Physiocratic Economic Policy

Physiocratic Economic Policy

The physiocrats' contributions to microeconomic theory were not as significant as their contributions to macroeconomic theory. They believed that the basic motivation for the economic activities of human beings was the desire to maximize gain. Prices were formed in the market by economic activity; and the formation of these prices could be studied, because it was governed by natural laws independent of human will. Although the physiocrats did not develop a coherent theory of prices, they concluded that free competition led to the best price and that society would benefit if individuals followed their self-interest. Furthermore, believing that the only source of a net product was agriculture, they concluded that the burden of taxes would ultimately rest on land. A tax on labor, for example, would be shifted to land, because competition had already ensured that the wage of labor was at a subsistence level. Perhaps most important, the physiocrats began to be aware of the function of prices in integrating the activities of the various factors in the economy. Like the more perceptive mercantilists, they recognized that an individual who appears to be working independently in a market economy is actually working for others and that these independent activities are integrated by the price system. Their microeconomic analysis tended to lack detail. For example, they offered no detailed argument that free competition would result in an optimum allocation of resources. But they did have some notion of the nature and function of relative price, an idea subsequently used by Adam Smith.

Because the physiocrats believed that a natural order existed that was superior to any possible human design, they conceived of the economy as largely self-regulating and thus rejected the controls imposed by the mercantilist system. The proper role of government was to follow a policy of laissez faire—to leave things alone. In the hands of Adam Smith and subsequent economists, this idea was of tremendous importance in shaping the ideology of Western civilization. Certain English writers were also advocating nonintervention as a general policy at the time, and they, too, influenced Smith.

The physiocrats maintained that the primary obstacles to economic growth proceeded from the mercantilist policies regulating domestic and foreign trade. They objected particularly to the tax system of the mercantilists and advocated that a single tax be levied on land. Of course, according to their theory, all taxes would ultimately fall on land anyway, but only after causing much friction in the economic system.

The most unfortunate of the many governmental regulations, according to the physiocrats, was the prohibition on the export of French grain. It kept down the price of grain in France, they said, and was therefore an obstacle to agricultural development. Because the physiocrats did not foresee the develop­ment of manufacturing, they concluded that a laissez-faire policy would produce tremendous growth in French agriculture as the small-scale agriculture of the feudal economy was replaced by large-scale agriculture. Thus, the wealth and power of the French economy would be increased. The mercantilists had, in effect, found the source of the net product to be exchange—particularly ex­change in the form of international trade—and therefore advocated policies designed to foster a favorable trade balance. The physiocrats, who considered the source of the net product to be agriculture, maintained that laissez faire would lead to increased agricultural production and ultimately to greater economic growth.