Notes on the Physiocrats

Mason Gaffney

[1998]

Here is material on The Physiocrats I needed for a class. I pass it along for your possible interest. Please send any corrections or criticism along.

I note two flaws in the reproduction that occur when I copy this into the text: (1) italics are lost; and (2) letters with accents are not reproduced at all; just the accents appear alone.

In this world of new puzzles, one group of thinkers pioneered ways to sort out the pieces and fit them together. We turn first to them, the French "Physiocrats."

The Physiocrats - Outline

1. These Physiocrats were pioneers of applied economic analysis. They were people of influence in the French court under Louis XV and XVI. Their motives were benign and idealistic: to shape royal policies to solve real social problems at home. They observed that France, with the greatest resources and population and location, was not living up to its potential. They were French patriots motivated to strengthen their nation and raise the welfare of its people; but they thought France could learn from England, whose progress and power they admired. They preceded the English in analyzing and articulating what the English, to some extent, practiced; and in showing France how to improve on it.

2. They addressed problems specific to France, but in the process developed general principles applicable to all times and places. They wrote during "The Enlightenment," and the age of "Benevolent Despotism," offshoots of "The Age of Reason," when reform was in the air in every court in Europe.

3. Politically, they got "ahead of the curve," and in France lost favor and power after 1776. (In Austria, under the Benevolent Despot Joseph II, their influence grew until Joseph died in 1790.) Their enemies who ousted and succeeded them paid the price in the French Revolution, from 1789, which the Physiocrats were trying to forestall.

4. Causes they championed:

A. Reforming obvious abuses: graft, corruption, tax- farming, etc.

B. Laissez-faire

C. "Natalism" - raising the birth rate

D. Untaxing production, trade, capital formation, and parenthood

E. Focusing taxation on the net product of land (aka economic rent), the only true taxable surplus

5. They had strong influence abroad, e.g. on Adam Smith and Thomas Jefferson

6. Some of them undervalued urban production relative to farm and other "primary" production. Another branch of Physiocrats (Vincent de Gournay, A.R.J. Turgot) did not buy into this quirky idea, so you may take your Physiocracy with or without it.

The Physiocrats - Narrative

1. The Physiocrats were a group of French thinkers from "The Age of Reason" (18th Century) who mingled and found favor in the courts of Louis XV and, briefly, Louis XVI. They were at the core of "The Enlightenment" of the times - "Enlightenment" meaning to apply the findings of The Age of Reason to real life. Paris, in turn, was the leading intellectual center of Europe. Their ideas travelled east as far as St. Petersburg (Catherine the Great), and west as far as the new U.S.A. (Tom Paine, Tom Jefferson, and Ben Franklin).

Francois Quesnay, the leading thinker, was a physician who became personal doctor to Mme. Pompadour, favorite courtesan to Louis XV. She also did most of the heavy thinking for Louis, who preferred chasing stags and skirts. Quesnay's influence grew when he saved the life of Louis' son (a life later lost to the guillotine). Quesnay was a deep thinker and creative theorist. He explained matters in plain French, exploiting and augmenting the clarity and utility of that sophisticated language; but he also used intricate diagrams and mathematics that still beguile economists. Adam Smith was his pupil.

Marquis Viktor de Mirabeau, a rich nobleman, was a humanist whose book title, Friend of Mankind, bespoke his benign attitudes (similar to those of Wm. Godwin whom we will meet later in England). Mirabeau was also a "pro-natalist," meaning he favored raising the population of France, which had been falling. Quesnay persuaded him that the route to that was a stronger farm economy.

Pierre Samuel du Pont de Nemours was a cagy politician and publisher who got the Physiocrats lots of good ink. He later was to participate in the French Revolution, support a losing faction, and yet manage to survive. In 1799 he left France for America where he befriended Thomas Jefferson, and reinforced Jefferson's belief in Physiocratic ideas. With his son, a chemist, he established the Du Pont firm in Delaware, now America's most enduring family-business dynasty. (His namesake, P.S. du Pont IV, had a run at the Presidential nomination in 1988.)

Baron A.R.J. Turgot was a skillful and honest administrator. Louis XVI, when newly crowned in 1774, made him Minister of Finance. It was a time when most people saw that France needed saving from itself. He proceeded vigorously to implement Physiocratic reforms, and weaken special privileges, but Queen Marie Antoinette, who had liked him once, fired him in 1776 for refusing to hire and promote her favorites. That political mistake led him to a comfortable early retirement, and later led her to a most uncomfortable one, as he had warned.

Turgot came to Physiocracy through the influence of Vincent de Gournay, rather than Quesnay. Turgot and Gournay did not buy into the quirk for which later critics have faulted Quesnay, i.e. the notion that commerce and industry are "sterile." They were of one mind, though, on all practical policy issues.

2. France had a number of problems inherited from previous regimes.

A. Vast lands held by nobles (the "First Estate") and the Clergy (the "Second Estate") were exempt from taxes. The "Third Estate" (businessmen, workers, and plain folks) paid the taxes.

Most revenues came from taxes on consumption and exchange (excise taxes) and from forced labor on public works and in the military. (Similar forced labor in Bohemia was called the "Robot," whence our word for a mechanical slave.) This amounted to a tax on rearing children, which helped account for falling population in France. (Interestingly, we are returning today to a somewhat similar tax system, and calling it "tax reform." We no longer force labor, except in prisons, but we do force people to pay special taxes for working, and again when they spend to support their families.)

B. J.B. Colbert, adviser to Louis XIV, had left France with a legacy of paternalism (or, more accurately, "dirigisme," which is the same buttinsky policy but without any fatherly solicitude for the poor, infirm or aged), whereby the state micro-directed many business and manufacturing affairs.

C. The state controlled farm prices below market levels, in a clumsy effort to share the bounty of farms with the urban poor. To keep the poor quiet, the state tried in this small way to appease them for the many wrongs it did them. A harmful byproduct was to demotivate farm production.

D. French Provinces regulated and taxed interprovincial trade, so that France itself did not comprise one common market.

E. Actual tax collections were handled by "tax farmers," each of whom was sold (or corruptly given) a contract for a certain region, and allowed to collect as much as he could force from the people there. This kind of "farmer" had the power of the state, without clear rules or restraints.

F. No one ever heard of a merit system in the civil service.

3. The Physiocrat's impact on power

Quesnay enjoyed favor at the court of Louis XV, thanks to the good graces of Mme Pompadour, Louis's favorite and Quesnay's patient. (To understand French policy, a good rule was "Cherchez la femme.") It was the age of "The Enlightenment," and for a time, Quesnay reigned as a guru at its center. European monarchs viewed themselves as "Benevolent Despots"; they vied to patronize artists, scientists and intellectuals, and to show their modernity and compassion by helping (or ceasing to abuse) the poor and oppressed. Frederick the Great of Prussia, Charles III of Spain, and Catherine the Great of Russia, among others, imported French intellectuals and savored their ideas - French being the universal court language.

Above all, Joseph II, Holy Roman Emperor and ruler of Austria, bought into Quesnay's ideas, and set about enacting them with conviction, royal power, and determination. To give you an idea of what Joseph faced, though, his related reforms included freeing serfs, abolishing torture, allowing freedom of worship, basing the civil service on merit, and letting peasants marry whom they wished. Austria was just emerging from the night of tyranny and oppression. The ancient oppressors, including Joseph's own family, did not appreciate his efforts. Only the people loved him.

To help you remember Joseph's time and place in history, he was the patron of composers Gluck, Salieri and Mozart. Much has been made of the suspicion that Salieri may have poisoned Mozart, >from professional jealousy. That may be a coded surrogate for the more plausible suspicion that someone did in Joseph himself, who died young in 1790. Privilege plays rough.

Joseph's keystone reform was having all lands valued, in order to tax them "ad valorem" (in proportion to value). That was Quesnay's central proposal. It aroused fierce opposition >from the First and Second Estates, who had been riding on the the Third Estate for so long they regarded this free ride as a sacred right of property. When Joseph died (or was he pushed?) in 1790, his brother and successor, Leopold II, aborted his reforms, and joined the entente against the French revolution, then just beginning. The establishment then did its best to wipe out the memory of Joseph II, and jeer at him. Not until the uprisings of 1848 was there an effort to revive some of Joseph's reforms, by which time Austria had fallen permanently behind rival powers.

Louis XVI, King of France from 1774, made a Physiocrat, Baron Turgot, his Minister of Finance. A.R.J. Turgot was a seasoned administrator with a "bias for action," who got right down to it. He pushed through new laws ending, and subjecting the vast estates of the nobles (the First Estate) and the clergy (the Second Estate) to taxation on the Net Product. He freed trade among the provinces, and let prices seek their own level in free markets. He proposed to end tax farming, and wipe out many other abuses and special privileges.

He also refused to let Queen Marie Antoinette pad his civil service with her friends. She got him sacked in 1776, and his laws repealed. (Again, Cherchez la femme. Ironically, Marie was the sister of Joseph II of Austria.) It was tragic: Turgot might have been one of the great lawgivers of all the ages, like Moses or Solon. Well may he have said, "Rude prendr'essor avec les aigles et travaillant avec les dindons" (It's hard to soar with eagles when you work with turkeys).

Marie, meantime, began a long journey that ended on the guillotine. Her main legacy for us is her memorable dismissal of the starving poor, "Qu'ils mangent de brioche" (Let 'em eat cake). She was seriously out of touch, and was to pay the price. During this period, France got revenge on Britain by helping win the American Revolution (some say it was France did the heavy lifting, and the Americans who just helped). This victory did not placate the suffering French masses, though, who took THEIR special revenge starting July 14, 1789, when they stormed the Bastille.

4. What policies did the Physiocrats champion?

A. They would reform obvious abuses like corruption, favoritism, undue influence, graft, and tax farming. This program was more novel and shocking in 18th Century France than it might seem today.

B. They adopted the slogan of Laissez-faire, laissez- passer, le monde va de lui-m___me (Let things work, let them happen, the world goes by itself). Today, we just say "Laissez- faire." This advice is aimed at control freaks in government. It bids them resign as general managers of the universe, and let people produce and trade freely, guided by market prices. Adam Smith was to borrow this concept, and time has coupled it with his name.

Recall that at this time the spirit of J.B. Colbert was ascendant in France. Physiocrats were reacting against his brand of extreme dirigisme. It is unlikely they would have gone as far to the other extreme as today's anarchists, libertarians, and Ayn-Randians. Quesnay, like Adam Smith later, explicitly acknowledged the need for the state to supply capital for public works, which Quesnay called avances souvera'nes.

Laissez-faire meant letting prices seek their own level, free of controls. In France of that age, that meant in particular letting the price of grain and flour rise. This was the people's bread, but Quesnay et al. reasoned that the people would be more than compensated by their relief from oppressive taxes. The Treasury, in turn, would be more than compensated by the resulting rise in land rents, which the Treasury would tax.

Note that in France, laissez-faire meant raising the price of grain. In England, we will see that it meant lowering the price - for France exported grain, while England imported it. In passing from France to England, the generic concept of laissez-faire had to pass from the particulars of an exporting nation to those of an importing nation.

C. Physiocrats were pro-natalist. This meant ending the forced labor, and encouraging subdivision of large estates by taxing the land. It also meant ending consumption taxes like the gabelle (salt tax). Does a salt tax seem trivial? To us, maybe, but that tells you something about the low living standards of that time and place. Salt was a big item in family budgets, just as it was later in Ghandi's India.

D. They would end all taxes that are contingent on production, labor, and trade. They would nurture capital, which they clearly distinguished from land: creating capital, conserving it, and turning it over. To them, taxing trade was as bad as regulating it - they correctly perceived taxes as a form of regulating. They favored complete free trade, including freedom from excise taxes, both domestically and internationally - but with emphasis on the domestic trade (unlike today's free traders, who slight domestic trade as they hype international trade).

E. They would focus taxes on the produit net, that is the Net Product of land after deducting all costs of improvement and production. ("Net" is French for "clean," or "clear," and has been borrowed into English accounting.) We will see that the classical English economists translated produit net as "rent."=20 Today, "rent" has taken on many confusing and conflicting meanings, even among economists, so when in doubt, think of economic rent as the "Net Product" of land.

They did not view this tax shift as a real shift that would raise the tax burden on landowners, because they believed other kinds of taxes are shifted to landowners anyway. You can't squeeze blood out of a stone, they reasoned, so there is only one true taxable surplus, and that is rent, the Net Product of land. For an acronym, we will use ATCOR (All Taxes Come Out of Rent) for this Physiocratic doctrine of tax incidence. Mirabeau's Theory of Taxation, 1760, spelled it out. Thus, to lower the corv___e and poll and consumption taxes, and replace them with taxes on the Net Product of land, would not raise the end-result tax burden on landowners. This was true even if the tax switch was "revenue neutral," i.e. would raise as much money as taxes do now. It would even lower the total burden on landowners.

How's that again? LOWER the total tax burden? This would result from unleashing the great power of market incentives, incentives to work, to save, to exchange, to produce, and to direct resources to their best uses. Such forces are now twisted and suppressed by taxes on capital, labor and exchange. Such twisting and suppression constitute an "excess burden" of such taxation, a burden NOT imposed by taxes on the Net Product.=20 This is the distinctive Physiocratic doctrine, one that we will find repeated in Adam Smith, David Ricardo, John Stuart Mill, and Henry George.

F. They gave a lot of thought to the role of capital in production. They thought of capital as what we today call "front money" - which they called "avances". They stressed the importance of getting it back, which reflux they called "revenue" (French for comeback). This reflux is recycled (reinvested) to create new incomes, and the quicker the better. This was one of their reasons for wanting to keep taxation off capital, and focus it on the Net Product of land. This part of their analysis was gradually lost, except among Austrian economists, who are still trying with little success to reintroduce it into Anglophone economics. This thread is important, but complex to follow, so we do not treat it in this short course.

G. Composing "left" and "right" positions. You may have noted that the Physiocrats appear "radical" in terms of raising taxes on the rich, and lowering them on the poor. At the same time they appear "conservative" (in modern terms) by favoring free markets. Their genius was to show how to accomplish both ends at once, by focusing taxes on the Net Product of land. This is a concept that most of the polarized pundits of today still fail to grasp, 222 years after Marie Antoinette axed Baron Turgot. It is one of the main ideas you should take from this course - an idea tragically missing from modern discourse.

5. Influence on Smith and Jefferson

Adam Smith traveled in France and studied for a time with Quesnay, to whom Smith credits many of his best ideas. Neither Smith nor Quesnay was the first to write on political economy, but most people look back to Smith as the father of Anglophone economics. First or not, Smith cast a long shadow: people still quote and revere him. Few realize their debt to the Physiocrats, who passed the baton to Smith: he published The Wealth of Nations the same year France lost Turgot, 1776.

Thomas Jefferson also wrote a famous document in 1776. The Declaration owes a lot to the Physiocrats. Jefferson, like Franklin, Adams, Paine and others, had spent time in Paris. Later he knew Du Pont and other transplanted Frenchmen in the States. Jeffersonian land policies, the basis of western settlement in the 19th Century, show the Physiocratic influence.

6. Primacy of agriculture?

It was Quesnay's quirk to undervalue commerce and industry. He thought them "sterile," meaning they produced no Net Product. This quirk found its way into English thinking, too, and took nearly a century to be worked out. Jefferson even shipped on a bit too much of it. Indeed, the attitude called "agricultural fundamentalism" is still common in most nations, including ours.

Some captious critics of Physiocracy have seized on this flaw to try to discredit the whole structure of their thought. As noted above, de Gournay and Turgot were devoted Physiocrats who did not buy into the fallacy; neither should we. We may appreciate Quesnay's positive achievements, and forgive him this trespass, as we sometimes ask God to forgive ours.