30 Physiocrates

Milanovic

It is well-known in the history of economic thought that the founders of political economy, the Physiocrats and Quesnay in particular, thought that only agriculture is productive and manufacturing is “sterile”. Their use of the word “sterile”, and insistence on it, is unfortunate because the reality of what they argued is more sensible and sophisticated.

        What they meant by “sterility” of manufacturing is that the price of manufactured goods decomposes into depreciation of capital, subsistence wage, “normal” return to the capitalist (which they, rather generously, assumed to be 10% per year) and even “recompense” for entrepreneurship. So why is it different from what economists believe today? In effect we use exactly the same components. But for the Physiocrats there was no surplus (on top of these four components which they saw as simple inputs) which could be taxed to provide income for the elite: the people who do not directly participate in the process of production, namely landlords, clergy and government officials.

In a certain way, it was quite sensible: one cannot tax subsistence wages, nor can he tax profit that is at a “normal” rate if he believes that driving it below that rate will result in no production being undertaken at all. However, absence of surplus in manufacturing was at odds with what was observed in France at the time. As Georges Weulersse, the author of the most detailed analysis of physiocracy (see below), explains, large fortunes—by definition made of accumulated surpluses—existed in manufacturing. Yet Physiocrats stubbornly refused to admit that, and argued that these fortunes existed only because of special protection given to individual industrialists. Manufacturing, they held, could not produce surplus on its own without state protection.

It was only in agriculture that existed a surplus that could be taxed: ground rent. For in agriculture, price decomposes into depreciation, return to capital advanced by the tenant-farmer, subsistence wages paid to the hired labor and…the rent. Rent is not an income necessary to bring forth output. It is (as the nice formula has it) price-determined, not price-determining. It is the only net income which can be taxed and used to maintain a civilized society that needs government for the protection of property and administration of justice, and clergy for the provision of spiritual sustenance.

        Physiocrats, quite consistently with this view, argued in favor of policies that would raise agricultural production through longer land-leases (so that tenant farmers have incentive to invest in land improvement), freedom of movement of grain (laissez-passer) and freedom of exports. Such measures would increase both the quantity of agricultural output and the relative price of food, and therefore doubly yield a greater net product, the goal of economic activity as defined by them.

This is, in essence, the logic behind the view that only agriculture is productive, which, without looking at it more closely, seems strange to the modern ear. But thinking of it, poses the all-important question: what is net income? There is no general answer to that question. It depends on what the social structure is, and what is the goal of economic activity. Incomes that Physiocrats disregarded, i.e., wages, depreciation, interest, and entrepreneurial profit, are all parts of the gross value added as presently defined. Their and our components were not different. It is just that they were not interested in the components, like wages, that appear to us to be a valuable goal of economic activity.

Some suggested readings on Physiocrats:

Georges Weulersse, Le movement physiocratique en France, de 1750 à 1770. Paris: Maison des Sciences de Homme, Editions Mouton, 1910. Available at http://archive.org/details/lemouvementphysi01weuluoft. (A monumental two-volume discussion of the intellectual milieu before the Revolution within which the movement developed, its rise and fall, and its ideology.)

Gianni Vaggi, The Economics of François Quesnay, Durham, N.C : Duke University Press, 1987. (Excellent and sophisticated analysis of the physiocracy enlightened by Sraffianism.

Ronald L. Meek, Economics of Physiocracy, Routledge, 1962. (A standard reference text with translation of selected writings, including Le tableaux économique and brilliant introduction by the editor),

Marguerite Kuczynski and Ronald L. Meek (edited with new material, translations and notes), Quesnay’s “Tableau économique”, London: MacMillan for the Royal Economic Society and the American Economic Association, 1972. (Le Tableau in all its grandeur and complexity with the commentary.)

Milanovic (2023) Net economic output in history: Why we work? Ideology behind economic accounting