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PHYSIOCRACY

François Quesnay

Physiocracy
1. 2. 3. 4. 5. 6. 7. Introduction to Physiocracy The Environment of Physiocracy Main Points of Physiocracy Precursors François Quesnay Anne Robert Jacques Turgot Conclusion

1.Introduction to Physiocracy

What is Physiocracy?
• Physiocracy was the first systematic school of economics, represented a reaction to mercantilism.

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

• 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.

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

. • The core of the system described by the Physiocrats is one of the "power of nature." a system based on a natural order. • It was the Classical Economists who provided the intellectual map and the justification for capitalism and market economies.• The ideas of the Physiocrats lay the foundation for Adam Smith and the Classical Economists.

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

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

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

Where? Only France .

investment discouraged by taxes. vs England which had been transformed into capitalist farming system . 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.2. many feudal/mercantilist imposts on trade (like England) • Stagnant agriculture.

• The Physiocrats represented a reaction against the policies of Jean Baptiste Colbert [16191683].• The Physiocrats arose in reaction to Colberg and were led by Franscois Quesnay. .

” 14 . protective tariffs and is regarded as a archetypical “Mercantilist. • Colbert advocated strict regulation of commerce.• Colbert was served as a minister in the Court of Louis XIV.

the well being of society could be increased.• As a reaction against the extreme mercantilist policies of Colbert. • The believed that if the order positiv (positive order or rule of man) could be made consistent with order naturel (the order of nature not to be confused with the state of nature). the Physiocrats advocated laissez faire policies. .

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

• While they lasted only a brief time. • Years of wars and extravagance of the monarch left a society ready for a new perspective that the Physiocrats provided.• The historical background of the Physiocrats would be a social history of France. their ideas were powerful and left a permanent influence on the development of economic thought .

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

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

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

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

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

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

extravagances in the court. There was a desire for reform.] • Industry/commerce added little to nat’l income due to regulation and protection. etc. The agrarian revolution in England *farming on a larger “scale”+ was more developed than in France. . • Under policies of Colbertism the French economy was highly regulated.• England was “ahead” of France in industrial revolution and output. there were excesses by both Louis XIV and XV [wars.

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

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 26 .

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

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

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

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

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

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: .• Founder Quesnay. doctor to Royal Court • Underlying concepts of: – “flows”.

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

• And he reacted against monopoly. • Mellon believed that the necessaries of life were more important than gold.Jean François Melon (1675-1738) • was a mercantilist but provided some of the rootsof Physiocracy • was a secretary to John Law. .

John Law (1671-1729) • Law was the son of a goldsmith. He became a Financier in the Mississippi Company that collapsed. • Law believed in the use of money policy to manage the economy. money can be created by banks. born and educated in Edinburgh. • He identifies the diamond water paradox and saw same solution as Smith. . He escaped. He shot and killed A rival in love affair then escaped to Europe. went to Belgium eventually became a professional gambler in Venice.

. • A major work was published in 1755. about 20 years after his death.Richard Cantillion (about 1680-1734) • Cantillion created something of a system of economics. he was a model builder and used abstract methods.

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

• Consideration of the flows among sectors of the economy. • Explain the adjustment of prices in international trade.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.

• It is these entrepreneurs who react to markets and generate a loose "general equilibrium. “matter” of all wealth. mechanical process that was constantly adjusting through individual pursuit of profits in a series of connected markets.• He started with land as the source. labour is the “form” that produces it. • The concept of the "entrepreneur" is associated with Cantillion in this regard." . • He saw the economy and society as a interconnected.

5. 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. Francois Quesnay (1794-1774) • Made a fortune as a court physician. 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) 40 .

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

.• The main document of Physiocratic doctrine was Quesnay's Tableau conomique. • Quesnay’s Tableau économique is 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. farmers and artisans. • The economy was divided into landlords. • Trade and industry perform an function but were seen as sterile in that they produce no net product. • A key idea of Physiocracy was that agriculture was the productive sector of an economy.

is divided between productive expenditure and s t erile e xpe ndit ure STERILE EXPENDITURE relative to industry. etc.P RODUC T IVE EX P ENDI T URE OFT HE EXPENDITURE relative to agriculture. Annual advances requir ed to p roduce a revenue 0f 600l are 600l REVENUE after deductio n of taxes. etc. Annual advances for the works of s t erile expe ndit ure are Annual revenue • Explaining this… .

50 Artisan 300.00 300.07 0.75 9.75 6 9.38 4.00 0.50 1.17 10 0.29 0.00 75.00 150.07 14 0.15 13 0.00 300.00 3 75.34 1.98 0.69 8 2.The “Tableau Economique” Previous harvest Rent to landlord Farmer buys tools to grow wheat Artisans buy wheat Period Farmer 0 600.00 37.69 2.00 37.69 2.50 18.15 0.59 11 0.00 75.04 0.04 15 0.34 9 1.75 9.59 0.00 150.50 18.17 0.34 1.15 0.00 1 300.07 0.38 4.04 0.50 5 18.17 0.00 2 150.29 0.02 599.38 7 4.29 12 0.00 4 37.02 Landlord buys wheat and “carriages” Surplus product goes to landlord as rent Recoups initial surplus .02 F/A Ratio Net Productivity A/F Ratio Landlord 600.59 0.

The “Tableau Economique” 2M to King Initial 2M 5M produced "Productive" Agriculture King & Court 1M spent on food 1M spent on "carriages" "Sterile" Manufact uring Payment 1M inputs .

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. 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.Basic Features of Physiocracy • Focus on production. input-output concepts) .

. 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. 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.Basic Propositions of Physiocracy • Agriculture only source of new value: – Land pre-dates man – For man to survive.

0 kilos steel .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.

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 .

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

• “Lost” until modern times (except for Marx) – Aggregate level of output depended on re-investment of net surplus: an investment-driven perspective – Contraction of net surplus means contraction of economy: an aggregate-demand perspective • Belief that agriculture only source of surplus • Development of input-output analysis hobbled by views on value • Politically unpalatable advice meant early downfall .Strengths & Weaknesses of Physiocracy • In many ways far ahead of their time: – Concept of surplus – Input-output concepts • Major advance over previous economists.

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. .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.

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 .

0 kilos steel • Benefits of improved technology – 16% reduction in necessary inputs – 50% increase in net product .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.

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

Strengths & Weaknesses of Physiocracy • In many ways far ahead of their time: – Concept of surplus – Input-output concepts • Major advance over previous economists. • “Lost” until modern times (except for Marx) – Aggregate level of output depended on re-investment of net surplus: an investment-driven perspective – Contraction of net surplus means contraction of economy: an aggregate-demand perspective • Belief that agriculture only source of surplus • Development of input-output analysis hobbled by views on value • Politically unpalatable advice meant early downfall .

Anne Robert Jacques Turgot (1727-1781) • • • • Born to nobility 1774 became Finance Minister Implemented numerous reforms Advocated: – Taxing the nobility.6. stop taxing subsistencelevel peasants – People should be free to choose their occupations – Allow religious liberty – Universal education – Create a central bank – Increase saving to increase investment • Got a lot of people angry with him! 57 .

the Pysiocrats had certain things confused. a Physiocrat. but he was soon fired. • Adam Smith recognized the importance of the Tableau Economique. • From the modern perspective.7. Conclusion • The Pysiocrats had an important social impact. . Reduced governmant controls on the economy. • The French finance minister. • Their division of society into classes represented useful structural analysis.