Physiocrats – The Catalysts of Economic Thought
Cross Posted from Monmouth University
Ordell P. Olson
Assistant Professor of Economics
France, at the end of the seventeenth and into the eighteenth century, was gradually going bankrupt. Wars were depleting both the natural and human resources of the country. The need to finance the wars and the court display of nobility was diverting increasingly large amounts of the country’s productive power .
To obtain the needed revenue a new social structure was being formed. This new class, the magistrates, auditors, masters of accounts and parliamentarians of the king, was set up for the administration of the country. However, their chief function was the collection of taxes. This class prospered, copied the nobility and in time bought up their estates. Thus they became the wealthy, landed class of the country. They held office at the discretion of the king and were his staunchest supporters.
There was one fundamental difference between this class and nobility they succeeded. They did not consider their estates or land a hobby, but rather a resource that must produce a surplus, a productive capital (12).*
While this class originally was formed to collect taxes, as landowners they were burdened by the fiscal and financial system of the “ancien regime.” In this system practically everything was taxed but a large amount was absorbed by the cost of collection. The two main taxes were the “taille” or direct tax imposed on real and personal property, and the “gabelle,” an indirect tax which came eventually to stand for a tax on salt (12, 7).
This system of taxes became an ever-increasing burden on fewer and fewer. Population was decreasing rapidly and the privilege of exemption, from the”taille,” could be purchased from the nobility (7). The result was a large decrease in national production. People moved from farms to the city, and those that remained on farms chose not to produce as taxes would take most of the product of their labor. All these factors resulted in a starving population and a bankrupt country.
The injustices inherent in this system plus the need to preserve France from anarchy led to new ideas in political economy. One of the earliest proposals to correct these abuses was John Laws’ state bank and paper money scheme (7). This idea caused controversy but little change. The need for change continued to exist and eventually resulted in a school of economic thought and political action that became known as the Physiocrats. They were an alliance of persons, a community of ideas which banded them into a society apart (7).
* Numbers in parentheses refer to bibliography
The work that started this school, the first active and original thought in French economics, was Cantillons’ “Essai sur la Nature du Commerce en general”published in 1775. Cantillon attempted to answer what and how wealth originates, how it is distributed and its circulation not only within but between countries. He states “Land is the source or material from which Wealth is extracted,” but, “human labor is the form which produces it; and Wealth in itself is not other than the sustenance, the conveniences, and the comforts of life” (quoted by Higgs (7)). Cantillon put forth the principles of physiocracy but it was Quesnay and Gournay that gave them systematic form and the first scientific doctrine of merce to the initial problem, an analysis of production, and there merce to the initial problem, and the analysis of production and thereby transformed the study of wealth into a science (12, 3, 7).
Francois Quesnay (1694-1774) became the leader of the Physiocrats. He was a Doctor of Medicine in the royal court, first as physician to Mme. De Pompadour and later to Louis XV. In 1735 he purchased a large estate and was raised to the rank of a noble. Here he discovered that if the price of land products increased, the revenue of his new estate would also increase (7). His writings before 1758 dealt largely with medicine and included two articles,”Fermiers” and “Grains.” “Fermiers” advocated improving agriculture production through use of horses. In “Grains” he proposed that France should stimulate agricultural production, particularly grapes and grain, and use this production in foreign trade rather than emphasizing manufactured goods (7).
Quesnay was hesitant about writing on economic questions due to his position in the court. However, he became the leader of the Physiocrats and his “Tableau Oeconomique,” published in 1758, put forth the precepts of the school.
The doctrine of the Physiocrats was based on the axiom that agriculture alone was productive. Any scientific doctrine of economics, if formulated in France at this time, would almost certainly have been based on the primacy of agriculture (14). France was primarily agricultural and French agriculture was a major problem. Just as agriculture was primary, another condition of their doctrine was not to disrupt the laws of nature. This concept led P.S. Dupont de Nemours to coin the word “Physiocrats,” from the Greek, meaning rule of Nature (3).
Quesnay’s “Tableau Oeconomique’ is an explanation of his economic table. The table itself has three headings:
Productive expenditures relative to Agriculture
Expenditures from revenue, deducting taxes, are divided between the productive and sterile expenditures
Sterile Expenditures relative to industry
Annual Advances to produce a revenue of 600L. are 600L. *
Annual revenue of
Annual Advances fro the production of the sterile expenditures are 300L.
600L. (Produce net)………….600L.
The table continues in steps, by dividing the 600L. revenue equally between Sterile and Productive expenditures, which causes a “reproductive net” of 300L.; this new 300L. revenue in turn being divided in step two, etc. (8).
Starting with the assumed “produit net” of 600L. and 300L. of Sterile inventory, distribution would proceed as follows:
The “produit net” first goes on to the proprietor. He spends one-half on sterile products and one-half on agriculture produce. The 300L. spent on agricultural produce are again applied to agriculture and yield a reproduce “produit net” of 100 percent or 300L. This is again divided as above, 150L. to sterile and 150L. to agriculture for a second reproduction “produit net” of 100 percent or 150L. These annual divisions would continue to infinity. At the same time the funds expended for sterile products would in turn be divided into two equal portions. One-half is returned in purchasing new materials and the other half is consumed, “unproductively.” These divisions would also continue, paced one year behind the original annual revenue, concurrently with proprietors spending to infinity.
Quesnay assumed an “avances annuelles,” seed and cultivation expenses plus other capital as given, these then reproduced 100 percent to yield a revenue of the same amount. He also assumed a level of one-half the revenue as inventory of industry. To him there were only three classes: (1) the proprietors who owned the land, were paid the “produit net” and provided the “avances foncieres” or fixed capital needed to agriculture; (2) the productive class, the farmers who actually tilled the soil; and (3) the sterile class, who made up the rest of the population, industry, financiers, commerce, etc.
For Quesnay and all Physiocrats only agriculture (in general, all extraction from nature) was capable of producing a “produit net;” a net profit over and above the expenses of production, including the cultivators’ profit. This “produit net” he assumed to be 100 percent i.e., if 600L. were advanced, the product would be something over 1200L. (some went for taxes). Of this, 600L. would be needed for farmers’ profit, seed, cultivation expenses. The remaining 600L. would go as revenue to the proprietor.
The table and Quesnay’s explanation is developed showing that the production of the country depends upon how much is returned to the producers, or on land. Anything spent for sterile products disappeared and adds nothing to the national increase. If more than 50 percent of the revenue were spent on sterile products the national product would decrease. Thus, wise employment of capital is needed. He also assumed horses replaced oxen as he proposed in “Fermiers.”
He concluded by itemizing eight obstacles which he had assumed were absent. These are:
- Bad forms of taxation, bearing upon the capital of cultivators.
- Excessive cost of collection of taxes.
- Excessive luxury of decoration.
- Excessive expense in litigation.
- Lack of freedom (a) in internal trade in raw material and (b) in cultivation.
- Lack of export in raw materials.
- Personal harassing of the country people.
- Lack of return of the annual “Produit net” to the category of productive expenses (8, 7).
This table is a physician’s idea of a distribution process. As all wealth comes from production, this wealth flows through the nation feeding the society (body) like the circulation of the blood (6). The table was the first attempt that had been made to see and analyze a national economy as a whole. The Marquis de Mirabeau, Quesnay’s first convert to Physiocracy, called the table the third great invention of political societies, the result of the first two inventions, writing and money (10).
Nature was the only resource capable of being productive. This resource produce not only the raw materials and provisions necessary for the industry and commerce and survival of man (food); but was also capable of yielding in addition to the subsistence of laborers and remuneration to its proprietors, a surplus profit for the owners of the resources; the “produit net.”
The sterile class was separated from producers on the basis that they produced no surplus profit. They only changed the form or transferred the products of nature from place to place. The proprietary class, however, was very important. They provided the capital necessary to produce the “produit net,” and the fixed capital provided by them could be almost equal to the value of the land itself. The Physiocrats therefore wanted to encourage not only the development of a class of rich agricultural entrepreneurs but also to facilitate the general flow of capital to agriculture (14).
In order for capital to flow to agriculture it must be free to do so. This was Quesnay’s fifth cause of decay. Capital could in a sense be equated to labor and labor, the Physiocrats, thought, was to be undistributed and unfettered and the fruits of labor guaranteed to the possessor. This in turn made private property sacred. For this freedom to exist there must be freedom of exchange, of commerce, and of competition with no monopoly or monopoly privileges.
Quesnay had observed on his estate that if the price of land products increased the revenue of his estate would increase. This probably led to the inclusion in Physiocratic doctrine the concept of the “good price” (le bon prix), with the freedoms. As agricultural prosperity rests in the last analysis on a price in excess of production cost, there must be a “good price.”
The “good price,” they thought, would best be brought about by an increase in consumption. This increase in consumption would be best accomplished by freedom from tolls and prohibitions. Free commerce and free competition would result in equal prices between the provinces of France, if commercial routes were improved. Above all, export must be at all times free so the lowest price possible would be the world price (14). Such was the Physiocratic argument for free industry, trade, commerce, capital movement, and labor. All of which would increase the “produit net.”
The Physiocrats were the revolutionaries of their time. They were attempting to correct the financial condition of France. To do this there would have to be a complete change in the tax structure. Their central economic doctrine was the “produit net” produced in agriculture or by land. As this net is the only true revenue of a country only it should be taxed. Other taxes were to them superfluous as they would be passes back to the landowners. Therefore the Physiocrats proposed their “import unique” or single tax- tax on land to pay all government expenses.
However, they were not revolutionaries to the extent that they advocated the overthrow of their monarch. After all, most of the Physiocrats were landed noblemen. They did favor a strong government but a government that left industry, agriculture, and commerce alone. To them the idea was perhaps a legal despot that had under his jurisdiction both the legislative and executive functions of government. This form of government would be the most prompt and effective to introduce new policy (3).
The policy of the Physiocrats was never adopted in France but was tried by Carl Friedrich, Margrave of Baden, in his own Duchy (7). In France itself the writings and teachings of the Physiocrats was tolerated and somewhat accepted until the fall of Turgot in 1776. Physiocracy, and Quesnay, at its height had many influential followers and sympatherizers; notably Marabeau, Turgot, Dupont de Nemours, Mercier de la Riviere, Le Trosne, Saint-Perauy, Baudeau, Roubaud, and outside of France the margrave of Baden and Gustavus of Sweden were followers.
Later writers in economics tended to discredit the Physiocrats. Adam Smith wrote that “the capital error of this system seems to lie in its representing the–(sterile)- class as altogether barren and unproductive” (10). Gray in writing about the “tableau” states that it is “now perhaps better reduced to an embarrassed footnote” (5). Gray is being rather unjust. The Physiocrats did turn attention from the phenomena of commerce to an analysis of production and transformed the study of wealth to a science. They gave us the first scientific doctrine of economics in a systematic form and were the first to attempt to see and analyze a national economy. In so doing they introduced the rallying cry of coming classical economists- “laissez-faire.”
To the Physiocrats nature was the source of all wealth. Therefore the role of statesman or government became to ascertain and protect from encroachment the laws of nature. This, plus the freedoms they advocated, led the Physiocrats to their admonition “laissez-faire et laissez passer”- “let things alone, let them take their own course.” (1).
(1) Bogart Ernest. “Physiocrats” under “Economics” in Encyclopedia Americana, Vol. 9:558. Americana Corporation, New York, 1955.
(2) Encyclopedia Britannica. “Economics.” Vol. 7:925B. Encyclopedia Britannica, Chicago. 1955.
(3) ___________. “Physiocratic School.” Vol. 17:885-6. Encyclopedia Britannica, Chicago, 1962.
(4) ____________. “Franco’s Quesnay.” Vol. 18:847-8. Encyclopedia Britannica, Chicago, 1962.
(5) Gray, Alexander. Development of Economic Doctrine. Longmans-Green, London, 1934.
(6) Heilbroner, Robert L. The Worldly Philosopher. Revised Edition. Simon & Schuster, New York, 1961
(7) Higgs, Henry. The Physiocrats. MacMillan & Co., London, 1897
(8) Quesnay, Francois. Tableau Oeconomique in Monroe, Arthur E., Ed. Early Economic Thought. Harvard Univ. Press, Cambridge, 1924.
(9) Roll, Eric. A History of Economic Thought. Third Edition, Prentice Hall, New York, 1961.
(10) Smith, Adam. The Wealth of Nations. Book IV, chapt. IX. Modern Library Edition, Random House, New York. 1937.
(11) Turgot, Ann Robert Jacques. Reflections on the Formation and Distribution of Riches. MacMillan & Co., London 1898.
(12) Ware, Norman J. “The Physiocrats: A Study in Economic Rationalization” in American Economic Review. Vol. 21:607-19. American Economics Association, Evanston, Illinois. 1931.
(13) Weulersse, Georges. Le Mouvement Physiocratique en France. F. Alcan, Paris, 1910.
(14) ____________. “Physiocrats” under “Economics” in Encyclopedia of The Social Sciences. Vol. 5-6:348-51. MacMillan & Co., New York, 1934.
(15) ____________. “Francois Quesnay” in Encyclopedia of the Social Sciences, Vol. 13-14:22. MacMillan & Co., New York, 1934.