10/13/2023

MSC IN ECONOMICS
ISCTE-IUL
HISTORY OF ECONOMIC THOUGHT

4. ‘TRANSITIONAL’ ECONOMIC THOUGHT:

PHYSIOCRACY AND OTHERS

Luís Francisco Carvalho

Department of Political Economy
Centre for International Studies
Iscte 2023/2024

STRUCTURE
1. Some ‘transitional’ authors
(William Petty, Richard Cantillon, David Hume)

2. Physiocracy
a) Context
b) Main ideas ( naturalist rationalism, economic liberalism,
agriculture, tax reform)
c) Quesnay and Turgot

Bibliography: Backhouse (2002), chapters 4 and 5.

Roll (1950 [1938]), pp.123-139.

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1. SOME ‘TRANSITIONAL’ AUTHORS

William Petty (1623-1687)

Member of the Royal Society.

Theory of value: human labour was central in the process of value and
wealth creation, but land also played an essential role: «Labour is the Father
and active principle of Wealth, as Lands are the Mother» (quoted in Roll
1950: 106).

Argued for a quantitative approach to economic phenomena - a ‘political

arithmetic’. He made estimations of population, of the value of land and of
national income (wealth ≠ income): national income as the sum of rents,
wages and profits; interdependence between production, demand and
income. Jointly with followers like John Gaunt, Gregory King and Charles
Davenant, Petty was a pioneer in the movement that led to modern national
accounts systems.

1. SOME ‘TRANSITIONAL’ AUTHORS

Richard Cantillon (c.1680/1690-1734?)
Cantillon defended that value is generated by the conjunction of labour
and land. However he thought that labour could be expressed as the
quantity of land necessary to sustain it, so he advanced what may be
termed as a ‘land theory of value’. ‘Intrinsic value’ vs. ‘market value’.

Cantillon introduced the concept of ‘entrepreneur’ in economic discourse

– entrepreneurs were individuals who have a low ‘risk aversion’ and were
essential as the ‘dynamic’ force for economic activities; they would
venture into new investments even in face of uncertainty, without any
sure prospects of profit.

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1. SOME ‘TRANSITIONAL’ AUTHORS

David Hume (1711-1776)
Very influential in the Scottish Enlightenment and Adam Smith.
Criticism of the mercantilist objective of pursuing a surplus in the balance
of trade. Hume argued that there was an ‘automatic’ mechanism for
correcting external imbalances, thus making such a policy objective self-
defeating. This was the price-specie-flow mechanism: a surplus would
mean an influx of precious metal, causing a rise in domestic prices, and
making imports cheaper and exports dearer (the reverse would happen in
case of a deficit). Quantitative theory of money.
Hume’s argument rested on the assumptions that: a) all precious metal is
immediately transformed into coins and put in circulation (there is no
hoarding or other uses for gold and silver); b) economies operate at full
employment – in situations of under-employment, the rise in the quantity
of money may not have the anticipated effects on inflation.

2. PHYSIOCRACY: CONTEXT
The first ‘school’ of economic thought, strictly speaking: group of authors
who lived in the same time and place, unity of principles and topics of
analysis, self-categorization as ‘phisiocrates’ and ‘les économistes’.
Origin of the word: Physis (nature) + Kratos (power). ‘Physiocracy’ would
therefore mean the ‘power of nature’.

France in mid-18th century

Enlightenment: New attitude towards knowledge, with the primacy of
reason (lumières), individual liberation from the shackles of tradition,
belief in progress through reform of human institutions. Voltaire,
Rousseau and Montesquieu. The Encyclopèdie edited by D’Alembert
and Diderot.
Final period of Ancien Régime: enlightened absolutism (the
monarch/despot would rule according to the new rational principles).

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2. PHYSIOCRACY: MAIN IDEAS

Physiocracy was marked by a critical attitude towards mercantilism

and the ‘colbertist spirit’, which was believed to be the cause of
the decline of the French economy.

Naturalist rationalism
Influenced by the advancements in natural philosophy (Descartes,
Newton), which showed that ordering and associating
phenomena led to the ‘discovery’ of stable relations, of ‘natural
laws’, the program of the physiocrats was to establish a logical
system of (natural) laws covering economic/social phenomena.

2. PHYSIOCRACY: MAIN IDEAS

Economic liberalism
In opposition to mercantilist interventionism and protectionism, liberty
of production, circulation, work. If everyone is free to pursue his
own advantage, this will liberate hidden energies and lead to the
best possible aggregate outcome. The best policy option was
therefore non-intervention; the free operation of markets would
spontaneously lead to a ‘natural order’ in the economy. This is
best captured by the famous dictum, ‘laissez-faire, laissez-passer’.
In this context, the role of the state was to provide the framework
for the natural order: protecting private property, securing
contracts, removing obstacles to freedom of production and
commerce.

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2. PHYSIOCRACY: MAIN IDEAS

Agriculture
Agriculture was considered as the sole true source of wealth, in contrast
with mercantilists and their emphasis on commerce/manufacture. All
wealth is produced by land, other sectors only move it around
(commerce) or transform it (manufacture). Only land produces a
surplus of output over inputs – a net product (produit net).

Tax reform
France in 18th century, was marked by a complex, oppressive and
arbitrary structure of taxation, with pressing needs to finance wars and
the luxury of élites (royal court at Versailles). In this context, the
physiocrats defended a single tax on the only productive activity,
agriculture; this tax would be paid by landowners (additionally would
have the advantage of fighting absentee ownership).

2. PHYSIOCRACY: QUESNAY AND TURGOT

François Quesnay (1694-1774)

Physician (Mme. Pompadour; close to Louis XV’s court).
Quesnay was the leading figure of the movement. Among other works,
he received acclamation for his Tableau Économique (1758). There
advanced a simplified representation of the economy, showing the
circulation of the produit net between the different classes of
society (namely ‘productive’, ‘landowner’, and ‘sterile’ classes), in
an explicit analogy with the circulation of blood in the human body.
The model illustrates the process of circulation and reproduction: it
is a stationary model, with no growth (each year the same produit
net is reproduced); it is a closed economy, with no state, no
savings, and no monetary phenomena (like inflation)

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2. PHYSIOCRACY: QUESNAY AND TURGOT

Anne-Robert-Jacques Turgot (1727-1781)
Minister of Louis XVI (1774-1776), will try to launch a reform program
inspired by physiocratic thought: liberalization of grain trade to
overcome chronic shortages, tax on rural property. Failed reforms;
conflict with Necker.
Turgot was also an economic thinker. He is best known for his
subjective theory of value. The foundation of value was what he
termed ‘valeur estimative’ (estimation-value) which was based on
the capacity of goods to satisfy individual wants as well as on
scarcity. The conjunction of individual valeurs estimatives would
result in the ‘valeur appréciative’ (exchange-value) of a good.