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Wednesday, September 07, 2005

Robert Reich and The Physiocrats

No too long ago I posted a commentary by Robert Reich, former secretary of labor in the Clinton administration, where he discusses the current tendency to erect both internal and external barriers to trade in the name of increasing employment. His point is  that while individually each of these seems to be a good idea, collectively they undermine the ability of markets to best respond to our collective wishes.

We are all familiar with international barriers, quotas, tariffs and the like, but what about internal barriers, what are those? One example, one that is a big local issue here right now, are enterprise zones and living wage laws.  There are designed to attract business to the area, and ensure they pay good wages when they get here.  Sounds good if it works. But what happens when governments in each area begin their own campaigns to attract their share of the business? The end result is a myriad of laws that firms must navigate in their decision making – a firm may face substantially different tax structures in each potential location –  and with each new law or regulation in each area, the problem grows more difficult.  This impedes entry and exit, impedes the free flow of resources between sectors and limits the economy's performance. As I read the Reich commentary, the Physiocratic school of thought came to mind.  The Physiocrats were important precursors to Adam Smith and believed the heavy government intervention associated with mercantilist (Colbertiste) policies limited economic performance. The Physiocrats did not last long, a couple of decades prior to 1776 is all, but their ideas that markets work best when governments intervene the least, i.e. when a government has a laissez-faire attitude, still resonate today.

According to the Physiocrats, only one sector in the economy, agriculture, is capable of producing a surplus and that surplus is a gift of nature. In order to produce the largest possible surplus, the flow of resources must be unimpeded.  Government interfered with the free flow of grain through the imposition of internal tariffs, labor migration was restricted, there were all sorts of government restrictions which the Physiocrats viewed as interfering with natural law and limiting the ability of the agricultural sector to produce a surplus. In addition, since government produces no surplus of its own, it is a parasite interfering with the natural order.  Thus government, while necessary, needs to be kept as small as possible:

The Physiocrats, The History of Economic Thought Website:  The physiocrats were a group of French Enlightenment thinkers of  the 1760s that surrounded the French court physician, François Quesnay. The founding document of Physiocratic doctrine was Quesnay's Tableau Économique (1759).  The inner circle included the Marquis de Mirabeau, Mercier de la Rivière, Dupont de Nemours, La Trosne, the Abbé Baudeau and a handful of others.  To contemporaries, they were known simply as the économistes.

The cornerstone of the Physiocratic doctrine was François Quesnay's (1759, 1766) axiom that only agriculture yielded a surplus -- what he called a produit net (net product). Manufacturing, the Physiocrats argued, took up as much value as inputs into production as it created in output, and consequently created no net product.  Contrary to the Mercantilists, the Physiocrats believed that the wealth of a nation lies not in its stocks of gold and silver, but rather in the size of its net product.

The Physiocrats argued that the old Colbertiste policies of encouraging commercial and industrial corporations was wrong-headed.   It is not … worthwhile for the government to distort the whole economy with monopolistic charters, controls and protective tariffs to prop up sectors which produced no net product and thus added no wealth to a nation.   Government policy, if any, should be geared to maximizing the value and output of the agricultural sector.

But how?  French agriculture at the time was still trapped in Medieval regulations which shackled enterprising farmers.  Latter-day feudal obligations -- such as the corvée, the yearly labor farmers owed to the state -- were still in force.   The monopoly power of the merchant guilds in towns did not permit farmers to sell their output to the highest bidder and buy their inputs from cheapest source.    An even bigger obstacle were the internal tariffs on the movement of grains between regions, which seriously hampered agricultural commerce. Public works essential for the agricultural sector, such as roads and drainage, remained in a deplorable state. Restrictions on the migration of agricultural laborers meant that a nation-wide labor market could not take shape.  Farmers in productive areas of the country faced labor shortages and inflated wage costs, thus forcing them to scale down their activities. In unproductive areas, in contrast, masses of unemployed workers wallowing in penury kept wages too low and thus local farmers were not encouraged to implement any more productive agricultural techniques.   

It is at this point that the Physiocrats jumped into their laissez-faire attitude. They called for the removal of restrictions on internal trade and labor migration, the abolition of the corvée, the removal of state-sponsored monopolies and trading privileges, the dismantling of the guild system, etc…It is interesting to note that the Physiocrats defended their laissez-faire policy conclusions not by pragmatic arguments about improving agricultural production, but rather by mystical views about the role of the government in their ordre naturel.  The Physiocrats, unlike many of their contemporaries, continued to view the State as a parasitical entity.  It lives off the economy and society, but it is not part of it.  Government has no prescribed place in the ordre naturel.  Its only role is to set the laws of men in a way that permits the God-given laws of nature to bring the natural order about.  Any attempt by the government to influence the economy against these natural forces leads to imbalances which postpone the arrival of the natural state and keep the net product below what it would otherwise be. A general laissez-faire policy …[was] the speediest, least distortionary and least costly ways of arriving at the natural state.

…The policy measures advocated by the Physiocrats went very much against the interests of the nobility and the landed gentry (however much they claimed to have their interests at heart).  But because Quesnay was the private physician to Madame de Pomapadour, the mistress of Louis XV, the Physiocratic clique enjoyed a good degree of protection in the French court. … The Physiocrats' own style did not help their case.  Their pompousness, their mysticism about the ordre naturel, the affected, flowery way in which they wrote their tracts, their petty "cliquishness", their unrestrained adulation and worship of Quesnay -- whom they referred to as the "Confucius of Europe", the "modern Socrates" -- irked just about everybody around them.  Even those who ought to be their natural allies, such as Voltaire, Diderot, Rousseau and de Mably, despised the Physiocrats with a passion. In a letter to Morellet regarding his upcoming Dictionnaire, the otherwise good-natured David Hume expressed his disdain for them thus:

"I hope that in your work you will thunder them, and crush them, and pound them, and reduce them to dust and ashes!  They are, indeed, the set of men the most chimerical and most arrogant that now exist, since the annihilation of the Sorbonne."  (Hume, Letter to Morellet, July 10, 1769)

Adam Smith killed them with faint praise, arguing that the Physiocratic system "never has done, and probably never will do any harm in any part of the world" (Smith, 1776).

…Although the Physiocratic system was accused of being "mysticism parading as science", the truth was perhaps quite the opposite. Physiocracy was more "science parading as mysticism".  For this reason, the Physiocrats still exerted a considerable amount of influence on the development of economics...

    Posted by on Wednesday, September 7, 2005 at 12:15 AM in Economics, History of Thought, Regulation | Permalink  TrackBack (0)  Comments (4)

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