The Physiocrats: Domestic Trade Theory

The Physiocrats, Domestic Trade Theory

Credit for the final destruction of mercantile principles both in theory and practice as far as France was concerned goes to those economists known popularly as the Physiocrats. To be sure, Montesquieu in the Esprit des Lois destroyed the philosophical basis of Mercantilism, much as Locke had done in England, by proclaiming the importance of natural law in social matters. However, his concern with economics was only incidental; and, as a matter of fact, he showed a general acceptance of certain mercantilist views. With the Physiocrats it was a different story. They broke completely with the past, and established a new order of economic life. Quesnay and Turgot were representative leaders of this school of thought. Their attitude toward trade was a direct outgrowth of their basic concept of a natural law which applied to all nature. The individual had a right to whatever natural enjoyments he could procure through his labor. The right to hold and transfer property was therefore undeniable. Once having granted these assumptions, it followed that competition should not be restricted by law, by the creation of monopolies, or by the granting of special privileges. On the other hand, Quesnay considered commerce as unproductive labor. The mere exchange of wealth, he claimed, was not the same as the production of wealth. The gain made by merchants was at the expense of the agriculturalists who alone were the producers of all value. He denied the value of a favorable balance of trade since its effect would be to raise prices; and the wealth of a state could not be judged by the quantity of money it possessed since money was sterile, having no value in itself except as it effected an exchange of commodities. To conduct commerce at the expense of another nation was impossible, since commerce can only take place as long as there exist reciprocal advantages. Nevertheless, the Physiocrat defense of free trade cannot be accepted as evidence of this high estimate of its worth. Just the opposite was the case. Foreign trade was a liability since the expenses of it were deducted from the real production of agriculture. Domestic trade at least kept all true values within the nation. Turgot modified some of the details of Quesnay's ideas but he changed no important feature. For example, in emphasizing the obligation of the state to prevent monopoly and special privilege to the extent of preserving natural liberty, he especially objected to extending the state's responsibility to the degree of a paternalistic care of the careless, lazy, or indifferent. Hence the free trade doctrine of the Physiocrats and their opposition to Mercantilism arose more from their philosophical world view than from any critical appraisal of the value of either in itself.