Transcript bachelor of arts in economics

Chapter 3
MERCANTILISM AND PHYSIOCRACY
2nd Semester, S.Y 2014 – 2015
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Mercantilism
Mercantilism is a pre-classical economic thought, dominant
in Europe from the 16th to the 18th century, that promoted
governmental regulation of a nation's economy for the
purpose of augmenting state power at the expense of rival
national power.
This economic doctrine suggests that prosperity is reached
by promoting manufacturing. The aim is to increase exports
and restrict imports, thus accumulating gold and precious
metals, relevant as a sign of wealth.
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Factors responsible for the Rise of
Mercantilism
Mercantilism was stimulated by factors like decline of
feudalism, lack of state organization, rise of free labor classes,
competition and development of exchange economy. Many
factors are responsible for the rise of mercantilism. So to
understand the basic tenets of mercantilists, it is necessary to
study those factors that were taking place during the 13th and
14th centuries in Europe.
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Economic Factors
Political Factors
Religious Factors
Cultural Factors
Religious Factors
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Mercantilistic Policies
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Building overseas colonies;
Forbidding colonies to trade with other nations;
Monopolizing markets with staple ports;
Banning the export of gold and silver, even for payments;
Forbidding trade to be carried in foreign ships;
Export subsidies;
Promoting manufacturing with research or direct
subsidies;
 Limiting wages;
 Maximizing the use of domestic resources;
 Restricting domestic consumption with non-tariff barriers
to trade
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List of Mercantilists
1. Jean Bodin (1530–1596)
2. Barthélemy de Laffemas (1545–1612)
3. Leonardus Lessius (1554–1623)
4. Edward Misselden (1608–1654)
5. Gerald de Malynes (1586–1626)
6. Thomas Mun (1571–1641)
7. William Petty (1623–1687)
8. Philipp von Hornick (1640–1714)
9. Jean-Baptiste Colbert (1619–1683)
10. Josiah Child (1630–1699)
11. Pierre Le Pesant, sieur de Boisguilbert (1646–1714)
12. Charles Davenant (1656–1714)
13. James Steuart (1713–1780)
14. Richard Cantillon (1680–1734)
15. John Locke (1632–1704)
16. Dudley North (1641–1691)
17. David Hume (1711–1776)
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Jean Bodin
FAST FACTS
Career
French jurist and political
philosopher
Born/Died
(1530–1596)
School of economic
thought
Mercantilism
Notable Economic
Thought
Inflation and quantity
theory of money
Magnum Opus
Reply to Malestroit
Influenced by
Influences
Giovanni Botero
Montesquieu
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Economic Thought of Jean Bodin
In 1568 Jean Bodin published Reply to Malestroit,
containing the first known analysis of the phenomenon of
inflation, which he claimed was being caused by the
importation of gold and silver from South America, backing
the Quantity Theory of Money.
The background to discussion in the 1560s was that by
1550 an increase in the money supply in Western Europe
had brought general benefits. But there had also been
appreciable inflation. Silver arriving via Spain from the
South American mine of Potosí, together with other sources
of silver and gold, from other new sources, was causing
monetary change.
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Money causes Inflation
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Barthélemy de Laffemas
FAST FACTS
Career
French mercantilist and
economist
Born/Died
(1545–1612)
School of economic
thought
Mercantilism
Notable Economic
Thought
Underconsumption
Theory
Magnum Opus
Les Trésors
Influenced by
Aristotle
Influences
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Economic Thought of Barthélemy
de Laffemas
In 1598 French mercantilist economist Barthélemy de
Laffemas published Les Trésors et richesses pour mettre
l'Estat en splendeur, which blasted those who frowned
on French silks because the industry created
employment for the poor, the first known mention
of Underconsumption Theory, which is later refined
by John Maynard Keynes.
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Leonardus Lessius
FAST FACTS
Career
Flemish Jesuit
theologian
Born/Died
October 1,1554 –
January 15, 1623
School of economic
thought
Mercantilism
Notable Economic
Thought
Magnum Opus
On Justice and Law
Influenced by
Influences
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Economic Thought of Leonardus
Lessius
In 1605, Leonardus Lessius published On Justice and Law,
the deepest moral-theological study of economics since
Aquinas, whose just price approach he claimed was no
longer workable. After comparing money's growth via
avarice to the propagation of hares, he made the first
statement of the price of insurance as being based on risk.
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Thomas Mun
FAST FACTS
Career
English writer and
economist
Born/Died
1571–1641
School of economic
thought
Mercantilism
Notable Economic
Thought
Foreign trade and
Protectionism
Magnum Opus
England's Treasure by
Foreign Trade /
Discourse of Trade
Influenced by
Aristotle
Influences
Subsequent mercantilists
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Economic Thought of Thomas Mun
 Thomas Mun is responsible for shaping the trade policies
of England during his time.
 He advocated the fundamental rule of international trade.
To him the rule of international trade should be “to sell
more to strangers yearly than we consume of their in
volume”.
 He was an ardent believer of nationalism and a strong
government. This according to him would be realized only
by accumulation of treasure.

 He suggested imposition of heavy import duties on goods
meant for domestic consumption and moderate duties on
export. He also recognized the importance of taxation.
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Economic Thought of Thomas Mun
According to Mun, trade was the only way to increase England's
treasure (national wealth), and in pursuit of this end he
suggested several courses of action.
1. Frugal consumption to increase the amount of goods
available for export
2. Increased utilization of land and other domestic natural
resources to reduce import requirements, lowering of export
duties on goods produced domestically from foreign
materials.
3. The export of goods with inelastic demand because more
money could be made from higher prices.
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Thomas Mun and Protectionism
Mercantilist theorist, Englishman Thomas
Mun, insisted that what matters is not the fact
that payments are made abroad, but how
trade and payments finally balance out. Mun
wanted to boost exports and cut imports
through more frugal consumption of domestic
produce. However, he saw no problem in
spending gold abroad if it was used to acquire
goods that were then reexported for a larger
sum, ultimately returning more gold to the
country than had initially been spent. This
would boost trade, provide work for the
shipping industry, and increase England’s
treasure.
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Edward Misselden
FAST FACTS
Career
English merchant and
mercantilist
Born/Died
(1608–1654)
School of economic
thought
Mercantilism
Notable Economic
Thought
Magnum Opus
Free Trade, or the
Means to make Trade
flourish,
Influenced by
Thomas Mun, Jean
Bodin
Influences
Other mercantilists
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Economic Thought of Edward Misselden
 He argued that international movements of specie and
fluctuations in the exchange rate depended upon the
international trade flows and not the manipulations of the
bankers, which was the popular view at the time.
 He suggested that trading returns should be established
for purposes of statistical analysis, so that the state could
regulate trade with a view to obtaining export surpluses.
 In his Free Trade, or the Means to make Trade flourish, he
discussed the causes of the alleged decay of trade, which
he attributed to excessive consumption of foreign
commodities, exportation of bullion by the East India
Company, and defective searching in the cloth trade.
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Thomas Hobbes
FAST FACTS
Career
English philosopher
Born/Died
(5 April 1588 – 4
December 1679)
School of economic
thought
Mercantilism
Notable Economic
Thought
Social contract theory
Magnum Opus
Leviathan
Influenced by
Plato, Aristotle
Influences
All subsequent Western
political philosophers
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Economic Thought of Thomas Hobbes
 In his famous book, Leviathan, Hobbes set out his
doctrine of the foundation of states and legitimate
governments – originating social contract theory.
 Beginning from a mechanistic understanding of human
beings and the passions, Hobbes postulates what life
would be like without government, a condition which he
calls the state of nature. In that state, each person would
have a right, or license, to everything in the world. This,
Hobbes argues, would lead to a "war of all against all".
The description contains what has been called one of the
best known passages in English philosophy, which
describes the natural state mankind would be in, were it
not for political community.
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Economic Thought of Thomas Hobbes
 In such a state, people fear death, and lack both the things
necessary to commodious living, and the hope of being
able to toil to obtain them. So in order to avoid it people
accede to a social contract and establish a civil society.
 According to Hobbes, society is a population beneath a
sovereign authority, to whom all individuals in that society
cede some rights for the sake of protection. Any abuses of
power by this authority are to be accepted as the price of
peace. There is no doctrine of separation of powers in
Hobbes's discussion. According to Hobbes, the sovereign
must control civil, military, judicial, and ecclesiastical
powers.
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William Petty
FAST FACTS
Career
English economist, scientist and
philosopher
Born/Died
May 27, 1623 – 16 December 16,
1687
School of economic
thought
Mercantilism and Classical
Economics
Notable Economic
Thought
National income accounting,
economic statistics, fiscal and
monetary theory
Magnum Opus
A Treatise of Taxes and Contributions
(1662) and Political Arithmetic
Influenced by
Aristotle, Thomas Hobbes, Francis
Bacon
Influences
Mandeville, Adam Smith, Keynes,
Karl Marx
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Three Economic Works of William Petty
Petty wrote three main works on economics, Treatise of
Taxes and Contributions (written in 1662), Verbum Sapienti
(1665) and Quantulumcunque concerning money (1682), all
refreshingly concise.
These works, which received great attention in the 1690s,
show his theories on major areas of what would later
become economics. What follows is an analysis of his most
important theories, those on fiscal contributions, national
wealth, the money supply and circulation velocity, value, the
interest rate, international trade and government investment.
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Value Theory of William Petty
William Petty introduced a fundamental distinction between
market price and natural price to facilitate the portrayal of
regularities in prices. Market prices are jostled by many
transient influences that are difficult to theorize about at any
abstract level. Natural prices, according to Petty, Smith, and
Ricardo, for example, capture systematic and persistent forces
operating at a point in time. Market prices always tend toward
natural prices in a process that Smith described as somewhat
similar to gravitational attraction. The theory of what
determined natural prices varied within the Classical school.
Petty tried to develop a par between land and labor and had
what might be called a land-and-labor theory of value.
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National Income Accounting by William
Petty
the above estimate, Petty introduces in the first two
In making
chapters of Verbum Sapienti the first rigorous assessments of
national income and wealth. To him, it was all too obvious that a
country’s wealth lay in more than just gold and silver. He worked
off an estimation that the average personal income was £6 13s 4d
per annum, with a population of six million, meaning that national
income would be £40m. Petty produces estimates, some more
reliable than others, for the various components of national
income, including land, ships, personal estates and housing. He
then distinguishes between the stocks (£250m) and the flows
yielding from them (£15m). The discrepancy between these flows
and his estimate for national income (£40m) leads Petty to
postulate that the other £25m is the yield from what must be
£417m of labor stock, the value of the people. This gives a total
wealth for England in the 1660s of £667m.
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William Petty and the Measurement of
Wealth
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Fiscal Policy Contributions
 Petty lists six kinds of public charge, namely defense, governance,
the pastorage of men’s souls, education, the maintenance of
impotents of all sorts and infrastructure, or things of universal
good. He then discusses general and particular causes of
changes in these charges. He thinks that there is great scope for
reduction of the first four public charges, and recommends
increased spending on care for the elderly, sick, orphans, etc., as
well as the government employment of supernumeraries.
 On the issue of raising taxes, Petty was a definite proponent of
consumption taxes. He recommended that in general taxes should
be just sufficient to meet the various types of public charges that
he listed. They should also be horizontally equitable, regular and
proportionate. He condemned poll taxes as very unequal and
excise on beer as taxing the poor excessively.
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William Petty as a Statistician
 He is remembered for his contribution in the field of statistical
methods and economic theory. He was the first to develop a fact
finding approach on economic inquiry. As a statistician Petty
confined himself only to the employment of quantitative data and
used simple average as the statistical tool.
 The way in which he would estimate the population would be to
start with estimating the population of London. He would do this
by either estimating it by exports or by deaths. His method of
using exports is by considering that a 30 percent increase in
exports corresponds to a similar proportionate increase in
population. The way he would use deaths would be by
multiplying the number of deaths by 30 — estimating that one out
of thirty people die each year. To obtain the population of all of
England he would multiply the population of London by 8.
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Philipp von Hornick
FAST FACTS
Career
Austrian civil servant and
mercantilist
Born/Died
January 23, 1640 –
October 23, 1714
School of economic
thought
Mercantilism
Notable Economic
Thought
Magnum Opus
Austria Over All, If She
Only Will
Influenced by
Thomas Hobbes, William
Petty
Influences
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Economic Thought of Philipp von Hornick
 Hornick laid out one of the clearest statements of
mercantile policy, listing nine principle rules of national
economy:
 Nationalism, self-sufficiency and national power were the
basic policies proposed
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Nine Principles of National Economy
1. To inspect the country's soil with the greatest care, and
not to leave the agricultural possibilities of a single
corner or clod of earth unconsidered.
2. All commodities found in a country, which cannot be
used in their natural state, should be worked up within
the country.
3. Attention should be given to the population, that it may
be as large as the country can support.
4. Gold and silver once in the country are under no
circumstances to be taken out for any purpose.
5. The inhabitants should make every effort to get along
with their domestic products.
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Nine Principles of National Economy
6. Foreign commodities should be obtained not for gold
or silver, but in exchange for other domestic wares.
7. Foreign commodities should be imported in unfinished
form, and worked up within the country.
8. Opportunities should be sought night and day for
selling the country's superfluous goods to these
foreigners in manufactured form.
9. No importation should be allowed under any
circumstances of which there is a sufficient supply of
suitable quality at home.
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Jean-Baptiste Colbert
FAST FACTS
Career
French politician
Born/Died
August 29, 1619 –
September 6,1683
School of economic
thought
Mercantilism
Notable Economic
Thought
Magnum Opus
Influenced by
Influences
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Economic Thought of Jean-Baptiste
Colbert
In 1665–1683 Jean-Baptiste Colbert was minister of
finance under King Louis XIV of France, setting up
national guilds to regulate major industries. Silk, linen,
tapestry, furniture manufacture and wine were examples of
the crafts in which France specialized, all of which came to
require membership of a guild to operate in until the French
Revolution. According to Colbert, "It is simply and solely the
abundance of money within a state [which] makes the
difference in its grandeur and power.”
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Josiah Child
FAST FACTS
Career
French jurist and political
philosopher
Born/Died
1630 – June 22,1699
School of economic
thought
Notable Economic
Thought
Magnum Opus
Brief Observations
concerning Trade and the
Interest of Money and A
New Discourse of Trade
Influenced by
Influences
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Economic Thought of Josiah Child
 Josiah Child is considered as the father of mercantilists. He is
proponent of the competitive market and simultaneously
argued for a government-controlled interest rate and restricted
trade among the colonies which would benefit England.
 He made various proposals for improving British trade by
following Dutch example, and advocated a low rate of interest
as the causa causans of all the other causes of the riches of
the Dutch people. This low rate of interest he thought should
be created and maintained by public authority.
 He had the mercantilist partiality for a numerous population,
and became prominent with a new scheme for the relief and
employment of the poor; it is noteworthy also that he
advocated the reservation by the mother country of the sole
right of trade with her colonies.
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Pierre Le Pesant
FAST FACTS
Career
French economist
Born/Died
February 17, 1646 –
October 10, 1714
School of economic
thought
Notable Economic
Thought
Notion of an
economical market
Magnum Opus
Testament Politique
Influenced by
Influences
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Economic Thought of Pierre Le Pesant
In 1695 French economist Pierre Le Pesant wrote a plea to
Louis XIV to end Colbert's mercantilist program, containing
the first notion of an economical market, becoming the first
economist to question the economic policy of mercantilism
and value the wealth of a country by its production and
exchange of goods instead of the amount of money it has.
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Charles Davenant
FAST FACTS
Career
British economist
Born/Died
1656–1714)
School of economic
thought
Notable Economic
Thought
Balance of Trade
Magnum Opus
An Essay on the East
India Trade (1697), Two
Discourses on the Public
Revenues and Trade
Influenced by
Thomas Mun, Jean
Bodin
Influences
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Economic Thought of Charles Davenant
 Davenant is also credited with being the first to discuss
the concept of Balance of Trade as being an important
part of the financial health of a country. The foundation of
the idea is that importing more goods than were
exported would create an outflow of currency.
 In 1696, Davenant wrote Essay on the East-India Trade,
displaying the first understanding of consumer demand
and perfect competition. This continued the argument
that imports should not be restricted because England
was a net exporter of the goods imported from India. The
restriction of imports would prevent re-exporting the
goods to the rest of Europe, and that would decrease the
total income of the government.
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James Steuart
FAST FACTS
Career
English economist
Born/Died
October 21,1713 –
November 26, 1780
School of economic
thought
Notable Economic
Thought
Diminishing returns to
land
Magnum Opus
Inquiry into the Principles
of Political Economy
Influenced by
Influences
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Economic Thought of James Steuart
 In 1767, James Steuart published An Inquiry into the
Principles of Political Economy, the first book in English
with the term "political economy" in the title, and the first
complete economics treatise.
 Steuart held that all profit arose from the seller
"overcharging" the buyer in any single sales transaction.
 He also introduced the concept of diminishing returns to
land. Steuart juggled two interesting theories of price—a
long-run labor theory of value and a short-run "demandand-supply" theory. Indeed, Steuart was among the first
to introduce the term "equilibrium".
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Richard Cantillon
FAST FACTS
Career
Irish-French economist,
banker
Born/Died
1680 – May 1734
School of economic
thought
Notable Economic
Thought
Entrepreneurship,
monetary theory,
spatial economics,
population theory
Magnum Opus
Essay on the Nature of Trade
in General
Influenced by
Charles Davenant, John Law,
William Petty, John Locke
Influences
Jean-Baptiste Say, Adam
Smith, Francois Quesnay
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Economic Thought of Richard Cantillon
 His Essai is considered the first complete treatise on
economic theory, and Cantillon has been called the "father of
enterprise economics".
 In his Essay on the Nature of Commerce in General, he
argued rational self-interest in a system of freely-adjusting
markets would lead to order and mutually-compatible prices.
 He developed long run price equilibrium, and a two sector
general equilibrium, quoted by Adam Smith in the Wealth of
Nations.
 Cantillon defined wealth as everything that gives satisfaction
and labor and capital as the true source of wealth. Capital
was regarded as a dependent factor produced jointly by land
and revenue.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
John Locke
FAST FACTS
Career
English philosopher and
physician
Born/Died
August 29, 1632 – October 28,
1704
School of economic
thought
Mercantilism
Notable Economic
Thought
Labor theory of property, tabula
rasa
Magnum Opus
Two Treatises of Government
Influenced by
Plato, Aristotle, Thomas
Aquinas, Hobbes
Influences
Smith and many subsequent
political philosophers
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Economic Thought of John Locke
 Locke believed that ownership of property is created by
the application of labor. In addition, he believed property
precedes government and government cannot "dispose of
the estates of the subjects arbitrarily."
 Locke stated his belief, in his Second Treatise, that nature
on its own provides little of value to society; he provides
the implication that the labor expended in the creation of
goods gives them their value. This is used as supporting
evidence for the interpretation of Locke's labor theory of
property as a labor theory of value.
 Locke distinguishes two functions of money, as a "counter"
to measure value, and as a "pledge" to lay claim to goods.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Economic Thought of John Locke

Locke’s general theory of value and price is a supply and demand theory,
which was set out in a letter to a Member of Parliament in 1691, titled Some
Considerations on the Consequences of the Lowering of Interest and the
Raising of the Value of Money. Supply is quantity and demand is rent. “The
price of any commodity rises or falls by the proportion of the number of buyer
and sellers.” and “that which regulates the price... [of goods] is nothing else
but their quantity in proportion to their rent.” The quantity theory of money
forms a special case of this general theory. His idea is based on “money
answers all things” (Ecclesiastes) or “rent of money is always sufficient, or
more than enough,” and “varies very little...” Regardless of whether the
demand for money is unlimited or constant, Locke concludes that as far as
money is concerned, the demand is exclusively regulated by its quantity. He
also investigates the determinants of demand and supply. For supply, goods in
general are considered valuable because they can be exchanged, consumed
and they must be scarce. For demand, goods are in demand because they
yield a flow of income.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Dudley North (1641–1691)
FAST FACTS
Career
English merchant,
politician and economist
Born/Died
May 16, 1641 –
December 31, 1691
School of economic
thought
Mercantilism
Notable Economic
Thought
Magnum Opus
Discourses upon Trade
Influenced by
William Petty, John
Locke, Josiah Child
Influences
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Economic Thought of Dudley North
 North shows that wealth may exist independently of gold
or silver, its source being human industry, applied either to
the cultivation of the soil or to manufactures. It is a mistake
to suppose that stagnation of trade arises from want of
money; it must arise either from a glut of the home market,
or from a disturbance of foreign commerce, or from
diminished consumption caused by poverty.
 The export of money in the course of traffic, instead of
diminishing, increases the national wealth, trade being
only an exchange of superfluities. Nations are related to
the world just in the same way as cities to the state or as
families to the city. North emphasizes more than his
predecessors the value of the home trade.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
David Hume
FAST FACTS
Career
Scottish philosopher,
historian, economist
Born/Died
April 26, 1711 – August 25,
1776
School of economic
thought
Mercantilism, Classical
School
Notable Economic
Thought
Price-specie flow, utility,
problem of causation, bundle
theory
Magnum Opus
A Treatise of Human Nature
Influenced by
John Locke, Thomas Hobbes
Influences
Adam Smith, Jeremy
Bentham, Alexander
Hamilton, John Stuart Mill,
etc.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Economic Thought of David Hume
 Developed the price-specie flow mechanism, an idea that
contrasts with the mercantile system. Simply put, when a
country increases its in-flow of gold, this in-flow of gold will
result in price inflation, and then price inflation will force out
countries from trading that would have traded before the
inflation. This results in a decrease of the in-flow of gold in the
long run.
 Hume dynarnised Locke's argument by establishing a causal
relationship between money supply and price level, Hume
recognized the existence of proportionate relationship
between money supply and price level, keeping volume of
trade and velocity of money constant: He considered only the
standard of value and medium of exchange function of
money. He ignored the store of value function of money.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Criticisms of Mercantilism
The following criticisms were levelled against mercantilism
by the opponents:
1. The mercantilists exaggerated the importance of
Commerce to the extent of depressing agriculture and
other branches of human industry.
2. Undue importance was attached to gold and silver.
3. They were under erroneous belief that a favorable
balance of trade alone would bring prosperity to the
country supremacy.
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Criticisms about Mercantilism
4. Their idea about value, utility capital and interest were
vague and imperfect.
5. They are narrow minded nationalists and not
cosmopolitans. They could not conceive the ideas of
mutually advantageous trade. However we cannot
dismiss their ideas as useless or impractical. The idea of
nationalism, self-sufficiency and economic strength were
the outcome of their policies. The mercantilist policy
proved successful in France, England, Holland and
Germany who were competing for colonial supremacy.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Physiocracy
The Physiocrats were a group of economists who
believed that the wealth of nations was derived solely
from agriculture. Their theories originated in France and
were most popular during the second half of the 18th
century. Physiocracy was perhaps the first well
developed theory of economics.
They called themselves économistes (economists) but
are generally referred to as Physiocrats in order to
distinguish them from the many schools of economic
thought that followed them. Physiocrat is derived from
the Greek for “Government of Nature”.
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Physiocracy
The Physiocrats saw the true wealth of a nation as determined by
the surplus of agricultural production over and above that needed
to support agriculture (by feeding farm laborers and so forth). Other
forms of economic activity, such as manufacturing, were viewed as
taking this surplus agricultural production and transforming it into
new products, by using the surplus agricultural production to feed
the workers who produced the extra goods. While these
manufacturers and other non-agricultural workers may be useful,
they were seen as 'sterile' in that their income derives ultimately not
from their own work, but from the surplus production of the
agricultural sector. The Physiocrats strongly opposed mercantilism,
which emphasized trade of goods between countries, as they
pictured the peasant society as the economic foundation of a
nation's wealth. The
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Factors Responsible for the Rise of
Physiocracy









Tyranny and Extravagant Court Life
Regressive Taxation
Decay of Mercantilism
Neglect of Agriculture
Emergence of a Group of Ambitious Agriculturists
Subjective Factors and Forces
Existence of Socio-economic Inequality
Influence of the Writers
Reactions against Mercantilist Policies
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Principles and Policies of Physiocracy
1.
2.
3.
4.
Agriculture is the only productive occupation.
Industry and trade are sterile occupations.
Agriculture alone produces net product.
There is a natural order which makes life happy and
meaningful.
5. There is harmony among all classes of people.
6. The individual should get maximum liberty.
7. State action should be limited to the minimum.
8. Trade is a necessary evil, and there should be free
trade.
9. Value depends on utility. Wealth has value. Value and
price are the same things
10. The wage level is at the subsistence level.
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Principles and Policies of Physiocracy
11. There is interdependence in the economic system.
12. Real wealth lies in tangible and consumable goods.
13. Private initiative must be encouraged.
14. Distribution of products is very essential.
15. Money is a medium of exchange.
16. All that is bought is sold and all that is sold is bought.
17. Rent is a perfectly legitimate income of the landlords.
18. There should be a single and direct tax on land, as it is
the only productive source.
19. Private property is essential.
20. There is the possibility of overpopulation on land.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Physiocratic Economic Thought
1. Natural Order or Natural Philosophy
2. The Net Product
3. The Circulation of Wealth
4. Individualism and Laissez Faire
5. Private Property
6. Diminishing Returns
7. Investment Capital
8. On Taxation
9. On Value
10. On Trade
11. Functions of the State
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Natural Order and Natural Laws
Natural order is the symbol of physiocratic system.
Dupontde- Nemours defined physiocracy as “the science of
natural order”. Natural order, according to physiocrats, was
an ideal order of things guided by the laws of nature, which
has been ordained by god for the happiness of mankind.
Natural laws govern the activities of its members. The
problem is to discover and obey these laws. There are two
types of natural laws. Natural physical laws and natural moral
laws. Physical laws govern physical universe. Natural moral
laws are the laws of human actions. They are laws which
govern human behavior. According to physiocrats, natural
order was an ideal order of things created by god for the
maximization of human happiness.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Net Product
The concept of net product was the direct outcome of the
philosophy of natural order of the physiocrats. The
mercantilists has maintained that the source of wealth lay in
foreign trade and that it consisted of precious metals. The
physiocrats differed from the mercantilists on both these
ideas. Physiocrats considered agriculture as the only source
of wealth. To the physiocrats the only productive wealth was
agriculture. To them the other occupations, other than
agriculture were unproductive and sterile. In agriculture
nature labours along with man. By the gift of nature (fertility)
agriculture produces more than what the farmers consumes.
This surplus production in the agriculture sector is called as
“Net product”.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
The Circulation of Wealth
Based upon the concept of Net Product, the physiocrats
advanced the theory of circulation of wealth. That is
distribution of net product. Physiocrats were the first to
attempt to analyze the problem of distribution. The credit for
putting the idea in a systematic manner goes to Francois
Quesney. He skilfully and graphically analysed the concept of
circulation of wealth, drawing 'analogies from the circulation
of blood in the' body. Being a doctor; he was able to describe
it very eloquently. The circulation of net product in the words
of Turqot constituted the very life blood of body politics, just
as the circulation of blood of the physical.
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Individualism and Laissez Faire
The Physiocrats, especially Jacques Turgot, believed that
self-interest was the motivating reason for each segment of
the economy to play its role. Each individual was best suited
to determine what goods he wanted and what work would
provide him with what he wanted out of life. While a person
might labor
for the benefit of others, he will work harder for the benefit of
himself; however, each person’s needs are being supplied by
many other people. The system works best when there is a
complementary relationship between one person’s needs
and another person’s desires, and trade restrictions place an
unnatural barrier to achieving one’s goals.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Private Property
None of the theories concerning the value of land could work
without strong legal support of ownership of private property.
Combined with the strong sense of individualism, private
property becomes a critical component of the workings of the
Economic Tableau.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Diminishing Returns
Jacques Turgot was one of the first to recognize that
“successive applications of the variable input will cause
the product to grow, first at an increasing rate, later at a
diminishing rate until it reaches a maximum”. This was a
recognition that the productivity gains required to
increase national wealth had an ultimate limit, and,
therefore, wealth was not infinite.
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Investment Capital
Both Quesnay and Jacques Turgot recognized that
capital was needed by farmers to start the production
process, and both were proponents of using some of
each year’s profits to increase productivity. Capital was
also needed to sustain the laborers while they produced
their product. Turgot recognizes that there is opportunity
cost and risk involved in using capital for something
other than land ownership, and he promotes interest as
serving a “strategic function in the economy.”
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Taxation
Physiocrats put forward a simple system of taxation. They
advocated a single tax system, namely the land tax, which
should be paid by the proprietary class directly to the
government. The theory of taxation was closely linked with
the concept of net product. Some taxes were required for
meeting the expense of the state 'for the maintenance of
security, spread of education and establishment of public
works. The only source which could be tapped was the net
product and the only class who could pay taxes were the
landed proprietors. So they advocated a single tax on
land. This single tax was direct and hence cannot be
evaded. It was simple to assess.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Value
Physiocrats had taken little interest in. the theory of
value. According to Turgot value depended upon utility.
But they did not regard value inherent in commodities,
they also differentiated value in use and value in
exchange. But they treated price and value as one and
the same thing. Value according to physiocrats was not
fixed but changed from time to time depending upon
demand: Anyhow, the theory of value was not much
important part of the physiocratic school.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Natural Order and Natural Laws
Natural order is the symbol of physiocratic system.
Dupontde- Nemours defined physiocracy as “the science of
natural order”. Natural order, according to physiocrats, was
an ideal order of things guided by the laws of nature, which
has been ordained by god for the happiness of mankind.
Natural laws govern the activities of its members. The
problem is to discover and obey these laws. There are two
types of natural laws. Natural physical laws and natural moral
laws. Physical laws govern physical universe. Natural moral
laws are the laws of human actions. They are laws which
govern human behavior. According to physiocrats, natural
order was an ideal order of things created by god for the
maximization of human happiness.
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Trade
As commodities of equal value were exchanged, trade and
commerce were considered as unproductive. According to
them trade did not produce any real wealth. Hence all
commodity transition were sheer waste of time and energy.
They wanted to counteract the evils of commerce by
advocating complete freedom in the field of commerce.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Functions of the State
The physiocrats were not anarchist. They suggested a
state with minimum of civil laws which place no hurdles
in the way of the realization of the natural order. To them
the best state was the one in which there were the least
number of laws. They advocated a state with minimum
of legislation and maximum of authority. The function of
the physiocratic sovereign were (a) to preserve natural
order (b) To defend private property (c) To spread
universal education (d) To undertake a programme of
public work.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
The Physiocratic School
The physiocratic school is credited with the creation of the
earliest school of thought in the proper sense of the terms.
They must be regarded as the real founders of the political
economy. The members of the physiocratic school
published certain important books and articles which laid
the foundations of physiocratic system. These physiocratic
economic thinkers are:






Francois Quesnay (1694–1774)
Jacques Turgot (1727–1781)
John Law (1671 – 1729)
Bernard Mandeville (1670 -1733)
Richard Cantillon (1680–1734)
Victor de Riquetti 1715 - 1789)
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Criticisms of Physiocracy
1. Their theory was drowned in normative statement.
This is quite true of natural order concept.
2. The physiocrats failed to consider the labouring Class
as a productive class. Moreover their contention that
manufacturing class is sterile is also subject to severe
criticism.
3. The physiocrats do not have a clear cut concept of
value. They have confused value with utility. They held
the view that value depend on utility.
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Criticisms of Physiocracy
4. Their conception of landlord as partly productive class is
more based upon political motive.
5. Physiocrats placed too much emphasis on agriculture
and have neglected the non-agricultural sector.
6. Hanex says that physiocratic doctrines are full of
negative attitudes.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Francois Quesnay
FAST FACTS
Career
French economist
Born/Died
June 4, 1694 – December 16,
1774
School of economic
thought
Physiocracy
Notable Economic
Thought
Circular flow of income,
importance of land and
agriculture
Magnum Opus
"Tableau économique“ or
(Economic Table)
Influenced by
Influences
Adam Smith, David Ricardo,
John Stuart Mill
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Economic Thought of Francois Quesnay
He believed that trade and industry were not sources of
wealth, and instead in his book Tableau économique (1758,
Economic Table) argued that agricultural surpluses, by
flowing through the economy in the form of rent, wages, and
purchases were the real economic movers. Firstly, said
Quesnay, regulation impedes the flow of income throughout
all social classes and therefore economic development.
Secondly, taxes on the productive classes, such as farmers,
should be reduced in favor of rises for unproductive classes,
such as landowners, since their luxurious way of life distorts
the income flow.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Francois Quesnay and His
Economic Table
The physiocratic system of circulation was
set out in Quesnay’s Economic Table. This
is a diagram that illustrates, through a
series of crossing and connecting lines, the
flow of money and goods between three
groups in society: landowners, farmers, and
artisans. The goods are agricultural and
manufactured products (produced by the
farmers and artisans). Although Quesnay
used corn as his example of an agricultural
product, he said that this category could
include anything produced from the land,
including mining products.
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Econ 126 – HISTORY OF ECONOMIC THOUGHT
Circular Flow of the Economy by
Francois Quesnay
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Circular Flow of Income Model
The interdependence of consumers and producers was first illustrated by
Quesnay. Consumers rely on producers for goods and services, who in turn
rely on the consumers for sales and labor.
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Jacques Turgot
FAST FACTS
Career
French economist and
statesman
Born/Died
May 10, 1727 – March 18,
1781
School of economic
thought
Physiocracy
Notable Economic
Thought
Concept of progress and net
product
Magnum Opus
Reflections on the Formation
and Distribution of Wealth
Influenced by
Francois Quesnay
Influences
Francois Quesnay, Adam
Smith, David Ricardo
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Economic Thought of Jacques Turgot
 Turgot's best known work, Réflexions (Reflections on the
Formations and Distribution) of wealth published in 1766
was a treatise containing about 100 paragraphs wherein
the superiority of agriculture was in full glory.
 In the Réflexions, after tracing the origin of commerce,
Turgot develops Quesnay's theory that the land is the only
source of wealth, and divides society into three classes,
the productive or agricultural, the salaried (the classe
stipendice) or artisan class, and the land-owning class
(classe disponible).
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Economic Thought of Jacques Turgot
 After discussing the evolution of the different systems of
cultivation, the nature of exchange and barter, money, and
the functions of capital, he sets forth the theory of the impôt
unique, i.e. that only the net product (produit net) of the land
should be taxed. In addition he demanded the complete
freedom of commerce and industry.
 The first complete statement of the Idea of Progress is that
of Turgot, in his "A Philosophical Review of the Successive
Advances of the Human Mind" (1750). For Turgot progress
covers not simply the arts and sciences but, on their base,
the whole of culture—manner, mores, institutions, legal
codes, economy, and society.
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John Law
FAST FACTS
Career
Scottish economist
Born/Died
April 21, 1671 – March 21,
1729
School of economic
thought
Physiocracy
Notable Economic
Thought
The Scarcity Theory of Value
and Real bills doctrine.
Magnum Opus
Money and Trade
Influenced by
Francois Quesnay
Influences
Adam Smith and David
Ricardo
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Economic Thought of John Law
 He originated economic ideas such as "The Scarcity Theory of
Value" and the "Real bills doctrine".
 Law urged the establishment of a national bank to create and
increase instruments of credit and the issue of banknotes backed
by land, gold, or silver. He published a text entitled Money and
Trade Consider'd with a Proposal for Supplying the Nation with
Money.
 He had the idea of abolishing minor monopolies and private
farming of taxes. He would create a bank for national finance and
a state company for commerce, ultimately to exclude all private
revenue. This would create a huge monopoly of finance and
trade run by the state, and its profits would pay off the national
debt.
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Bernard Mandeville
FAST FACTS
Career
English philosopher and
political economist
Born/Died
October 21,1713 – November
26, 1780
School of economic
thought
Physiocracy / Classical
Notable Economic
Thought
The unknowing cooperation of
individuals, modern free
market, division of labor
Magnum Opus
The Fable of the Bees
Influenced by
Rene Descartes, William Petty
Influences
Adam Smith, Friedrich Hayek
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Economic Thought of Bernard
Mandeville
 His main thesis is that the actions of men cannot be
divided into lower and higher. The higher life of man is a
mere fiction introduced by philosophers and rulers to
simplify government and the relations of society.
 He argues that the basest and vilest behaviors produce
positive economic effects. A libertine, for example, is a
vicious character, and yet his spending will employ tailors,
servants, perfumers, cooks, prostitutes. These persons, in
turn, will employ bakers, carpenters, and the like.
Therefore, the rapaciousness and violence of the base
passions of the libertine benefit society in general.
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Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
Econ 126 – HISTORY OF ECONOMIC THOUGHT
Economic Thought of Bernard
Mandeville
 Mandeville concluded that vice, at variance with the
"Christian virtues" of his time, was a necessary condition
for economic prosperity. His viewpoint is more severe
when juxtaposed to Adam Smith's. Both Smith and
Mandeville believed that individuals’ collective actions
bring about a public benefit.
 He coins the term “division of labor” in his The Fable of
the Bees.
 He explores the idea that when people act out of selfinterest, they benefit the whole of society, like the selfinterested behavior of bees benefits the hive.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
Econ 126 – HISTORY OF ECONOMIC THOUGHT
Bernard Mandeville and his Fable of
the Bees
 The Fable of The Bees: or, Private Vices, Public
Benefits is a book by Bernard Mandeville, consisting of
the poem The Grumbling Hive: or, Knaves turn’d Honest
and prose discussion of it. The poem was published in
1705 and the book first appeared in 1714.
 The poem elucidates many key principles of economic
thought, including division of labor and the invisible hand,
seventy years before Adam Smith (indeed, John Maynard
Keynes argues Smith was probably referencing
Mandeville. It also describes the paradox of thrift and
effective demand centuries before Keynes, and may be
seen as part of the school of underconsumption.
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
Econ 126 – HISTORY OF ECONOMIC THOUGHT
Victor de Riquetti
FAST FACTS
Career
French economist
Born/Died
October 1715 – July 13, 1789
School of economic
thought
Physiocratic School
Notable Economic
Thought
Magnum Opus
Testament Politique
Influenced by
Jacques Turgot, Francois
Quesnay
Pangasinan State University
Social Science Department – PSU Lingayen
BACHELOR OF ARTS IN ECONOMICS
Econ 126 – HISTORY OF ECONOMIC THOUGHT