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PHYSIOCRACY Begins in 1756. OVERVIEW OF THE PHYSIOCRATS. A reaction to mercantilism and to the feudal system of old regime in France. Too detail regulation retard development. Internal toll, taxes and tariffs restrict movement of goods. PHYSIOCRACY.
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OVERVIEW OF THE PHYSIOCRATS • A reaction to mercantilism and to the feudal system of old regime in France. • Too detail regulation retard development. • Internal toll, taxes and tariffs restrict movement of goods.
PHYSIOCRACY • Appear in France, at end of mercantilism period. • The school roughly begins in 1756, when Quesnay published his work Tableque Economique.
MAJOR TENETS OF PHYSIOCRATIC SCHOOL • Natural order • Laissez-faire • Emphasis on agriculture • Taxation of the landowner • Interrelatedness of the economy
Natural Order • Introduced the idea of natural order. • Term physiocrat itself means “rule of nature”. • Law of nature governs human society. • All human activities should be brought in harmony with these natural laws. • In economy – the law of nature is that individuals have the right to enjoy the fruits of their own labor.
Laissez-faire • Means “let people do as they please without government interference.” • Government interference should only to the extent protecting life and property and to maintain freedom of contract. • Physiocrats opposed feudal, mercantilist and government restriction. Favor freedom trade at home and abroad.
Emphasis on agriculture • Industry, trade and profession were useful but sterile. • Only agriculture was productive, because it produces surplus.
Taxation of landowner • Only landowner should be taxed. • Direct tax on the landowner was preferable to indirect tax, because they were passed along to others.
Interrelatedness of the economy • Quesnay, in particular and other physiocrats analyzed the circular flow of goods and money within the economy.
WHO BENEFIT FROM PHYSIOCRATIC SCHOOL? • The peasants. • Due to their idea of Laissez-faire, physiocrats were promoting industry. • They favored capitalistic farms. • Their emphasis on agriculture and free internal trade helped big producers.
PHYSIOCRATS CONTRIBUTIONS • Before industrial revolution, industry had low productivity. • Promote capitalistic economic development. • Emphasis production rather than exchange as source of wealth. • They support direct tax (on landowners). • They argued that capital accumulate through consumption of the wealthy.
WEAKNESS OF PHYSIOCRATS • Several ideas were incorrect:- • Was wrong to consider industry and trade as sterile • Only landowners were taxed because it was assumed that only land yield surplus. • Wealthy industrialist did not pay tax because physiocrats do not consider them as contributor to wealth
LASTING CONTRIBUTION • Physiocrats tax concept left a long legacy. • Today tax shifting and incidence is an important part of applied macroeconomics. • Physiocrats examined the society as a whole and analyzed laws that governed the circulation of wealth and goods. • They founded economics as a social science.
Quesnay’s economic table is a precursor to: • Economic flow diagram and national income accounting. • The law of diminishing returns (Turgot)
FRANCOIS QUESNAY (1694-1774) ANNE ROBERT JACQUES TURGOT (1727-1781) Son of a landed proprietor. The founder and leader of physiocratic school. A doctor and a surgeon Born of a noble family of Normandy. Peak of his career, he became finance minister of France. CONTRIBUTIONS: *Society as physical organism. *Circulation of wealth and goods was like blood in the body. *Man made law and natural law should be in harmony. *1758 he constructed Tableau Economique – circular flow of goods and money. Smith, Marx and Keynes pays tribute to Quesnay. CONTRIBUTIONS: *Introduced anti-feudal and anti-mercantilist in keeping with physiocratic ideas. *Greatest contribution – presenting the law of diminishing returns. *This doctrine was later used in the analysis of rent by David Ricardo, Malthus, and Edward West.
FRANCOIS QUESNAY (1694-1774) • Son of a land proprietor. • Founder and leader of Physiocratic School. • Trained physician – skill in medicine and surgery. • In 1750 became more interested in economic than medicine after meeting Gournay.
Quesnay’s ideas… • Society is like physical organism. Circulation of wealth and goods in the economy was like the circulation of blood in the body • Agriculture is the only source of wealth. • Manufacturing and commerce were sterile.
Quesnay’s ideas… • Believed that laws made by people should be in harmony with natural laws. • Tableau Economique was constructed for the King of France in 1758 and revised in 1766. • Their systematic analysis of the flow of wealth later came to be called macroeconomic basis. • The table was a predecessor of the input-output analysis which was introduced by Leontief in 1930’s. • Smith, Marx and Keynes paid tribute to Quesnay
TABLEAU ECONOMIQUE • Traces spending and revenue received by farmers, landlords and manufacturers/merchants. • He assumed that landlords own the land and cultivation was done by tenant farmers.
The society was divided into 3 classes: • Productive class • (Farmers and Agriculture labors) • Proprietary class • (Landlords) • Sterile class • (Manufacturers, Artisan and Merchants)
The tenant farmers were therefore seen to be the productive class. The product they create not only for themselves but to satisfy the needs of landowners (King, church, public servant. and others who depend on the income of landowner) and the sterile class (manufacturers and merchants) • The economy was described in a flow .
