A Companion to the History of Economic Thought - Chapter 5 ppsx

5.2.1 Economic policy, the price of grain, and taxation In the papers written in the years 1756–7, Quesnay was busy with economic government, defined thus: The state of the population and

C H A P T E R F I V E Physiocracy and

French Pre-Classical Political Economy

Philippe Steiner

5.1 INTRODUCTION

The final part of Louis XIV’s reign saw the development of major economic works with the contributions of Pierre de Boisguilbert (1646–1714) and Sébastien

le Prestre, Marshall Vauban (1633–1707) A member of the local administration, the former wrote several pamphlets and booklets on economic administration (taxation, grain trade, and money) in which several market mechanisms were studied with great insight (Boisguilbert, 1966) Following the Jansenist approach – according to which a good society may work well without virtuous behavior, since self-love is enough – Boisguilbert explained that wealth did not result from benevolence and charity, but from self-interest (Faccarello, 1986) Since corn does not grow like mushrooms, the price paid to the farmer should be high enough to

cover the cost of production With the concept of proportionate prices (prix de proportion), Boisguilbert pointed out that markets were connected by money

flows: an expense for the buyer of grain is a revenue for the farmer Thus, lowering the price of corn – a usual claim in periods of grain shortage – was a danger-ous economic policy, since farmers would stop producing corn More generally, Boisguilbert warned the government that any active policy on the grain market (for example, buying corn abroad) would give birth to anticipations (a likely shortage) and would prevent the policy from being effective (buyers eager to obtain a stock of grain would increase their demands, prices would rise, and a shortage would be created) Free trade thus appeared to be a sound policy In line with English political arithmetic, Marshall Vauban, a great military engineer,

grounded his proposal for a new fiscal system, known as La dîme royale (Vauban,

1992 [1707]), on calculations He suggested that an increase in the military and economic power of the king could be achieved together with an increase in the well-being of the population through an appropriate taxation system: the state would collect a moderate percentage (from 5 to 10 percent) of the agricultural produce, whereas commerce and industry would contribute a very small amount

to the royal revenues

These reflections on economic affairs likely were related, on the one hand, to the poor situation of the realm (with a series of bad weather conditions in 1693–4, 1698–9, and 1709–10, accompanied by famines and a huge mortality –

up to one-tenth of the population) and, on the other, to continuous warfare with the continental power (the Austrian Empire) or with the maritime power (The Netherlands) The situation in the 1750s was again marked by military conflict – the Seven Years’ War (1756–63) between France and England – but, as recent French historiography has demonstrated (Perrot, 1992; Théré, 1998), economic affairs were then a public concern

First, several journals appeared, such as the Journal Œconomique (1751–72), the Journal du commerce (1759–62), the Journal de l’agriculture, du commerce et des finances (1765–74), and the Ephémérides du citoyen (1767–72; second series 1774–6) The first

promoted agronomy and pushed for more rational husbandry; and the second,

in which one may find influences from Cantillon’s work, was devoted to the science of commerce; whereas the last two were partially or completely domin-ated by the physiocrats Secondly, the Intendant du commerce, Jacques Vincent

de Gournay (1712–59), gathered a group of young men, including François Véron

de Forbonnais (1722–1800) and Anne-Robert-Jacques Turgot (1727–81), in order

to promote the study of commerce Finally, the number of economic publications exploded after the middle of the century (table 5.1), the authors coming from all of the enlightened strata of French society: out of 1587 authors during the period 1750–89, about 10 percent were landowners, farmers, or manufacturers,

10 percent were ecclesiastics, and 6.5 percent were military officers, but the vast majority came from intellectual strata, with educators and men of letters (14.5 percent), lawyers, judicial officers, or financial magistrates (21 percent), or doctors and surgeons (6.5 percent)

This very active period in French political economy was dominated by François Quesnay and Turgot, whose work we will now consider in greater detail

Table 5.1 Ten-yearly movements in economic publications, 1700–1789

1700– 10 1710–20 1720–30 1730–40 1740–50 1750–60 1760–70 1770–80 1780–89

Source: Based on Théré (1998), table 1.2.

5.2 QUESNAY AND THE ECONOMIC THEORY OF

AN AGRICULTURAL KINGDOM

François Quesnay (1694–1774) began his career as a surgeon, and then became

a physician, working for the nobility and finally at the court in Versailles, where

he was the protégé of Mme de Pompadour, the favorite of the king, Louis XV (Weulersse, 1910) He was well established in his profession, a member of the Académie des sciences (Paris) and of the Royal Academy of Sciences (London), and author of several books on medical subjects Why he left this domain to become an economic thinker remains unclear

The first step came with a new, enlarged, edition of his Traité de l’œconomie animale (Quesnay, 1747), in which he introduced considerations related to the

theory of knowledge and rational behavior He critically examined major philo-sophers of the day (Nicolas Malebranche and John Locke) in order to deliver his own interpretation of Condillac’s sensualism, to which he added the con-cept of order borrowed from Malebranche’s Cartesianism This approach was

reassessed in his first contribution to the Encyclopédie (“Evidence,” 1756), in

which Quesnay stressed the difference between self-interest and enlightened self-interest or rational behavior, the one needed amongst landlords and the administration in order to reach the state of bliss

The second and decisive step came when Quesnay wrote five papers (“Fermier,”

“Grains,” “Hommes,” “Impôts,” and “Intérêt de l’argent”) to be published in the

Encyclopédie: due to difficulties with the royal censorship, only the first two

papers were published; nevertheless, all of them circulated and the last one

appeared in the Ephémérides du citoyen in 1765 Quesnay then met the Marquis de Mirabeau (1715–89), whose fame was high after the publication of L’ami des hommes

(1756–60), and turned the populationist into a fierce advocate of the new science

They jointly wrote two major books (Théorie de l’impôt in 1760 and Philosophie rurale in 1763) and a school grew up, with Pierre-Samuel Dupont de Nemours (1739–1817), l’Abbé Baudeau (1730–92), whose journal (Ephémérides du citoyen)

became the journal of the school, and Pierre-Paul le Mercier de la Rivière (1727–

1801), whose book (L’ordre naturel et essentiel des sociétés politiques, 2001 [1767] )

gave a general and methodical exposition of the whole doctrine At their height, the physiocrats were sufficiently influential to promote a free trade policy, with

an Act passed in 1764 concerning the freedom of the grain and flour trade

5.2.1 Economic policy, the price of grain,

and taxation

In the papers written in the years 1756–7, Quesnay was busy with economic government, defined thus:

The state of the population and of the employment of men is therefore the principal matter of concern in the economic government of states, for the fertility of the soil, the market value of the products, and the proper employment of monetary wealth

are the results of the labour and industry of men These are the four sources of abundance, which co-operate in bringing about their own mutual expansion But they can be maintained only through the proper management of the general

administration of men and products; a situation in which monetary wealth is valueless is

a clear evidence of some unsoundness in government policy, or oppression, and of

a nation’s decline (Quesnay, 1958, p 512; Meek, 1964, p 88; emphasis in the original)

He strongly rejected the economic policy of the French kingdom, a policy too close to the commercial interest, what Quesnay labeled the merchant’s system

(le système des commerçants, Quesnay, 1958, p 555), with monopolies, chartered

companies, and the like (ibid., p 523) Mesmerized by Amsterdam, with its com-mercial and monetary wealth, French governments since the time of Colbert, the great minister of Louis XIV, had been misled Dutch economic government did not fit the French situation, claimed Quesnay, since The Netherlands was a com-mercial republic with few lands, whereas France was an agricultural kingdom, a large country with a rich soil, in need of an economic policy that favored a large

volume of agricultural production that could be sold at a good price (bon prix).

In order to ground his view on economic policy, Quesnay reconsidered some

basic theoretical issues In “Hommes” and in chapter VII of the Philosophie rurale,

he made a distinction between use value and monetary value, the latter being the true subject matter of political economy Wealth is then defined as the goods ex-changed on the market against money, in conformity to their value (ibid., p 526); however, he had no explicit theory of value and price formation He noted that use value cannot explain market value, since the latter is continuously changing whereas the former does not, but he contented himself with stating that prices were evolving according to a large number of unspecified circumstances (ibid.,

p 526) He later urged his adversaries to write an “Essay on prices” that would offer “a fundamental contribution in order to close the discussions in this domain” (ibid., p 750) Quesnay overcame the lack of a theory of price by presenting

a large number of specific prices combined in an insightful comparison between two economic governments, autarky and free trade (Vaggi, 1987; Steiner, 1994, 1998b), the core of which is given in two tables, here presented in a slightly modi-fied form (table 5.2)

In a manner reminiscent of Cantillon’s definition of the entrepreneur (Cantillon,

1997, pp 28–33), Quesnay’s farmer has to assume certain costs (the fundamental price or the production cost plus rent – accordingly, the fundamental price is a production price, since it contains a part of the net surplus) with uncertain rev-enues, depending on the climate and the actual economic policy Given a stable distribution of the climate over a period of five years, the model focuses on prices and revenues, the economic policy being considered as the independent variable

In the absence of free trade, current market prices within the nation differ from international prices and, except in the case of a bad harvest, the former is below the latter since the nation is rich and fertile; this situation is detrimental to both the seller (the farmer, since the merchant is left out) and the buyer (the final consumer) The consumer is supposed to buy the same quantity of corn (three units) each year in order to fulfill his basic needs Accordingly, the current sum

spent, or the consumer price, is equal to the quantity times the market price (pt)

and the average cost of one unit of corn for the consumer, or the average consumer price, is 1/5 Σpt = 17.4 livres, according to Quesnay’s data The situation is sub-stantially different for the producer, since his annual revenue depends on prices

and on the quantity produced (qt); accordingly, the average revenue that he gets

for one unit of corn, or the average producer price, is Σptqt/Σqt = 15.48 livres The same unit of corn costs more to the consumer than it yields to the producer; this is due to the price–quantity relationship, which is the core element of the model Quesnay’s price–quantity relationship is a King–Davenant relation, with a weaker price elasticity (Steiner, 1994), which means that prices overreact to a fall in production Finally, in the situation of autarky, net product (annual gross revenue minus fundamental price) is positive but, on the one hand, there is an inverse relation between net product and quantity produced and, on the other hand, producers and consumers have a direct opposition of interest: when the crop is plentiful, the consumer enjoys abundance and low prices, which means a loss for the producer, whereas the producer gets a large surplus when the crop is bad – that is, when there is a shortage and a high price

Under free trade policy, with the broadening of the market, a different price–

quantity relationship is at work together with a higher current price (p′t), except

in the case of a bad harvest Nevertheless, the average consumer price is not substantially modified (from 17.4 livres to 18 livres) due to the disappearance of the very high price that was formerly associated with bad harvest Meanwhile, the average producer price jumps from 15.48 livres to 17.6 livres, and the net product is greater, with 50 livres for 5 years instead of 17 livres formerly Finally, consumers and producers have the same interest in a plentiful harvest, since the inverse net product–quantity produced relation has disappeared with the King– Davenant price–quantity relation

Without the help of a theory of price, Quesnay produced a fine piece of eco-nomic analysis showing the benefits associated with free trade The improvement

Table 5.2 Economic government: autarky and free trade compared

Autarky Free trade Fundamental Quality Quantity Market Net surplus Market Net surplus price of the produced by prices, p t (in livres) by prices, p’ t (in livres) by (in livres) climate unit of land, q t (in livres) unit of land (in livres) unit of land

Source: Based on Quesnay (1958), pp 532–3.

in the situation of the farmer comes from a small increase in the average price of corn, which means that wages have no reason to rise substantially, permitting the export sector to remain competitive abroad Furthermore, if one takes the size

of the net product as the yardstick for evaluating policy, the system of merchants appears to be disastrous: in order to get a small net product from commerce, based on a low cost in manufacturing and in maritime commerce (Steiner, 1997) – that is, with a low price for corn and low wages – the French kingdom deprives itself of the large agricultural net product associated with a free trade policy According to Quesnay, farmers constitute the core of the productive class, since the level of production depends on the size of their capital once the correct economic policy is implemented In “Fermier,” Quesnay explained that when farmers are poor (do not have capital of their own), they cannot produce with a

good technique (grande culture), which is characterized by a net product to

circu-lating capital ratio equal to 100 percent, and they must content themselves with a

less productive technique (petite culture), with a lower ratio equal to 35 percent.

The productive sector (agriculture) must be given the priority over the sterile one (manufacture), and thus Quesnay asked for institutional reforms in favor of this class, because their wealth was the basic fuel for the recovery of the French nation In a period during which France was involved in a costly war against England, this policy would appeal to a kingdom in need of the financial re-sources necessary to cope with the high costs of maritime and continental wars (Steiner, 2002) Nonetheless, it raised some important problems related to the distribution of wealth

Rent is determined though a bargaining process between the landlord and the farmer, but Quesnay did not introduce any specific revenue for the farmer In his papers, farmers are supposed to pay both the taxes (whether to the state or to the Church) and the rent out of the net product; a profit could be conceived as the remaining part of the net product accruing to the farmer In the following period, Quesnay went in a different direction with the single-tax doctrine

This fiscal doctrine was aimed at diminishing the economic and social costs of fiscal administration, notably for the people living in the countryside, through a tax directly paid by those who were the effective taxpayers, the landlords Quesnay’s single tax doctrine was a bold policy according to which farmers would pay the whole net product to the landlords, so that the latter could pay all of the taxes to the king and the Church Then farmers would no longer fear the tax administrators and their capital would be free of any threat, as would

be the agricultural net product that was so important for restoring the nation The theoretical cost of this solution was important: from an analytic point of view; this meant that there was no room for a genuine concept of profit, since all of the surplus was paid as rent to the landlords In this respect, the only possible remaining profit was the temporary profit that the farmer would retain as long as the productivity of his farm was enhanced, but he had yet to bargain anew his

lease with the landlord (Meek, 1964; Eltis, 1975) In Philosophie rurale, Quesnay, followed by Dupont’s De l’importation et de l’exportation des grains (1910 [1764]),

used this temporary profit argument to explain how farmers would find the necessary capital for progressively restoring the agricultural sector: as soon as a

free trade policy was implemented, farmers would receive a larger revenue while paying rent on the former and less profitable basis; this extra revenue could be invested, permitting them to use more efficient techniques (Eltis, 1996)

The political cost of this solution was high, since it demanded that landlords, many of whom were members of the nobility, pay the taxes Indeed, Quesnay carefully explained that his tax system was the best solution for them, since, directly or indirectly, taxes were being paid by them It is difficult to believe, how-ever, that they would have welcomed such a proposal, at least without any political compensation in terms of the rights of citizenship and political representation

It is true that the physiocrats were looking for such political representation (Charles and Steiner, 1999), but they were not very successful in this respect

5.2.2 The Tableau économique: capital and

the circulation process

Quesnay devoted much effort to understanding the functioning of a large

agricul-tural kingdom in which the government has implemented free trade: the Tableau économique was the result of this effort.

In line with his theory of knowledge, Quesnay considered that genuine eco-nomic science should be grounded on sensations; or, more precisely, on facts grasped through a quantitative dimension In this respect, Quesnay was close to Petty’s political arithmetic, in which the latter characterized his approach by the use of weights and numbers instead of superlatives

Empirical relevance was a methodological prerequisite for accurate economic calculations, out of which evidence could make its way through the misleading arguments that vested interests often spread about during economic debates

As Quesnay put it in the preface of the Philosophie rurale, “Calculations are to the

science of political economy, what bones are to the human body.” Conscious of the specificity of the social sciences, he added a rhetorical dimension: “It takes calculations to critique calculations” (Quesnay, in Mirabeau, 1763, pp xix–xx) Nevertheless, calculation was limited to arithmetic and geometry; in his book on mathematics Quesnay (1773, vol 5, pp 26–7) explained that calculus was a meta-physical tool, free of any sensationalistic basis, and useless in political economy Empirical accuracy and rhetorical advantage were important aims, but Ques-nay added a theoretical one to his approach as far as his economic table was concerned In the final remark in his first edition, he told the reader that, by hypothesis, agricultural techniques permitted the net product to circulating capital ratio to reach 100 percent but, whatever the actual ratio, wrote Quesnay, the principles at work in the table were correct (Quesnay, 1958, p 673) As in Ricardian

“strong cases,” the economic table was constructed to explain the functioning

of basic principles Which ones? Two kinds of economic table can be distingu-ished (Cartelier, 1984; Herlitz, 1996), even if, as indicated above, one can make

room for a third kind using the disequilibrium approach in Philosophie rurale,

“Premier problème économique” (1766) and “Second problème économique” (1767) (Eltis, 1996) The first kind is given in the three successive editions of the zig-zag

Table 5.3 Two economic tables: the zig-zag (1758–9) and the formula (1765)

The zig-zag

Productive

expenses

Landlords’

expenses

Sterile expenses Revenue

Annual

advances

Annual advances

The arithmetic formula

Productive class

Landlords Sterile

class 2

1

e

2 Total: 5

Total: 2

formulated in the years 1758–9; the second is limited to the “Analyse de la formule arithmétique du tableau économique.”

In the zig-zag (table 5.3), the major concern was spending The formalization shows how the rent paid by farmers to landlords (600 livres) is successively received and spent by two other classes (the agricultural or productive class and the artisan or sterile class), giving rise to the same amount of net product (600 livres) The initial expenditure of the landlords is divided into two equal sums (300 livres), one for the luxury consumption of food and the other for the luxury consumption of furniture, clothes, and the like Then, the sterile class spends half

of the money received (150 livres) to buy food and raw materials from the pro-ductive class; the other 150 livres is used to reconstitute the capital of the sterile class, eventually with some goods being bought abroad (Meek, 1964) The pro-ductive class spends 150 livres to get manufactured goods from the sterile class, whereas the 150 livres that are left are spent within the sector The two classes go

on spending half of the money received until all of the money is finally spent When this spending process is complete, the gross total revenue received by the productive class (300 livres from the landlords and 300 livres from the sterile

class) is equal to the circulating capital (or “annual advances” in Quesnay’s language) of this class; consequently, the reproduction of the capital generates a net product of an equal amount, as shown in the central column of the table

In line with Keynesian insights (a multiplier equal to two), Quesnay showed that the sums spent by the landlords are crucial: the various classes are related

by flows of money and, to use Michal Kalecki’s language, those in possession of money (landlords) earn what they spend, whereas others spend what they earn Nevertheless, as recognized by François Véron de Forbonnais (1767), who carefully studied this version of the economic table, the table is not correct as far

as the reproduction of capital is concerned In the table, the gross revenue (600 livres) and the net revenue (300 livres) of both the sterile class and the productive class are equal, a result clearly at variance with the principle of exclusive pro-ductivity of the productive class Aware of this fact, in his commentary on the table, Quesnay introduced an extra flow (300 livres) from the sterile class to the productive class in such a way that the latter obtain a net revenue equal to the initial amount of the net product (600 livres) This is a clear sign that the eco-nomic table cannot prove the exclusive productivity of one sector alone, but that this exclusive productivity was only an hypothesis – a weak one, according to many contemporaries (Galiani, 1984 [1770] )

Hence, the formula can be considered as an attempt to overcome the remain-ing difficulty in the zig-zag: how the reproduction of capital (circulatremain-ing and fixed capital, money capital) results from the monetary flows between the three classes At the outset, the productive class has two units of money, and has advanced ten units of fixed capital and two units of circulating capital; the sterile class has only one unit of circulating capital; this capital generates a gross pro-duction of five units of agricultural goods and two units of manufactured goods Then the productive class pays the rent or net produce to the landlords, with the two units of money The circulation process begins with (a) landlords spending half of their rent to get luxury food from the farmers (one unit) and (b) luxury goods from the artisans (one unit); thereafter, artisans buy one unit of agricul-tural produce for their food (c), while farmers reconstitute their fixed capital with one unit of manufactured goods (d), since this capital suffers from an annual depreciation of one-tenth of its value Finally, (e) artisans spend this unit of money buying one unit of agricultural produce in order to reconstitute their circulating capital

Summing up, the landlords have spent all the money received as rent in order

to consume; the artisans have sold two units of manufactured goods, and have spent a corresponding amount of money in order to buy food and to reconstitute their capital; the circulation process has thus allowed these two classes in the end

to get what they had in the beginning What about the productive class? They have sold three of the five units of the agricultural goods produced, they have bought the necessary manufactured goods in order to reconstitute their fixed capital, while the two remaining units of agricultural goods reconstitute their circulating capital Finally, the money capital is reconstituted as well, since they have two units of money equal to their gross revenue (three units) minus their expenses (one unit) Every form of capital is thus reproduced, in value and in use

value, by the class that formerly possessed it: the process of circulation has repro-duced the initial conditions of production

The effective spending of all of the money received by the various classes is a

crucial hypothesis; however, Quesnay adds a further hypothesis, since landlords have to spend half of their rent in each sector If they do not, if they spend more

in manufactured goods than in food, then, according to Quesnay, the reproduc-tion of agricultural advances cannot be achieved and a process of decline neces-sarily ensues Modern analysis does not confirm this point, since if artisans were

to go on spending all their money buying agricultural produce, agricultural revenue would be left unchanged and the only effect would be a modification of the proportion of both sectors in the economy (Cartelier, 1984, 1991)

It was a substantial tour de force to set out the circulation process of a whole

nation within three nodes and five lines It is no surprise that the formula has since attracted the attention of major theoreticians: Karl Marx, when he built his reproduction model (Gehrke and Kurz, 1995); Joseph Schumpeter, when he praised Quesnay for this first attempt to set forth the general equilibrium approach,

which he considered as the economists’ Magna carta; and Wassily Leontief, when

he modeled the American economy with his input–output table

5.3 TURGOT: TOWARD A THEORY OF A CAPITALIST ECONOMY

After brilliant academic studies, Anne-Robert-Jacques Turgot gave up his anti-cipated ecclesiastical career and became a member of the high governmental administration He was personally acquainted with Gournay, traveling with him during the years 1756–7; his first notes on trade, wealth, and money, and several entries (“Etymologie,” “Existence,” “Expansibilité,” “Foires,” and “Fondation”)

for the Encyclopédie date from that period Appointed intendant in Limousin, one

of the poorest parts of France, a position in which he remained from 1761 to 1774,

he became an emblematic figure of the reformer Nevertheless, he often stayed

in Paris and was well acquainted with the physiocrats, Dupont in particular, and other Parisian salons (he met Adam Smith during the latter’s stay in Paris

in 1765) through which he met Condorcet, one of his major intellectual heirs During this period, he wrote his major essays in political economy: on taxes

(Observations sur les mémoires de Graslin et de Saint-Péravy, 1767), on the grain trade (Lettres au Contrôleur général sur le commerce des grains, 1770), on money and interest (Valeur et monnaie, 1769; Mémoire sur les prêts d’argent, 1770), and his most comprehensive book, Réflexions sur la formation et la distribution des richesses (1766).

Louis XVI appointed him Contrôleur général and he served from August 1774 to May 1776: he reestablished the freedom of the internal grain trade, which had been suppressed by the former Contrôleur général (Abbé Terray), and he worked for the freedom of the labor market

A correct assessment of Turgot’s political economy must cope with his relation

to physiocracy Recent research emphasizes his differences with Quesnay’s polit-ical economy (Faccarello, 1992; Ravix and Romani, 1997), suggesting that Turgot was directly in line with classical political economy (Groenewegen, 1969, 1983b;