The Interrelatedness of an Economy

The Interrelatedness of an Economy

Even though physiocratic theory was deficient in logical consistency and detail, the physiocrats did determine the necessity for building theoretical models by isolating key economic variables for study and analysis. Using this process, they achieved significant insights into the interdependence of the various sectors of the economy on the levels of both macro- and microeconomic analysis.

The major concern of the physiocrats was with the macroeconomic process of development. They recognized that France was lagging behind England in applying new agricultural techniques. Some areas of northern France were introducing advanced techniques, but most of France was maintaining its old ways; thus, the country was developing unevenly. To cope with this problem, the physiocrats, like the English and French mercantilists, wished to discover the nature and causes of the wealth of nations and the policies that would best promote economic growth. French" mercantilism had been even more thorough­going in its regulation of domestic and foreign economic activity than its British counterpart, and physiocracy was an intellectual reaction to this regulation. The physiocrats focused not on money but on the real forces leading to economic development. In reaction to the mercantilistic notion that wealth was created by the process of exchange, they studied the creation of physical value and con­cluded that the origin of wealth was in agriculture, or nature.
In the economy of their time, more goods were produced than were needed to pay the real costs to society of producing those goods. Therefore, a surplus was generated. Their search for the origin and size of this surplus led them to the idea of the net product. The agricultural production process provides a good example of a net product. After the various factors of production—seed, labor, machinery, and the like—are paid for, the annual harvest provides an excess. The physiocrats regarded this as resulting from the productivity of nature. Labor, according to them, could produce only enough goods to pay the costs of labor, and the same held true for the other factors of production, with the exception of land. Therefore, production from land created the surplus that the physiocrats called the net product. Manufacturing and other nonagricultural economic activities were considered "sterile," because they created no net product. The belief that only agricultural production was capable of returning to society an output greater than the social costs of that output may seem quaint today, but it may be explained by the fact that the physiocrats focused on physical productivity rather than value productivity. Also, because large-scale industry had not yet developed in France in the middle of the eighteenth century, the productivity of industry was not apparent in the economy of the physiocrats. The small employer with only a few employees did not seem to be making any surplus, and his standard of living was not significantly different from that of his employees. Having established that the origin of the net product was in land, the physiocrats concluded that land rent was the measure of the society's net product.