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  2. 2. PHYSIOCRACY  Physiocracy is the economic doctrine put forth by a group of thinkers in France, in the 18th century. Independent thinkers, Reaction against Mercantilists policies, Reaction against oppressive rule of the Louis – kings of France. 19-01-2017Prabha Panth 2
  3. 3.  Discarded the Mercantilist belief that wealth is money (gold and silver), that comes through exchange,  Emphasised the Natural Order and Natural Law.  Agriculture alone is productive,  Other occupations are all sterile. 19-01-2017Prabha Panth 3
  4. 4. Factors leading to rise of Physiocracy:  Corruption and degeneration of Court life under Louis XIV, XV, and XVI.  Long and wasteful wars against England and Holland,  Heavy taxes on peasants and farmers. Noblemen and Church exempted from taxes. Regressive and irrational taxation  Tax on salt,  Multiple taxes on manufacturing,  Tax on land and produce,  Exploitation by tax collectors, only 1/3 went to the State. 19-01-2017Prabha Panth 4
  5. 5. Factors leading to rise of Physiocracy:  Mercantilist policies gave preference to trade. But it was agricultural revolution in England which led to its prosperity.  Agriculture was the worst sector affected in France.  Concept of justice: simple laws, scientific temper, such as Newton’s work - changed the attitude of the French people. 19-01-2017 Prabha Panth 5
  6. 6. Physiocratic Doctrines: 1. Concept of Natural Order and Natural Laws 2. Net Product of the economy, 3. Distribution of Wealth – the Table Economic 1. Natural Order:  Mercantilists created an artificial order – based on man made laws. Positive approach.  Natural order was an “Ideal Order arranged in conformity with the Laws of Nature,” 19-01-2017Prabha Panth 6
  7. 7. 1. Natural order  Leads to well being of the people,  Natural rights of man,  Man made laws should not violate natural laws,  Concept of “laissez faire” – or no Government interference in the economy,  Freedom to individuals,  Secure the greatest amount of pleasure.  “Nature is the Mother, and Labour is the Father of all wealth.” – Sir William Petty 19-01-2017Prabha Panth 7
  8. 8. 2. Net product:  Land or Nature is the source of all wealth as seen in agriculture.  Nature and Labour produces wealth in agriculture.  Labour consists of 1) Sterile labour and 2) Productive labour.  Productive labour produces a surplus over and above the inputs.  E.g. in agriculture, with a one good model, no exchange value,  Output – (wages + seeds) = Surplus 19-01-2017Prabha Panth 8
  9. 9.  Commerce and manufacturing are sterile – they do not produce any surplus.  But the surplus of agriculture supports them.  Hence only agriculture is “productive”.  Surplus is created in agriculture, and paid to artisans and other types of employment.  Thus manufacturing and commerce, though important, are not productive, for they do not generate any “surplus”.  Hence it is only increase in agricultural production that increases the wealth of a country.  Not trade. 19-01-2017Prabha Panth 9
  10. 10. 3. Distribution of Net Product:  Based on the concept of “Net Product” – the Physiocrats formulated the theory of distribution.  Quesnay created the Tableau Economique, or Economic Table.  Agricultural surplus flows through the economy in the form of rent, wages, and purchases.  These were the real economic movers: 1. Government regulation impedes the flow of income in the economy, and also economic development. 2. Taxes on the productive classes such as farmers reduced, higher taxes for unproductive classes such as landowners should be increased. This is because their luxurious way of life distorts the income flow. 19-01-2017Prabha Panth 10
  11. 11. Assumptions of the Model: 1. Lag Model: Income of one year spent the next year. But can also use a lead model – income of present year is spent in the present time period. 2. Stationary State: Self replacement, no growth, 3. Capital: as advances for both working and fixed capital. 4. Classes: three classes 1. Farmers :extract wealth from the soil, produce seed, food and raw materials, 2. Proprietors: Kings, Nobles, and Landlords. Own land, which produces wealth, so are productive like farmers. 3. Sterile class: manufacturers, artisans, shop keepers, and merchants (unproductive). 19-01-2017Prabha Panth 11
  12. 12. Assumptions continued: 5. All transactions are in money terms – that reflect the actual output in physical or real terms, money is important only as a medium of exchange, 6. Free trade and free competition. Not allow merchants, the sterile class to profit. The above three classes: Proprietary, productive, and sterile interact with each other in the economy. 19-01-2017Prabha Panth 12
  13. 13. The Tableau Economique: The Economic Table (Quesnay: 1758) ►Stationary state. State of equilibrium ►Circulation of money within the economy (corresponding to circulation of blood in the body) ►Three classes: Proprietors of land, farmers and manufacturers. ► Farmers rent land from Landlords or Proprietors, ► All transactions are in money terms. Prices are given. ► All classes consume both food and non-food (manufactured) goods. 19-01-2017Prabha Panth 13
  14. 14. The Model: an example:  Farmers produce agricultural goods worth $5000.  Out of this, they retain food and raw material (working capital) worth $2000 for themselves,  They pay $2000 as rent to the Landlord (proprietor),  And they spend $1000 on manufactured goods.  Farmers produce $5000 worth of agricultural products, but consume only $2000 of this output.  Thus farmers or agriculture produces a Net Surplus.  Net surplus = $5000 - $2000 = $3000  This amount is transferred to the landlord as rent, and by both to manufacturers for their output. 19-01-2017Prabha Panth 14
  15. 15.  Proprietors or landlords receive $2000 as rent from farmers.  They spend $1000 on food, and $1000 on manufactured goods.  Manufacturers receive $2000 ($1000 from farmers and $1000 from landlords).  They spend $1000 on food, and $1000 on raw materials, which they buy from farmers. 19-01-2017Prabha Panth 15
  16. 16.  Thus, it is only the agricultural sector that creates a surplus in real terms – the “net surplus.”  The other two only recycle the amount they receive as payment from agriculture.  However, landlords or proprietor’s income (rent), considered as legitimate for:  They own and clear the land, construct drainage and irrigation which makes land productive.  Thus property is considered the fundamental feature of Natural order, the tree of which, other social institutions are branches. 19-01-2017Prabha Panth 16
  17. 17. Role of Trade  Trade – both internal and external - was considered unproductive.  Only exchange of goods of equal value.  Encouraged Free Trade, as part of the Natural Order, no restrictions to ensure best possible prices.  Import duties raise Ps,  Export earnings increase supply of money, value of money falls, as prices rise. Makes domestic goods more expensive  People prefer to import at lower prices, so gold flows out of the country.  Not desirable. 19-01-2017Prabha Panth 17
  18. 18. Taxation  To be paid out of the surplus i.e. Net Product. Single tax on surplus from land.  No indirect tax, direct tax more economical in collection  Net product goes to landlord, sole payer of the tax.  Misery caused by unequal and regression taxation.  Workers and industrialists receive no profits or surplus 19-01-2017Prabha Panth 18
  19. 19. Criticism:  Stationary state, there is no growth.  No capital formation, and increase in investments.  If K is spent on land, it is not original gift of Nature.  Landlords do not play an active role in production, they are like capitalists, owning land.  Possibility of exploitation of labour. 19-01-2017 Prabha Panth 19
  20. 20. Criticism:  Sterile class (manufacturers) have capital to produce output, does not explain how they got the capital.  No depreciation.  Price and cost determination is not discussed.  Vague concept of Natural Law,  Ignored role of labour, classical economists showed that labour also contributes to wealth.  Balanced budget and laissez faire. 19-01-2017 Prabha Panth 20