Unlike the mercantilists, Physiocratic thought developed over a short period (1756-1776) and only in the French context. It is a genuine school of thought with a master (F. Quesnay) and disciples.
Contrary to mercantilist thought, Physiocratic thought holds a significant place in economic theory. Through Quesnay’s economic table, this school of thought has had a profound influence on many economists. It has contributed to the development of national accounting and macroeconomics.
The study of Physiocracy is particularly interesting not only because of its importance in shaping economic thought but also, and above all, because of the relevance of some of its teachings today. It can help us understand some of the modern economy’s problems, such as famines and environmental degradation.
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Table of Contents
The Historical Context of Physiocracy
Physiocratic thought emerged in France before the Industrial Revolution as a reaction to mercantilism. French agriculture was in crisis due to mercantilist policies (Colbertism), which favored industry and foreign trade.
Low wheat prices, coupled with heavy taxation, led to an increase in uncultivated land and a rural exodus to the cities. In response to this worrying economic and social situation, Physiocratic thought developed with a focus on agriculture’s development.
The Physiocrats introduced two new ideas to the scientific community, which were precisely the opposite of the mercantile system: the existence of a natural order and the primacy of agriculture over commerce and industry.
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Agriculture: The Source of Wealth
Unlike mercantilists, the Physiocrats believed that a nation’s wealth did not depend on the quantity of precious metals it possessed but on the material goods necessary to satisfy the nation’s basic needs. Money was merely a medium of exchange.
According to the Physiocrats, the earth is the only source of wealth. Through his labor, man merely taps into the earth’s generosity. Industry only transforms existing wealth, and commerce transmits it. For them, true wealth must meet three conditions:
- Renewable: This means that it can be consumed without altering the principle of its reproduction. Therefore, non-renewable natural resources are not considered wealth by the Physiocrats.
- Salable: It must be exchangeable.
- Necessary for satisfying human needs: It should fulfill human necessities.
Agriculture creates wealth because it produces a surplus called the net product (the difference between produced wealth and consumed wealth is always positive: one quintal of seeds could yield a production of 100 quintals).
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The Natural Order of the “Economic Table”
The “Prince” must submit to the logic of the “economic table.” Quesnay’s ambition in his “table” is to describe the circulation of wealth among the different classes of society and thus reveal the “natural economic order.”
This table is often considered the origin of national accounting. It is more of a small macroeconomic model ahead of its time. Quesnay’s model is constructed from three classes defined by their relationship to the net product: the productive class, the proprietary class, and the sterile class.
Wealth, or net produce, is generated solely by agricultural labor, provided that “land advances” (investments) are made: upstream, the proprietary class and the sovereign must agree to make these advances (land reclamation, drainage of marshes, construction and maintenance of transportation infrastructure, purchase of equipment and raw materials, etc.).
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The agricultural net product will then constitute the reward for these “land advances” (investments) and will logically return, in the form of rent, to those who have made the advances, the landowners, and the sovereign. Wealth is then diffused among the different classes of society through the expenditures of each.
This diffusion process will only work if the circuit of expenditures is scrupulously respected, allowing land advances to be reconstituted and the agricultural product to be released again in the following period. Therefore, each class (especially the dominant classes of landowners and sovereigns) must respect this scheme, submit to the revealed economic order, and occupy the place and role assigned to them.
Similarly, it is in this ordering of the table that the Physiocrats call for a tax reform downstream, leading to the establishment of a single tax on land rent. This, too, is to convince the landowning aristocracy to conform to an economic order considered superior to their political power.
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In brief, the Prince and the classes that form his aristocracy must not subject economic activity to their whims but submit to and accept an economic order that supersedes their political power. They should then “let do, let go” (freedom of grain trade, for example).
Social Structures are Linked to Economic Structures
The classes of society other than the agricultural class are sterile classes. The Physiocrats distinguished three classes of variable importance:
- The sovereign class of landowners: Landowners do not directly participate in production, i.e., they do not create wealth, but they play a fundamental role in ensuring land advances. They live off the rents paid by the farmers.
- The productive class of farmers: This class creates wealth by cultivating the land.
- The sterile class: This class includes all individuals engaged in activities other than agriculture. They are considered sterile because they do not contribute to wealth creation; they only transform the products supplied by farmers.
Physiocratic Economic Policy
Physiocratic thought seeks to discover the means by which society can conform to the natural order, a necessary condition for prosperity. Like all normative economic thought, Physiocracy leads to an economic policy articulated around three axes:
- A liberal policy that favors exchange
- A policy of modernizing agriculture
- A fiscal policy that does not affect the conditions of reproduction
A Liberal Policy that Favors Exchange
Unlike mercantilists, Physiocrats recommend liberalism. They advocate for “laissez-faire, laissez-passer.” They promote competition and, consequently, emphasize the elimination of monopoly privileges, customs duties, and any measures hindering the free movement of goods. They develop means and infrastructures of communication (roads, canals, fleets, etc.).
Why this liberal policy? What is its justification?
This freedom of exchange is justified because it promotes the production of wealth. Indeed, in a larger (global) market, agricultural product prices are higher, stable, and non-fluctuating. These good prices encourage the production of wealth because the increase in agricultural product prices raises the net product.
A Policy of Modernizing Agriculture
As the only activity that produces wealth, agriculture must be the focus of economic policy. This policy should aim to modernize agriculture and ensure that the allocation of expenditures by landowners and the state favors this sector:
- Modernizing agriculture means replacing sharecropping with leasing, large-scale exploitations with small family farms, and using modern techniques and salaried labor instead of traditional practices.
- The allocation of expenditures by landowners and the state should favor the productive class and, consequently, the conditions of reproduction because any increase in expenditures for the productive class is considered an addition to the advances of that class, leading to increased wealth production and improved living standards.
On the other hand, excessive spending on the sterile class may reduce the amount of advances made by the productive class and, consequently, the total product.
The essential idea to retain at this level, which is still current, is that for the Physiocrats, the standard of living is linked to the conditions of wealth reproduction.
A Fiscal Policy that Does Not Affect the Conditions of Reproduction
For the Physiocrats, the taxation system is the first factor negatively affecting production. At that time, taxes were collected indirectly through leasing (rent collection was leased to financiers who paid advances to the state and were then reimbursed by the population with considerable gains).
To ensure that taxation does not alter wealth production, the Physiocrats propose a single, direct tax based on the net product. In their view, any other form of taxation is likely to reduce the net product volume.
Conclusion
The Physiocrats contributed to the formation of economic science. They discovered the concept of net product and revealed the strategic character of its reproduction. They analyzed and emphasized the primary role of capital in producing wealth and demonstrated the interdependence between different economic sectors.
These points would be further developed by subsequent authors. However, Physiocratic thought is not without its errors, the main one being the belief that only agriculture is productive, while other sectors are sterile.
