize that there is a likely shortage and would increase their demand, so that prices may rise and a shortage might result. This idea was an early example of advocation for free trade. In anonymously published tracts, Vauban proposed a system known as La dîme royale which suggested major simplification of the French tax code through switching to a relatively flat tax on property and trade. Vauban's use of statistics marked a noted increase on empirical methods in economics from previous times.[5]
During the periods around the Seven Years' War between France and England, the physiocracy movement began to grow. For one, several journals appeared, signaling an increasing audience in France to new economic ideas. Among the most important were the Journal Œconomique (1721–1772), which promoted agronomy and rational husbandry and the Journal du commerce (1759–1762), which was heavily influenced by the Irishman Richard Cantillon (1680–1734), and two dominated by physiocrats; the Journal de l'agriculture, du commerce et des finances (1765–1774) and the Ephémérides du citoyen (1767–1772 and 1774–1776). Also, de Gournay (1712–1759) (who was the Intendant du commerce) brought together a group of young researchers including François Véron Duverger de Forbonnais (1722–1800) and one of the two most famous physicrats, Anne-Robert-Jacques Turgot (1727–81). The second in the pair, François Quesnay (1694–1774), was among those publishing heavily in the journals that were appearing at the time.[1]
Tableau économique
The Tableau économique or Economic Table is an economic model first described by François Quesnay in 1759, which laid the foundation of the Physiocrats’ economic theories.[6]
The model Quesnay created 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 started with the Proprietary class because they own the land and they buy from both of the other classes.
Characteristics
Natural Order
The Physiocrats thought there was a "Natural order" that allowed human beings to live together. Men did not come together via a somewhat arbitrary "social contract". Rather, we have to discover the laws of the natural order that will allow individuals to live in society without losing significant freedoms.[7]
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 for the ownership of private property. Combined with the strong sense of individualism, private property becomes a critical component of the Tableau's functioning.
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.”[8] 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.”[9]
See also
People
Notes
- ^ a b Steiner (2003) p62
- ^ Why Americans Value Rural Life by David B. Danbom
- ^ Byrd, 34
- ^ Derk Bodde, CHINESE IDEAS IN THE WEST
- ^ Steiner (2003) p61
- ^ Henry William Spiegel (1983) The Growth of Economic Thought, Revised and Expanded Edition, Duke University Press. p.189
- ^ A history of economic doctrines from the time of the physiocrats to the present day[page needed]
- ^ Spiegel (1983) p.195
- ^ Spiegel (1983) p.196
References
- Byrd, Robert (1995). The Senate of the Roman Republic. US Government Printing Office Senate Document 103–23.
- Henry William Spiegel (1983) The Growth of Economic Thought, Revised and Expanded Edition, Duke University Press
- Yves Charbit; Arundhati Virmani (2002) The Political Failure of an Economic Theory: Physiocracy, Population, Vol. 57, No. 6. (Nov. - Dec., 2002), pp. 855–883.
- A. L. Muller (1978) Quesnay's Theory of Growth: A Comment, Oxford Economic Papers, New Series, Vol. 30, No. 1., pp. 150–156.
- Steiner, Phillippe (2003) Physiocracy and French Pre-Classical Political Economy in eds. Biddle, Jeff E, Davis, Jon B, & Samuels, Warren J. A Companion to the History of Economic Thought. Blackwell Publishing, 2003.
- The History of Economic Thought Website, The New School of Social Research. 6 Feb. 2006
- Tableau Économique - Modern view
- A History of Economic doctrine from the time of the Physiocrats to the present day - Gide, Charles and Rist, Charles. 1915