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Monday, October 31, 2016

The Early Economists Who Tried to Save France

The legacy of the French Physiocrats is too important to allow to be lost to history.

In the middle decades of the eighteenth century two schools of thought emerged, one in France and the other in Great Britain, that were critical of Mercantilism, the government system of economic planning and regulation in the 1700s. In Great Britain, the primary thinkers were members of what has become known as the Scottish Moral Philosophers.

Property and, consequently, security and liberty of enjoyment are the essence of the natural and fundamental order of society.

In France the proponents of the new ideas of economic freedom were known as the Physiocrats. The term came from the ancient Greek word, “physiocracy,” meaning “rule by nature.” They also liked to call themselves “the economists.”

Central to their critique of the regulatory state of their time was insistence that there was a “natural order” to things in the social world as much as in the physical world. A proper arrangement of the institutions of society required reflection on the nature of man, his requirements for survival and betterment, and his relationship to others in society.

As Austrian economist, Murray Rothbard, summarized,

“In political economy, the Physiocrats were among the first laissez-faire thinkers . . . They called for complete internal and external free enterprise and free trade unfettered by subsidies, monopoly privileges or restrictions. By removing such restrictions and exactions, commerce, agriculture and the entire economy would flourish . . . They also supported the operation of a free market and the natural rights of person and property.”

The Physiocrats and a Natural Order to Society

Pierre-Paul Mercier de la Riviere presented one of the clearest statements of the Physiocrat’s conception of man and the social order in, The Natural and Essential Order of Political Societies (1767). Each man, Riviere said, has a natural right to secure what was necessary for his survival. This was, also, the cornerstone for deducing the relationships that would be both just and wealth generating for all men:

“I do not think that anyone will deny the existence of the natural right to secure one’s own survival. This basic right is, indeed, only the result of a basic duty that is imposed upon man under penalty of pain or even death . . .”

“Now, it must be clear that man’s right to secure his own survival includes the right to acquire, by his own work, those things that are useful to his existence as well as the right to keep them after their acquisition. It is evident that this second right is only part of the first, for one cannot be said to have acquired what one has not a right to keep; the right to acquire and the right to keep form together only one and the same right although considered at different times . . .”

“The exclusive property of his person, which I am going to call personal property is thus for each man a right by absolute necessity; and since this exclusive personal property would be nil without the exclusive ownership right to those things which man acquires by his own labor, this second exclusive right of property, to which I shall give the name of negotiable property is an absolute necessity, like the first from which it is derived . . .”

“Once it is realized that it is absolutely necessary that personal and movable property are exclusive rights we are able to realize that each man has also duties which are of absolute necessity. These duties consist in the obligation not to invade the property rights of others, for it is evident that without these duties right would cease to exist . . .”

“Property and, consequently, security and liberty of enjoyment are the essence of the natural and fundamental order of society. This order is part of the physical order, and therefore its principle characteristics are in no way arbitrary.”

Francois Quesnay and Circular Flow of Economic Coordination

If there was a natural order to society, how did it ensure harmony and balance in the productive activities among men? An explanation was given by one of the leading figures among the Physiocrats, Francois Quesnay.

Quesnay insisted that government had no essential role directing or controlling the circular flow of goods between town and country.

For two decades Quesnay served as royal physician to the king of France, Louis XV. But his attention and interests were focused equally on the social system and it’s functioning. He blended his knowledge of agriculture with his training as a medical doctor.

He insisted that it was the production of the land – resources and food production – that was the basis of all prosperity in society. Manufacturing and industrial crafts were derivative and not primary sources of wealth. There would be nothing to transform into finished goods for consumption and other productive uses if the resources of the earth had not been mined, and the soil had not been tilled so both those who worked the land and those who were employed in industrial enterprises could have the means of material survival. Thus, in the division of labor, it was the agricultural sectors that were the foundation of society and its economic wellbeing, Quesnay argued.

In 1758, Quesnay prepared for the King his famous Tableau Economique (“The Economic Table”) It was designed to demonstrate the interdependency and flow of goods and money through the various sectors of the economy: farmers, landowners, manufacturers and merchants. It showed a harmonious and self-balanced coordination in the division of labor.

Quesnay’s Tableau Economique outlined the interdependency of the various specialized activities within the economic order. The resources and foodstuffs produced by the agricultural sectors were exchanged for the manufactured goods of the towns. The town manufacturers and craftsmen supplied those who worked in agriculture with the tools and implements that increased their productive capability on the land as well as with finished items for consumption that the farmers could not as easily produce for themselves.

The more abundant the output from the countryside, the more the people could be freed from agriculture to specialize in manufacturing in the towns. And the more improvements from specialized manufacturing there were, the better the tools and equipment that those in agriculture could acquire to improve their own productivity over time.

Goods circulated in exchange from countryside to towns and from towns to countryside. And the circulation of all these various goods between town and country was facilitated by the medium of money. Quesnay’s intricate diagram showed how goods for money and money for goods flowed through the various parts of the economic system and how wealth was distributed among the farmers, the manufacturers and merchants, and the king and the Church.

“Stop, my friend, stop and do not be misled by political speculations that aim to persuade you that in commerce you can take advantage at the expense of other nations.”

Leaving Markets Free to Set Prices and Direct Production

He insisted that government had no essential role directing or controlling the circular flow of goods between town and country and the matching flow of money between agriculture and manufacturing to facilitate the exchanges. There was no need for the government to regulate the prices at which goods were bought and sold. “Do not attempt to fix the prices,” Quesnay declared. “Only competition can regulate prices with equity.”

The same applied to international trade. The Mercantilist dogma that trade among nations always resulted in a gain for one of the traders and a loss for the other was wrong. Declared Quesnay: “Stop, my friend, stop and do not be misled by political speculations that aim to persuade you that in commerce you can take advantage at the expense of other nations. For a just and good God has seen to it that that is impossible.”

The best policy for government to follow is “laisser passer, laisser faire” — let goods pass and leave men alone to their own decisions.

The French Enlightenment thinkers of those middle decades of the eighteenth century were equally concerned about the financial burden that government’s placed on the people due to extravagant and unnecessary taxation, which squanders the hard-earned wealth of the citizens and undermines their incentives for work and industry. This was said in especially insightful and eloquent words by Baron de Montesquieu (1689-1755) in his, The Spirit of the Laws (1748):

“The revenues of the state are a portion each citizen gives of his goods in order to have the security or the comfortable enjoyment of the rest. In order to fix these revenues well one must consider both the necessities of the state, and the necessities of the citizens. One must not take from the real needs of the people for the imaginary needs of the state.”

“Imaginary needs are the ones sought by the passions and weaknesses of those who govern, the charm of an extraordinary project, the sick envy of vainglory, and a certain impotence of spirit in the face of their fancies. Often those who, with restless spirit, were at the head of public business under a prince have thought that the needs of their small souls were the needs of the state.”

“There is nothing that wisdom and prudence should regulate more than the portion taken away from the subjects and the portion left to them. Public revenues must not be measured by what the people can give but by what they should give, and if they are measured by what the people can give, it must at least be by what they can always give . . .”

“The effect of the wealth of a country is to fill all hearts with ambition; the effect of poverty is to bring them to despair. Ambition is excited by work; poverty is consoled by laziness. Nature is just toward men. She rewards them for their pains; she makes them hard workers because she attaches greater rewards to greater work. But if an arbitrary power removes nature’s rewards, the distaste for work recurs and inaction appears to be the only good . . .”

“If some citizens do not pay enough, there is no great harm; their plenty always reverts to the public; if some individuals pay too much, their ruin turns against the public. If the state matches its fortunes to that of individuals, the plenty of the individuals will soon make its fortune increase.”

“Everything depends on the moment. Will the state begin by impoverishing its subjects in order to enrich itself? Or will it wait for its subjects to enrich it at their own pace? Will it have the first advantage or the second? Will it begin by being rich, or will it end by being so?”

Jacque Turgot’s Experiment with Free Market Reform

Turgot presided over the abolition of this crude and despised forced labor in the entire country.

Another member of the Physiocrat School, Anne-Robert-Jacques Turgot, brought some of the ideas of greater economic freedom into practice, at least to a limited degree. In 1761 Turgot was appointed the intendant (or governor) of the French province of Limoges — a position that he held for 12 years, with virtually complete administrative powers within the province’s boundaries as the local representative of the central authority in Paris.

He did away with one of the most oppressive and hated taxes in the province, the corvee, which was the compulsory labor required of the peasantry to construct and repair roads, for which labor the workers received no pay. Any who resisted or failed to show up to perform their required work could be imprisoned or arrested and compelled to work. Turgot, instead, paid salaries for skilled workers to perform the roadwork and assessed a moderate tax on all the taxpayers within the province to cover the cost. Within a short time, the roads in Limoges were considered some of the finest in France.

One of Turgot’s contemporaries said of his abolition of the corvee: “A benefit which will cause the name of Turgot to be blessed by succeeding generations is the abolition of the corvee. There are deeds on which we do not compose an ode, as on a battle gained, but which are worth more than victories.”

Later, when Turgot served as the comptroller-general for all of France, he presided over the abolition of this crude and despised forced labor in the entire country. He insisted that it was important “not to sacrifice the liberty of the king’s subjects.”

Free Trade Among the Provinces of France

Another reform that Turgot fostered was the abolition of the laws restricting the free flow of agricultural goods from one part of France to another, particularly during a time of famine. Freedom of trade among the provinces of France would ensure a partial shift of available wheat supplies to those provinces experiencing famine and a high price for cereals from those provinces experiencing a greater abundance and therefore lower prices for bread. Said Turgot,

“It is necessary, then, that the transport and the storage of grain should be entirely free, for if the inhabitants of a particular town arrogate the right to prevent the grain going elsewhere, the other towns will believe themselves to have the same right, and thus the places where the dearth is greatest, not being succored by the others, will be condemned to suffer famine.

“Also, if merchants who form magazines of wheat are exposed to the insults, to the violence of the populace, if the magistrates by their suspicions, by imprudent inquisitions, by injunctions to sell at a low price, sanction the popular prejudice against this commerce . . . no one will give himself to it . . .

“What designs have the people in their blind excitement? That the merchants should be obliged to sell cheap? That they should be forced to lose? In this case who would bring grain to them? The pavements of the towns would not produce it. Soon, in places of mere scarcity, a famine would ensue.”

Turgot also ended the forced billeting of soldiers in the homes of people in the province. Instead, he rented several houses and built others to end what had been an especially hated practice of the government.

Turgot wrote to the king saying that bankruptcy of the government had to be avoided but taxes should not be increased.

In his last year as intendant of Limoges, in 1773, Turgot spoke out in favor of greater economic liberty in general, saying, “I know no other means of quickening any commerce whatever than by granting it the greatest liberty, and the freedom from all taxes.”

Turgot as Comptroller-General and France’s Financial Chaos

In August 1774, Jacque Turgot was appointed comptroller-general of the finances of France by the new king, Louis XVI. The finances of the French government were in total chaos because of the exorbitant expenditures of the royal house, with an accumulated debt of 2,470,000,000 livres (a livre then being worth about 20c). The royal expenses for 1774 alone were 399,200,000 livres, with tax receipts of only 371,980,000, leaving a deficit of 27,220,000 livres.

Turgot wrote to the king saying that bankruptcy of the government had to be avoided but taxes should not be increased and there should be no more borrowing to cover expenses. Instead, he said that the government should institute a policy of retrenchment through deep cuts in spending. He also told the king that he realized the anger he could expect from those who had become accustomed to financial favors, privileges, and subsidies from the government. Said Turgot:

“I foresee that I shall be alone in fighting against abuses of every kind, against the power of those who profit by these abuses, and against the crowd of prejudiced people who oppose themselves to all reform, and who are such powerful instruments in the hands of those interested parties for perpetuating the disorder. I shall have to struggle even against the natural goodness and generosity of your Majesty, and of the persons who are most dear to you. I shall be feared, hated even, by nearly all the Court, by all who solicit favors.”

But before his removal from office, Turgot attempted to carry out the free market reforms he considered essential for the betterment of the people of France. All that Turgot anticipated in his letter to the King came true.

Turgot’s Free Market Reforms

He abolished all restrictions on the free trade in grain within France, declaring, “It shall be free to all persons whatever to carry on, as it may seem best to them, their trade in corn and flour, to sell and to buy it, in whatever places they choose throughout the kingdom.”

He abolished the practice of the comptroller-generals being paid huge bribes for appointing tax gatherers for the various provinces of the country. Restrictions on and financial abuses against foreigners residing in France were ended. He eliminated discriminatory taxing practices against various segments of the French public that discouraged investment and work.

He demanded that provincial authorities reduce their regulatory infringements on the manufacturers and merchants in their areas of jurisdiction. He went about breaking the power of privileged monopolies by ending legal restrictions that prohibited new competitors from entering various markets and local taxes that made entry too costly.

Finally, to bring the government’s finances under control, Turgot began the arduous process of eliminating layers of bureaucracy and privileged court intermediaries who used their positions to obtain bribes from special interests desirous of political privileges and benefits. Turgot said,

“It is the interest of the whole kingdom we have to consider, the interests and the rights of all our subjects, who, as buyers or as sellers, have an equal right to find a market for their goods and to procure the object of their needs on the terms most advantageous to themselves.”

Special Interests Bring Turgot Down

The more Turgot instituted such sweeping free-market-oriented reforms, the greater the number of special interests who found themselves with a common goal to defeat him. The nobility and the clergy formed a common front to oppose him — the latter group because Turgot was suspected of “liberal” views on religion.

The manufacturing interests, who feared the free winds of competition in their corners of the market, worked hard to defeat him. The bureaucracy and the members of the royal court who saw their privileges, tax revenues, and sources of bribes and favors being eaten away intrigued against him.

Finally, on May 12, 1776, the king dismissed Turgot. The power of the interests had triumphed against the “economist” reformer who dreamed of making France free and prosperous. This was also France’s last real chance for economic transformation before the corruption and financial chaos of the government would lead to the catastrophe and terror of the French Revolution that began in 1789.

  • Richard M. Ebeling is BB&T Distinguished Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina. He was president of the Foundation for Economic Education (FEE) from 2003 to 2008.