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The Physiocrats

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The Physiocrats, a group of 18th-century French economists, are often credited with founding Western political economy — the study of “laws” governing the production and distribution of wealth.

The word “law” is not used in a legal sense. Rather it refers to a principle or governing rule, much as one might speak of the laws of physics. The Greek word “physiocracy,” from which the Physiocrats derive their name, means “government of nature.” They believed that natural laws governed human interaction in the same manner they governed every other aspect of reality; they wanted legislation to reflect those natural laws. In short, the Physiocrats advocated the natural rights of man and focused on applying them to the realm of economics. In doing so, they constructed an integrated system of economic theory.

Politically, the Physiocrats held that every person possessed identical natural rights. Although individual capacities varied widely, every person best knew his own self-interest and how to best use his own capacities. Society or a nation consisted of the individual persons within it, and the social union was the agreement or contract between those persons, which had the goal of restraining violations of natural right. Government was a necessary evil for the purpose of securing the rights of contract and private property. The essence of the Physiocrats’ theory of government was expressed in the phrase “laissez-faire, laissez-passer” (“let us alone, get out of the way”), which has been attributed to the Physiocrat Jean C.M.V. de Gournay.

The French statesman and political economist Frédéric Bastiat wrote of the Physiocrats, “The basis of their whole economic system may be truly said to lie in the principle of self-interest…. The only function of government according to this doctrine is to protect life, liberty, and property.”

The emphasis on individual persons, free trade, limited government, and a social contract made the Physiocrats a significant voice for change. Owing partly to their dry and dogmatic style, however, they never enjoyed grassroots popularity. Instead, their influence was exerted on fellow intellectuals of the day, including the philosopher and mathematician the Marquis de Condorcet and the Marquis de Mirabeau (Mirabeau the elder). Even that influence was fleeting, lasting only a few decades, roughly from the mid to late 1700s, after which it was swept away by the French Revolution (1789).

The school’s most important legacy was to be a forerunner to classical liberalism, especially through its personal impact on Adam Smith. The school’s rise closely preceded the publication of Smith’s magnum opus, An Inquiry into the Nature and Causes of the Wealth of Nations (1776), from which the more modern school of classical economics springs.

Indeed, Smith was so influenced by the Physiocrats that he had intended to dedicate The Wealth of Nations to François Quesnay, the leading figure of the school; perhaps his several significant disagreements with Quesnay dissuaded him. The Physiocrats also exerted a deep impact on early American agrarian thought through admirers such as Thomas Jefferson and Benjamin Franklin. Through the 19th-century libertarian Henry George and the ongoing single-tax or Georgist movement, the Physiocrats’ vision remains a subtheme within modern libertarianism.

Some of the Physiocrats’ theories sound antiquated and flatly false to modern ears. One belief, for example, was that all wealth has its origins in agriculture; the production of goods and services is merely the consumption or remixing of agricultural surplus. (Not all Physiocrats agreed on that point; for example, Anne Robert Jacques Turgot differed.) In exploring their theories, however, it is important to remember their historical context and the competing theories against which they argued.

The context of the Physiocrats

Under Louis XV (1710–1774) and Louis XVI (1754–1793), France was plagued by ruinously expensive warfare along with economic instability. A huge schism existed between the elite with wealth and status and the vast majority of people without either. The elite consisted of the nobility and the clergy, both of whom were exempt from taxes; they lived off the sweat of average people in the private sector, most of whom were peasants.

The foundation of the private sector was agriculture, even though very few citizens owned land. The nobility and clergy (some 600,000 in a population of roughly 25 million) held most of the property. For example, the Church owned about one-fifth of the total land in France; in some provinces, it owned up to two-thirds. Moreover, the Church had feudal privileges that had continued from the Middle Ages and bound approximately one million people to the land as serfs.

France was a comparatively wealthy nation, but the peasants existed at near-starvation level because they were so burdened by taxes in their myriad forms. A direct tax ate as much as 50 percent of the earnings of the nonelite. The collection process was also brutal because tax collectors were “entrepreneurs” who paid the king a flat amount for the privilege of collecting taxes; anything over that amount became profit, so there was great incentive to be aggressive and overcollect.

There were a slew of other taxes as well, some of them quite creative.

For example, a salt monopoly tax required almost everyone except young children to purchase several pounds of highly inferior government salt every year. The law also prescribed how the salt could be used and imposed heavy fines for misuse, such as the preservation of meat. Presumably, the salt was so inferior that its use was not difficult to detect.

Many other commodities had their own separate taxes. Daily life itself was monitored for purposes of taxes and fines. Fees were levied at every stage of manufacture, upon transportation, at the time of sale to retailers and, then, at the sale to customers. The list of taxes could scroll on and on, including many customs duties that were imposed not merely on goods passing into and out of France but often on goods traveling between different provinces within the nation. It is estimated that those taxes literally doubled the cost of goods.

And, of course, there was the constant bribery, unofficial theft by authorities, et cetera, for which France was notorious. Unfortunately, it is impossible to estimate how much the corruption cost the average person. Even without that factor, however, the nobility (including the king) and the Church took an estimated 75 percent of the wealth produced by peasants — many of whom lived on the margin to begin with. Overtaxed, often homeless, unemployed, hungry, and with no hope of justice from the “system,” the vast majority of French citizens were nevertheless not blind. They saw the starvation of their own children and the riches lavished on the velvet-clad children of the elite — riches that had been stolen from them.

Against this backdrop, the Physiocrats consistently called for a more reasonable and just system of taxes and the elimination of tariffs.

Their advocacy was not merely intellectual. In August 1761, Turgot became a tax collector for the Limoges region and began to apply the insights of his mentor Quesnay. For example, he surveyed land to obtain a more just assessment of the value upon which it was taxed.

The economic ideas of the Physiocrats rose to prominence in pre-Revolutionary France. Part of the reason was the prominence of the Physiocrats themselves: some were members of the nobility; others served as ministers to the king. Another reason was the period in which they wrote, a time in which France stumbled under its economic system and practical alternatives received serious consideration, at least in intellectual circles. When the famous Encyclopedie (1751–1772), a 35-volume manifesto of the French Enlightenment edited by Denis Diderot and Jean le Rond d’Alembert, featured the Physiocrats it was no more than an acknowledgement that their ideas had become an integral part of the Enlightenment.

In 1789, the French Revolution erupted. Early in the revolution, the National Constituent Assembly was established and moved quickly to abolish both feudalism and special privileges for the nobility and clergy. A “Declaration of the Rights of Man and of the Citizen” was issued, modeled on America’s Declaration of Independence.

The impact of Physiocratic theory on the ongoing French Revolution can be understood by tracking the experiences of Physiocrat Pierre Samuel du Pont de Nemours, who was elected to the Assembly in 1789 and served on about a dozen economic committees. A moderate, Du Pont wanted to preserve the monarchy (later abolished in 1792) and to institute Physiocratic economic policies. He came into increasing conflict with more radical revolutionaries who were rising in power. In 1791 the National Constituent Assembly dissolved and was replaced by the Legislative Assembly. Under what was called “the Self-Denying Ordinance,” no member of the first Assembly was allowed to sit on the second one; the measure virtually ensured that elder or experienced statesmen did not have a legislative voice. In 1791, Du Pont retired temporarily from public life.

The Legislative Assembly lasted one year, leaving France in economic chaos and social turmoil. Left-wing revolutionaries known as Jacobins came to dominate. Ultimately, under the Jacobin leadership of Maximilien Robespierre and Louis de Saint-Just, the Reign of Terror (1793–1794) was unleashed. During that period, the deceptively named Committee of Public Safety directed the widespread execution of those considered to be enemies of the state. It was during the Reign of Terror that Louis XVI and his queen, Marie Antoinette, were guillotined as counterrevolutionaries.

In 1795, Du Pont was chosen to sit on the Council of Elders, the upper house of the legislature of France. Again, his moderate policies caused conflict and he was “proscribed” in 1797. France was no longer a safe home for moderates.

The fate of Du Pont was the fate of the Physiocrats. They inspired a revolution for which they became increasingly unsuited and, finally, they were viewed as obstructive. The Physiocrats’ legacy lay elsewhere.

The legacy within Adam Smith

In the mid 1760s, professor of moral philosophy Adam Smith toured Europe at the behest of the wealthy Duke of Buccleuch who greatly admired Smith’s recently published Theory of Moral Sentiments. It was during that period that Smith met Quesnay and commenced writing The Wealth of Nations. Quesnay was not merely the leading Physiocrat but also the court physician to Louis XV, who called him “my thinker.” Respected in Parisian intellectual circles, Quesnay became famous for his Tableau economiques or Economic Table (1758) — an economic model that formed a basis for Physiocratic theory. Smith also became well acquainted with other prominent Physiocrats, including Turgot, who later became minister of finance and authored “Reflections on the Formation and Distribution of Wealth.” Smith was deeply impressed by the Physiocrats’ unrelenting and integrated attack on the prevailing economic theory in Europe: mercantilism.

The 20th-century Austrian economist Murray Rothbard defined the term: “‘Mercantilism’ is the name given by late 19th-century historians to the politico-economic system of the absolute state.” Intimately linked with the rise of the nation-state, mercantilism held that a nation should export more than it imported, the resulting surplus wealth being held in a currency, usually gold, by the ruler or government. To become wealthy, therefore, a nation needed to tightly regulate trade through an elaborate system of tariffs and taxes; it sought to establish colonies that became both a source of raw materials for the mother country and a captive export market for the finished products. Since the wealth of the world was considered to be finite, one nation’s wealth was deemed to impoverish others. Thus, mercantilism contributed to constant European warfare over resources and trade.

By contrast, the Physiocrats believed the wealth of a nation derived from the productive labor of individuals. It consisted of the surplus of agriculture products, including metal; that is, the wealth of a nation consisted of the excess of product over the cost of production. The Physiocrats dismissed manufacturing and other forms of nonagricultural production as merely a way to change the wealth that came from the earth. Thus, manufacturing was deemed “useful” but “sterile” in that it created no value. Adam Smith and the classical economists later corrected that error (among others) even as they built on the Physiocrats’ strengths.

In the fourth book of The Wealth of Nations — entitled “Of Systems of Political Economy” — Smith details his several disagreements with the Physiocrats and then concludes that “with all its imperfections, [the Physiocratic system] is perhaps the nearest approximation to the truth that has yet been published upon the subject of political economy….”

The legacy within American agrarian thought

Agrarianism — as expressed by foundational American thinkers such as Thomas Jefferson, James Madison, John Taylor of Caroline, and George Logan — idealizes the rural life, considering it to be morally superior to city life. In a letter (1785) to John Jay, Jefferson wrote, “Cultivators of the earth are the most valuable citizens. They are the most vigorous, the most independent, the most virtuous, & they are tied to their country & wedded to its liberty & interests by the most lasting bonds.”

Several Founding Fathers, including Benjamin Franklin, traveled to France where they personally met the Physiocrats. Franklin first visited Paris in 1767 and, at that point, formed close bonds of friendship with the French economists with whom he shared many beliefs, including free trade, agrarianism, and natural law. Upon his return to America, he maintained active contact with them through correspondence. In one letter, Du Pont enclosed his work Physiocratie. Declaring himself “perfectly charmed” by the work, Franklin claimed to have received “a great deal of instruction from it.”

The American agrarians were clearly influenced by the Physiocrats, although the depth of that influence varied from person to person and is sometimes a matter of debate. George Logan defined one extreme. His work “Letters Addressed to the Yeomanry of the United States: Shewing the Necessity of Confining the Public Revenue to a Fixed Proportion of the Net Produce of the Land; and the Bad Policy and Injustice of Every Species of Indirect Taxation and Commercial Regulations” (1791), written under the pen name “a Farmer,” was an Americanization of Physiocratic ideas.

Other agrarians, such as Jefferson, seemed to incorporate whatever Physiocratic ideas they found valuable. The Physiocratic influence upon Jefferson may have deepened when Du Pont emigrated to America (1799) and the two men become personal friends. Arguably, Jefferson’s land policies that were key to 19th-century Western settlement derived their tone from the Physiocrats. (Du Pont went on to establish the Du Pont firm, which became the financial basis of one of America’s most famous family-business dynasties.)

The legacy within libertarianism

Henry George was one of the most prominent figures in late 19th-century libertarianism. Today he is remembered for the single-tax movement that he championed. George believed land to be the common property of mankind and, so, argued for financing government through a single tax on those who used this “common” property. The tax would be on the unimproved value of the land; that is, on the land in its natural state without crops, homes, or other contributions of labor.

Although several economists, including David Ricardo, had espoused a similar idea, George drew directly on the Physiocrats’ advocacy of an “impôt unique.” This was a tax on unimproved land that landowners would pay to the king as a means to finance all expenses and so eliminate the need for other taxation. In his best-known book, Progress and Poverty (1879), Henry George wrote,

[There] has been a school of economists who plainly perceived, what is clear to the natural perceptions of men when uninfluenced by habit, that the revenues of the common property, land, ought to be appropriated to the common service. The French economists of the last century, headed by Quesnay and Turgot, proposed just what I have proposed, that all taxation should be abolished save a tax upon the value of land….

In dedicating his later work, Protection or Free Trade (1886), George wrote, “To the memory of those illustrious Frenchmen of a Century ago Quesnay, Turgot, Mirabeau, Condorcet, Dupont and their fellows who in the night of despotism foresaw the glories of the coming day.”

Currently, Georgism is considered a “fringe” aspect of modern libertarianism, but its voice is a direct link back to the Physiocrats.

Conclusion

Within their historical context, the Physiocrats represented a huge leap forward toward individualism and economic freedom. Although their ideas were overwhelmed by the violent forces they helped to release, the Physiocrats made an indelible contribution to the literature and progress of human liberty. In the larger picture, they may have been a small step toward freedom … but they were one of the first steps and in the right direction.

This article originally appeared in the December 2010 edition of Freedom Daily. Subscribe to the print or email version of Freedom Daily.

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    Wendy McElroy is an author for The Future of Freedom Foundation, a fellow of the Independent Institute, and the author of The Reasonable Woman: A Guide to Intellectual Survival (Prometheus Books, 1998).