Read Ebook: A History of Economic Doctrines from the time of the physiocrats to the present day by Gide Charles Rist Charles Richards R Robert Translator Smart William Translator

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The most interesting thing in the Physiocratic scheme of distribution is not the particular demonstration which they gave of it, but the emphasis which they laid upon the fact of the circulation of wealth taking place in accordance with certain laws, and the way in which the revenue of each class was determined by this circulation.

The singular position which the proprietors hold in this tripartite division of society is one of the most curious features of the system.

Anyone examining the table in a non-Physiocratic fashion, but simply viewing it in the modern spirit, must at once feel surprised and disappointed to find that the class which enjoys two-fifths of the national revenue does nothing in return for it. We should not have been surprised if such glaring parasitism had given to the work of the Physiocrats a distinctly socialistic tone. But they were quite impervious to all such ideas. They never appreciated the weakness of the landowners' position, and they always treated them with the greatest reverence. The epithet "sterile" is applied, not to them, but to manufacturers and artisans! Property is the foundation-stone of the "natural order." The proprietors have been entrusted with the task of supplying the staff of life, and are endued with a kind of priestly sacredness. It is from their hands that all of us receive the elements of nutrition. It is a "divine" institution--the word is there. Such idolatry needs some explanation.

There is no need to insist on this strange aberration which led them to look for the creator of the land and its products, not amid the cultivators of the soil, but among the idlers. Such was the logical conclusion of their argument. We must also remember that the Physiocrats failed to realise the inherent dignity of all true labour simply because it was not the creator of wealth. This applied both to the agricultural labourer and the industrial worker, and though the former alone was considered productive it was because he was working in co-operation with nature. It was nature that produced the wealth and not the worker.

Something must also be attributed to their environment. Knowing only feudal society, with its economic and political activities governed and directed by idle proprietors, they suffered from an illusion as to the necessity for landed property similar to that which led Aristotle to defend the institution of slavery.

Although they failed to foresee the criticisms that would be levelled against the institution of private property, they were very assiduous--especially the Abb? Baudeau--in seeking an explanation of its origin and a justification of its existence. The reasons which they advanced are more worthy of quotation than almost any argument that has since been employed by conservative economists.

The Physiocrats failed to notice the contradiction involved in this. If the revenue which the proprietor draws represents the remuneration for his outlay and the return for his expenditure it is no longer a gift of nature, and the net product vanishes, for, by definition, it represented what was left of the gross product after paying all initial expenses--the excess over cost of production. If we accept this explanation of the facts there is no longer any surplus to dispose of. It is as capitalists pure and simple and not as the representatives of God that proprietors obtain their rents.

Must we really believe that although these outlays afford some explanation of the existence of private property they supply no means of measuring or of limiting its extent? Is there no connection between these outlays and the revenues which landed proprietors draw?

Or must we distinguish between the two portions of the revenue--the one, indispensable, representing the reimbursement of the original outlay, and in every respect comparable to the revenue of the farmer, and the other, being a true surplus, constituting the net product? How can they justify the appropriation of the latter?

There is another argument held in reserve, namely, that based upon social utility. They point out that the cultivation of land would cease and the one source of all wealth would become barren if the pioneer were not allowed to reap the fruits of his labour.

The new argument is a contradiction of the old. In the former case land was appropriated because it had been cultivated. In the present case land must be appropriated before it can be cultivated. In the former labour is treated as the efficient cause, in the latter as the final cause of production.

Finally, the Physiocrats believed that landed proprietorship was simply the direct outcome of "personal property," or of the right of every man to provide for his own sustenance. This right includes the right of personal estate, which in turn involves the right of landed property. These three kinds of property are so closely connected that in reality they form one unit, and no one of the three can be detached without involving the destruction of the other two. They were full of veneration for property of every description--not merely for landed property. "The safety of private property is the real basis of the economic order of society," says Quesnay. Mercier de la Rivi?re writes: "Property may be regarded as a tree of which social institutions are branches growing out of the trunk." We shall encounter this cult of property even during the terrible days of the French Revolution and the Reign of Terror. When all respect for human life was quite lost there still remained this respect for property.

The defence of private property was already well-nigh complete. But if they were strong in their defence of the institution they did not fail to impose upon it some onerous duties--which counterbalanced its eminent dignity. Of course, every proprietor should always be guided by reason and be mannerly in his behaviour, and he should never allow mere authority to become the rule of life. Their duties are as follows:

So far we have considered only the Physiocratic theory. But the Physiocratic influence can be much more clearly traced if we turn to applied economics and examine their treatment of such questions as the regulation of industry, the functions of the State, and the problems of taxation.

I: TRADE

All exchange, the Physiocrats thought, was unproductive, for by definition it implies a transfer of equal values. If each party only receives the exact equivalent of what it gives there is no wealth produced. It may happen, however, that the parties to the exchange are of unequal strength, and the one may grow rich at the expense of the other. In giving a bottle of wine in exchange for a loaf of bread there is a double displacement of wealth, which evidently affords a fuller satisfaction of wants in both cases, but there is no wealth created, for the objects so exchanged are of equal value. To-day the reasoning would be quite different. The present-day economist would argue as follows: "If I exchange my wine for your bread, that is a proof that my hunger is greater than my thirst, but that you are more thirsty than hungry. Consequently the wine has increased in utility in passing from my hands into yours, and the bread, likewise, in passing from your hands into mine, and this double increase of utility constitutes a real increase of wealth." Such reasoning would have appeared absurd to the Physiocrats, who conceived of wealth as something material, and they could never have understood how the creation of a purely subjective attribute like utility could ever be considered productive.

We have already had occasion to remark that industry and commerce were considered unproductive. This was a most significant fact, so far as commerce was concerned, because all the theories that held the field under Mercantilism, notably the doctrine that foreign commerce afforded the only possible means of increasing a country's wealth, immediately assumed a dwindling importance. For the Mercantilists the prototype of the State was a rich merchant of Amsterdam. For the Physiocrats it was John Bull.

That may be; but, admitting a contempt for commerce, what conclusions do they draw from it? Shall they prohibit it, or regulate it, or shall they just let it take its own course? Any one of these conclusions would follow from their premises. If commerce be as useless as they tried to make out, the first solution would be the best. But it was the third that they were inclined to adopt, and we must see why.

The fallacy lurking behind the "balance of trade" theory is exposed with great neatness by Mercier de la Rivi?re. "I will drown the clamour of all your blind and stupid policies. Suppose that I gave you all the money which circulates among the nations with whom you trade. Imagine it all in your possession. What would you do with it?" He goes on to show how not a single foreign country will any longer be able to buy, and consequently all exportation will cease. The result of this excessive dearness will be that buying from foreign countries will be resorted to, and this will result in the exportation of metallic currency, which will soon readjust matters.

The contention that import duties are paid by the foreigner is also refuted. Nothing will be sold by the foreigner at a lower price than that which other nations would be willing to give him. An import duty on such goods will increase the real price, which the foreigner will demand, and this import duty will be paid by those who buy the goods.

There is also a refutation of the policy known as reciprocity. "A nation levies an import duty upon the goods of another nation, but it forgets that in trying to injure the selling nation it is really checking the possible consumption of its own goods. This indirect effect, of course, is inevitable, but can nothing be done to remedy this by means of reprisals? England levies a heavy duty on French wines, thereby reducing its debit account with France very considerably, but more French wine will not be bought if a tax is also placed upon the goods which England exports to France. Do you think that the prejudice which England has taken against France can be remedied in this way?"

We have multiplied instances, for during the whole of the hundred years which have since elapsed has anyone deduced better arguments?

In monetary matters, especially on the question of interest, the Physiocrats were willing to recognize an exception to their principle of non-intervention. Mirabeau thought that whenever a real increase of wealth resulted from the use of capital, as in agriculture, the payment of interest was only just. It was simply a sign or symbol of the net product. But in trade matters he thought it best to limit if not to prohibit it altogether. It often proved very harmful, and frequently was nothing better than a tax levied by order of "the corrosive landowners." Quesnay could not justify it except in those cases where it yielded a net product, but he was content simply to suggest a limitation of it. The Physiocrats are at least logical. If capital sunk in industrial and commercial undertakings yields no income it is evident that the interest must be taken from the borrower's pocket, and they condemned it just as they condemned taxing the industrial and commercial classes.

Turgot is the only one of them who frankly justifies taking interest. The reason that he gives is not the usual Physiocratic argument, but rather that the owner of capital may either invest it in the land or undertake some other productive work--capital being the indispensable basis of all enterprise--and that, consequently, the capital will never be given to anyone who will offer less than what might have been made out of it did the owner himself employ it. This argument implies that every undertaking is essentially a productive one, and indeed one of the traits which distinguishes Turgot from the other Physiocrats is the fact that he did not think that industry and commerce were entirely unproductive.

II: THE FUNCTIONS OF THE STATE

Seeing that the Physiocrats believed that human society was pervaded by the principle of "natural order," which required no adventitious aid from any written law, and since Nature's voice, without any artificial restraint, was sufficient guide for mankind, it might have been expected that the trend of Physiocracy would have been toward the negation of all legislation, of all authority--in a word, toward the subversion of the State.

On the other hand, great respect was shown for the social hierarchy, and they were strong in their condemnation of every doctrine that aimed at attacking either the throne or the nobility. What they desired was to have sovereign authority in the guise of a hereditary monarchy. In short, what they really wanted--and they were not frightened by the name--was despotism.

"The sovereign authority should be one, and supreme above all individual or private enterprise. The object of sovereignty is to secure obedience, to defend every just right, on the one hand, and to secure personal security on the other. A government that is based upon the idea of a balance of power is useless."

This should help us to realise the distance separating the Physiocrats from the Montesquieuian idea of the distribution of the sovereign authority, and from the other idea of local or regional control. There is no mention of representation as a corollary of taxation. This form of guarantee, which marks the beginnings of parliamentary government, could have no real significance for the Physiocrats. Taxation was just a right inherent in the conception of proprietary sovereignty, a territorial revenue, which was in no way dependent upon the people's will.

Despotism, in the eyes of the Physiocrats, had a peculiar significance of its own. It was the work of freedom, not of bondage. It did not signify the rule of the benevolent despot, prepared to make men happy, even against their own will. It was just the sovereignty of the "natural order"--nothing more. Every reasonable person felt himself bound to obey it, and realised that only through such obedience could the truth be possibly known.

This despotism was incarnate in the person of the sovereign or king. But he is simply an organ for the transmission of those higher laws which are given to him. They would compare him with the leader of an orchestra, his sceptre being the baton that keeps time. The conductor's despotism is greater than the Tsar's, for every musician has to obey the movement of the hand, and that immediately. But this is not tyranny, and whoever strikes a false note in a spirit of revenge is not simply a revolter, but also an idiot.

In practice there will be nothing of great importance for the despot to do. "As kings and governors you will find how easy it is to exercise your sacred functions, which simply consist in not interfering with the good that is already being done, and in punishing those few persons who occasionally attack private property." In short, the preservation of the "natural order" and the defending of its basis--private property--against the attacks of the ignorant and the sacrilegious is the first and most important duty of the sovereign. "No order of any kind is possible in society unless the right of possession is guaranteed to the members of that society by the force of a sovereign authority."

Instruction is the second duty upon which the Physiocrats lay special stress. "Universal education," says Baudeau, "is the first and only social tie." Quesnay is specially anxious for instruction on the "natural order," and the means of becoming acquainted with it. Further, the only guarantee against personal despotism lies in well-diffused instruction and an educated public opinion. If public opinion, as Quesnay said, is to lead, it should be enlightened.

This is by no means all. There are a number of duties recognised as belonging to the State, of which every economist of the Liberal school up to Bastiat and M. de Molinari approves.

We will add one other trait. Like the Liberal school, the Physiocrats were whole-hearted "internationalists." In this respect they differ from their prototypes, the Chinese. They believed that all class distinctions and all international barriers ought to be removed in the interest of political development, as well as in that of scientific study. The peace advocates of to-day would do well to make the acquaintance of their illustrious predecessors.

The bulk of the Physiocratic system is taken up with the exposition of a theory of taxation, which really forms one of the most characteristic portions of their work. Though inextricably bound up with the theory of the net product and with the conception of landed proprietorship, curiously enough, it has survived the rest of their doctrine, and quite recently has been given a new lease of life.

The reply is obvious if we have grasped their system. The only available fund is the net product, which is the only new wealth that is really dispensable--the rest is necessarily absorbed in the repayment of the advances made for the upkeep of the agricultural and industrial classes. Were taxation to absorb a proportion of the revenues that are devoted to production it would gradually drain away the source of all wealth. So long as it only takes the surplus--the true net product, which is a mere tributary of the main stream--no harm will be done to future production.

All this is quite clear. But if taxation is to absorb the net product the question arises as to who is to pay it. It is equally evident that it can only be taken from those who already possess it, namely, from the landed proprietors, who must bear the whole burden of taxation. Just now we were amazed at the privileges which the Physiocrats so light-heartedly granted them: this is the ransom, and it is no light one. The next problem is how to assess this tax.

The Physiocrats were extremely loth to rob the gentry of their incomes, and a number of pages in their writings are devoted to a justification of their claims upon them. Not only were they willing to leave them everything that was necessary to compensate them for the outlay of capital and labour, but also all that might be required to make the property thoroughly valuable and the position of the landowner a most enviable one. The preference shown for the landowner is just the result of the social importance attributed to him by the Physiocrats. "If some other class were preferable," says Dupont de Nemours, "people would turn their attention to that." They would no longer spend their capital in clearing or improving the land. But if the possession of land be so desirable, is there not some danger lest everybody should become a landlord and neglect the other walks of life? The Physiocrats thought not, for, since Nature has set a limit to the amount of land in existence, there must also be a limit to the number of landowners.

The proprietors, who were then for the most part free from taxation, felt that this was a very considerable contribution, and that the Physiocrats demanded a heavy price for the high honour which they had conferred upon them. Even to-day a tax of 30 per cent. on the gross revenue of landlords would cause some consternation. The Physiocrats anticipated this objection, and in reply brought forward an argument which shows that they possessed exceptionally keen economic insight. They argued that none would feel the burden, seeing that no one was really paying it. Land would now be bought at 70 per cent. of its former value, so that the 30 per cent. nominally paid by the proprietor was in reality not paid by him at all. Land let at ?10,000 would be valued at ?200,000. But with a tax of ?3000 it is really only yielding ?7000, and its value will be ?140,000. The buyer who pays this price, despite the fact that he has paid a tax of ?3000, will enjoy all the revenue to which he has any claim, for he can only lay claim to what he has paid for, and he did not pay for that portion of the revenue which is affected by the tax. It is exactly as if he had only bought seven-tenths of the land, the remaining three-tenths being the State's. And if at some later time this tax should be abolished, it would merely mean making him a present of ?3000 a year--the equivalent of a lump sum of ?60,000.

The sovereign's position in the main is like that of the landed proprietors, which is in agreement with the Physiocratic conception of sovereignty. The landed proprietors and the king in reality form one class of fellow landowners, with the same rights, the same duties, and the same revenues. Hence the sovereign's interests are completely bound up with those of his country.

The objections which a single tax, levied only on the landed interest, was bound to provoke were not unforeseen by the Physiocrats, nor did they neglect to answer them.

To the objection that it was unjust to place the burden of taxation upon the shoulders of a single class of the nation, instead of distributing it equally among all classes, the Physiocrats replied that the statesman's ideal was not equal taxation, but the complete abolition of all taxation. This could only be achieved by taxing the "net product."

Suppose that we agree that the taxes should be paid by some other class. The question then is to determine what class of the community should be chosen.

This process of reasoning seems to imply that the revenues of the agricultural and industrial classes are not squeezable because they represent the indispensable minimum necessary for the expenses of production. This seems to be an anticipation of the notorious "iron law." Turgot's formula incisively stating this law, but containing no attempt at a justification, is known to most people. Long before his day, however, it had been stated by Quesnay in terms no less pronounced, though perhaps not so well known. "It is useless to urge that wage-earners can pay the tax so levied upon them, by restricting consumption and depriving themselves of luxuries without thereby causing the burden to fall upon the classes who pay the wages. The rate of wages, and consequently the amount of comfort and luxury which wages can purchase, are fixed at the irreducible minimum by the action of the competition which prevails among them." This is quite a characteristic trait. The author of the "natural order," without any hesitation, admits that the direct outcome of the establishment of that order would be to reduce the life of the wage-earners to a level of bare subsistence.

Another objection consists in the insufficiency of a single tax to meet all the needs of the State. "In some States it is said that a third, a half, or even three-fourths of the clear net revenue from all sources of production is insufficient to meet the demands of the Treasury, and consequently other forms of taxation are necessary."

One of the disciples of Quesnay put the theory to the test of practice. The Margrave of Baden had the advantage of being a prince, and he proceeded to experiment on his own subjects. The system was tried in three communes of his principality, but, like most social experiments, failed. In two of the communes it was abandoned at the end of four years. In a third, despite its evil effects, it was prolonged until 1802. The increase in the land tax caused a veritable slump in the value of property just when the remission of taxes upon consumption was resulting in the rapid multiplication of wineshops and beerhouses. It is unnecessary to add that the failure of the experiment did nothing to weaken the faith of the Margrave or his fellow Physiocrats. An experiment on so small a scale could not possibly be accepted as decisive. This is the usual retort of innovators when social experiments prove failures, but we must recognise the element of truth contained in their reply.

But if we wish to see the real results of the Physiocratic system we must look beyond the private experiments of a prince. Elsewhere the effects were much more far-reaching.

The fiscal aspect of the French Revolution owed its guiding inspiration to their ideas. Out of a budget of 500 million francs the Constituent Assembly decreed that about half of it--that is, 240 millions--should be got out of a tax levied upon land, equal to a tax of 2400 million francs nowadays; and the greatest part of it was to be raised by direct taxation.

Distrust of indirect taxation, and of all taxes on commodities, is also a consequence of the Physiocratic system--a distrust that is bound to grow as society becomes more democratic. Most of the arguments in favour of direct taxation are to be found in the Physiocratic writings. But the chief one employed nowadays--namely, that indirect taxes often bear no proportion to the amount of the revenue, but weigh heaviest upon those who have least, is not among them. This concern about proportionality, which is merely another word for justice, was quite foreign to their thoughts.

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