Physiocracy: The 18th-Century Economic Theory Explained
What is Physiocracy?
Physiocracy was an 18th-century economic theory that emphasized the importance of agriculture and land as the primary sources of wealth. Physiocrats believed in a natural law governing economic performance, independent of human will, but which could be studied and used for human benefit. They asserted that if there were no government intervention, the economic system would function properly. This belief stemmed from their view that only agriculture produced a surplus beyond what was needed for its own maintenance, unlike other branches of activity.
The Single Tax and Free Trade
Physiocrats advocated for a single tax on land and the abolition of mercantilist policies. They believed that all wealth originated from land, and therefore, the tax burden should fall solely on landowners. Their general inclination was towards free trade, as they saw state intervention as disruptive to the essential natural order of the economy. This led to the famous phrase “laissez-faire, laissez-passer” (let it be, let it pass), which maintained its influence for a century.
The Role of Agriculture
Physiocrats viewed manufacturing as sterile, failing to recognize its potential for growth, likely due to the limited industrial development of their time. This oversight led to an emphasis on physical productivity over value productivity. They believed that the net product, or surplus, generated by agriculture was the true measure of societal wealth, representing the price for using this wealth-creating resource.
François Quesnay and the Physiocrats
François Quesnay, physician to Louis XV, was the founder and principal theorist of physiocracy. He published the Tableau Économique in 1758, outlining the flow of wealth between different social classes: the productive class (farmers), the sterile class (artisans and traders), and the proprietors (nobility, clergy, and landowners). The Physiocrats defended their doctrines through a newspaper called The Ephemeris of the Citizen School.
The Rise and Fall of Physiocracy
The Physiocratic school emerged and flourished exclusively in France for a relatively short period, from approximately 1750 to 1780. These thinkers recognized the interconnectedness of economic sectors and studied the functioning of unregulated markets. While the classical school later corrected their view on the sterility of manufacturing, their emphasis on laissez-faire was adopted and developed by Adam Smith and his followers.
The Legacy of Physiocracy
Quesnay, drawing from his medical background, likened the circulation of wealth among social groups to the circulation of blood. He explained how wealth was distributed to the sterile class through the purchase of manufactured goods. The Physiocrats’ attempts to analyze and understand the economic system’s workings laid the groundwork for modern macroeconomic policy analysis, such as fiscal policy and the impact of capital mobility on exchange rate regimes.
Key Contributions of Physiocracy:
- Emphasis on agriculture as the source of wealth.
- Advocacy for free trade and a single land tax.
- The concept of laissez-faire.
- Analysis of the flow of wealth between economic sectors.
- Early attempts at macroeconomic modeling.
The Three Rules for Maintaining the Natural Order:
- The right to property.
- Economic freedom (laissez-faire, laissez-passer).
- Security in the enjoyment of these rights and freedoms.