THE PHYSIOCRATS AND OTHER LIBERAL WRITERS I. INTRODUCTION: A.

At this point, the English economy was just biding time to take off towards industrialization their practices of mercantilism seemingly paid off at least in the context of acquiring the important elements of a modern market economy B. But the rest of Europe was not able to ride on the economic wave set by the English Except for a few active explorers and traders (e.g., Spain, Portugal, the Dutch), continental Europe was still feudal C. The French economy was at its lowest: 1. the French Monarch was one of the last to relinquish absolute authority this lead to the worsening of elitism between societal classes 2. Two-thirds of French society was recognized as nobility while the rest were mere peasants noble families were exempt from taxes, so in effect, more than half of French society were obligated to pay taxes (FYI: there were three forms of taxes in France!) 3. The French Monarchs lavish lifestyle also dug into the already pathetic state of the National Treasury, and the primary source of more revenue was further squeezed higher taxes! 4. Efforts towards launching mercantilism in France failed miserably The Monarch supported mercantilist efforts forgetting the fact that the peasantry was generally agriculturally-oriented 5. Pretty soon, the French Monarch was so badly in debt from its own National Treasury. D. The Physiocrats were able to observe their conditions and present their solutions to the economic problems of France II. Sir William Petty was doctor by profession but was also adept in the social sciences A. On Method of Analysis 1. came up with political arithmetic an old form of econometrics 2. endorsed quantifiable elements for analysis more than just Aristotelian deductive reasoning B. On Money 1. was able to observe and note the positive relationship between the volume of money in circulation and how fast people spend their money but the relationship of these variables to the general level of prices was not included C. On Value 1. proposed the Quantity Theory of Value a general ratio between land and labor in the production goods BUT modern microeconomics founded the production function as unique III. Richard Cantillon died too soon to reap the fame of his groundbreaking analysis of different economic variables even Adam Smith had to acknowledge him in his Wealth of Nations A. His original contributions cover a lot of areas in economic study 1. Treat population growth as an integral part of the economic process 2. Develop an economic explanation of the location of cities and sites of production 3. Make a distinction between market price and intrinsic value (i.e., equilibrium price) and show how the two may converge over time

4. Demonstrate that changes in velocity are equivalent to changes in the stock of money 5. Trace the channels through which changes in the stock of money influence prices 6. Describe the mechanism by which prices adjust in international trade 7. Analyze income flows between major sectors of the economy B. The Market System 1. saw the market system as organized interaction between smaller markets distributing different goods the way modern economic analysis views it! 2. the economic system was hierarchal 3. that market price have subjective elements imputed on it 4. self-interest was a motivating force in the market as it adjusts selling prices to a level where buyer and seller agree 5. equilibrium in the demand and supply of labor is also attained through changes in the volume of in/out migration C. On Competition and Entrepreneurship 1. all merchants take risks by selling a good at an undetermined price 2. recognized how the resource markets and the goods markets are interconnected 3. buying and selling are the essence of competition different sellers vying for the same customers D. On Money and Prices was able to establish how increases in the volume of money in circulation tend to drive the general level of prices upwards IV. Pierre le Pesant de Boisguilbert A. placed more value on the goods money is capable of buying than the value integral to specie B. effective demand and not nominal balances was the key to national wellbeing the income of a nation was based on flows of money expenditure V. Physiocracy The Rule of Nature was the first real school of thought in economics was lead by a court physician Francois Quesnay these ideas came about as a response to the continuing decline of the French economy due to high taxes and lowering of wages under mercantilist attempts A. Physiocratic Economics 1. society was subject to the rules of natural law and man should NOT interfere 2. endorsed economic liberalism, freedom of trade, free competition and the abolition of special privileges 3. defended private property particularly land ownership 4. believed in the economic significance of large-scale agricultural activity 5. divided society into groups tenants or cultivators, the landowners and the rest of society a. cultivators were fully productive b. landowners were partially productive because they interacted with using and improving the land c. all other sectors were entirely unproductive

6. Quesnay developed his Tableau Economique a diagram that demonstrated how agricultural surplus as distributed among the classes in society 7. Theory of Value believed that free competition is effective in bringing out a good price for goods this price would be approximately equal to the costs of production 8. still held on to subsistent wages and even profits were to be at a minimum 9. government was only there to protect people and property 10. called for the abolition of all indirect taxes and the imposition of a single tax on the net income from land B. Significance, Limitations and Criticisms of the Physiocrats 1. exaggerated the importance of agriculture 2. their belief in the natural order did away for any need for social and economic control 3. defended limited government control at a time when the government was about to be confronted with economic problems and responsibilities 4. was able to establish economics as a distinct and separate science 5. was able to expose the misleading elements of mercantilism 6. roused an active interest in the problems of resource distribution and in taxation VI. Count Pedro Rodgriguez de Campomanes A. published his work two years before the Wealth of Nations and his ideas were considered as comparable worthwhile to Smiths B. believed that economic welfare in Spain will not be achieved without reforms in the system of landholdings and property rights C. argued for self-interest and free trade in both the resource and the goods market D. promoted free movements of all forms of inputs and outputs within Spain E. supported free trade with the Americas F. all forms of price controls are to be condemned G. believed that a reduction in taxes on the peasants was called for while the taxes imposed on the aristocracy and on Church lands be increased H. endorsed the notion of formal venues for learning the essentials in nurturing economic growth is established in the country I. endorsed the idea that human capital was just as important as real fixed capital in the efforts toward growth