Chapter 1: Introduction
·
Economic thought consists of both a vision and a
formal theory. The vision is the broad perception with which individuals look
at the world. The theory comprises the specific models that capture the vision.
To understand the thought of individual economists, one must understand both
their vision and their model.
·
Economics is a
social science. It examines the problems that societies face because
individuals desire to consume more goods and services than are available,
creating a condition of relative scarcity.
To meet the problem of scarcity, a
social mechanism is required for allocating limited resources among unlimited
alternatives. Historically, four mechanisms have been used to deal with the
problem of scarcity: Brute force, Tradition, Authority and Market.
Resource allocation mechanisms
determine who gets, and who does not get, resources.
·
Modern orthodox
economic theory consists of a body of knowledge that
includes both micro- and macroeconomics.
i.
Microeconomics considers questions of allocation
and distribution whereas Macroeconomics considers questions of stability and
growth.
ii.
Microeconomic theory begins with an
analysis of an individual and builds up to an analysis of society whereas
macroeconomics begins with an analysis of society as a whole and works downward
to the individual.
iii.
The allocation problem (what to
produce and how to produce) and the distribution problem (how real income is
divided among the members of a society) generally fall under microeconomic
theory. Macroeconomics
focuses on the stability and growth of an economy, utilizing aggregate
variables for the entire economy: the level of income and employment, the
general level of prices, and the rate of economic growth.
Approach (How economic theory develops)
i.
Relativist and Absolutist Approach
-
Relativist historians concern
themselves (1) with the historical, economic, sociological, and political
forces that brought men and women to examine certain economic questions and (2)
with the ways in which these forces shape the content of emerging theory.
-
Absolutist writers (Whigs) stress
internal forces, such as the increasing professionalism in economics, to
account for the development of economic theory.
-
Prior to the 1950s, the most
influential historians of economic theory took a relativist position. Beginning
in the 1950s, the absolutist position was forcefully stated.
-
Economic thought as a dynamic process is
of interaction between forces external and internal to the discipline that
bring about new theoretical developments.
ii.
Orthodox and
Heterodox Economists
- Modern orthodox theorists have largely
focused on the four problems of allocation, distribution, stability, and
growth, whereas
heterodox
economists have studied the forces that produce changes in the society and
economy.
-
the differences between heterodox and
orthodox economists are often differences in focus, not diametrically opposed
theories. Often what orthodox writers take as given, heterodox writers try to
explain; and what heterodox writers take as given, orthodox economists try to
explain.
-
orthodox writers have taken as given the
specific social, political, and economic institutions and have studied economic
behavior in the context of these institutions, whereas heterodox writers have
focused on the forces leading to the development of these institutions.
-
heterodox economists generally tend to
focus on methodology, since through methodology they can question the
legitimacy of the assumptions, scope, and methods that mainstream economists
take as given.
-
A problem faced by almost all
heterodox groups is that of moving beyond methodology to establish their own
analysis and provide a viable competing research program. There is truth in the
saying that a theory can be replaced only by another theory.
Methodological Issues
i.
Economics as
an art and as a science
-
Positive economics concerns the forces
that govern economic activity (science of economics).
-
Normative economics explicitly
concerns questions of what should be (ethics of economics).
-
The art of economics concerns
questions of policy. It relates the science of economics to ethics of economics
and asks questions such as: If these are one’s normative goals, and if this is
the way the economy works, then how can one best achieve these goals?
-
The methodology of positive economics
is formal and abstract; it tries to separate economic forces from political and
social forces.
-
The methodology of the art of
economics is more complex because it concerns policy and must address
interrelationships among politics, social forces, and economic forces.
-
Whether positive economics or the art
of economics should be the primary focus of economics has prompted unending
debate in the history of economic thought. The German historical school and the
English Marshallian school have advocated that primary attention be given to
the art of economics. They draw strength in this advocacy from the work of Adam
Smith. Modern orthodox economists focus on positive economics and find support
for this position in the writings of David Ricardo.
ii.
Empirical
Verification
-
Inductive reasoning is empirical,
proceeding from sensory perceptions to general concepts;
-
deductive reasoning (logic) applies
certain clear and distinct general ideas to particular instances.
-
Abductive” is the name pragmatic
philosopher Charles Peirce gave to a particular mix of the inductive and
deductive approaches.
Even
though methodology is seldom discussed, ultimately it is methodology that
accounts for many of the differences among economists. Formalists are more
likely to use a logical positivist or falsificationist methodology and believe
in an absolutist approach; non-formalists are more likely to use a sociological
or rhetorical approach and believe in a relativist approach.
Part One: Pre-Classical Economics
Earlier
societies often passed on their writings in the form of religious tomes; thus,
one could begin an analysis of economic ideas with these very early texts.
A
fundamental tenet of modern orthodox theory is that more goods are better than
fewer goods, and prevailing patterns of activity in modern societies lend
strong confirmation to this tenet. Early religious, Creek, and scholastic
thinkers did not begin with this premise, and the questions they raised about
economic versus noneconomic goals of the individual and society are eternal.
Feudalism: Scholastic Economic Thought
Merchant Capitalism: Mercantilist Theory
Producer Capitalism: Classical Laissez-faire Ideas
A.
Early
Preclassical Period
-
800 BC to
1500
B.
Preclassical
Era
-
1500 to 1776
Then comes Classical Economics with publication of Wealth of Nations in
1776.
Chapter 2: Early Preclassical Economic Thought
Four Subperiods
1.
Early Eastern
Economic Thought [Guan Zhong]
2.
Greek Thought
[Hesiod, Xenophon, Aristotle]
3.
Arab-Islamic
Thought [Al-Ghazali, Ibn Khaldun]
4.
Economic
Thought of Scholastics [St. Thomas Aquinas]
·
One of the
most significant differences between early preclassical and modern orthodox
economic thought concerns the mechanism for resource allocation. In a premarket
setting, thinkers focused on the use of authority as an allocator of resources.
·
Two important themes emerge from early preclassical doctrine.
One concerns the level of inquiry appropriate for analyzing society. These
writers believed that it was inappropriate to separate any particular
activity—economic, for example—from all other activities. A second theme is the focus on broad
philosophical issues, giving particular attention to questions of fairness,
justice, and equity. These
two themes—the illegitimacy of abstraction and the focus on equity—can also be
found within a good deal of heterodox economic writing from the eighteenth
century to the present.
·
The majority
of early Chinese writings on economics fit Schumpeter’s characterization: they
were essentially limited to considerations of public administration within
ethical frameworks, rather than strictly “scientific” studies. Guan Zhong’s
book Guan Zi, however, stands out as going far beyond the administrative mold.
It includes a number of ideas that are central to economic thinking.
·
Guan Zhong argued that when a good was abundant, it
became light, and its price would fall. When it was “locked away,” it became
heavy, and its price would rise. There would be movements of goods into and out
of markets based on their lightness and heaviness, with a definite tendency
toward one price—equilibrium. Thus the light/heavy theory is a statement of the
law of supply and demand. Guan Zhong also used this light/heavy theory to
develop a quantity theory of money, asserting that when money was heavy, its
price should rise (prices of goods would fall), and when money was light, its
price would fall (prices of goods would rise). To stop that fluctuation, he
advised that the state should buy goods when money was heavy (thereby holding
the price level up) and sell goods when it was light (thereby holding the price
level down). This would not only help stabilize the price level, but also make
money for the government.
·
when it comes
to policy, the thoughts reflected in Guan Zi also suggest that economic
insights have no direct policy implications independent of institutional
structure. Change the institutional structure and one changes the policy
implications.
·
According to
Hesiod, scarcity does not arise from a human condition related to limited
resources and unlimited desires; rather, it was one of the evils released when
Pandora opened the Box. Hesiod’s economic ideas are presented in Works and
Days, in which he initiates a pursuit of economic questions that continued for
two centuries. Being a farmer Hesiod was interested in efficiency.
·
The word
economics, derived from Greek, was used by Xenophon as the title of his book Oeconomicus.
As used by the Greeks, however, the term refers to efficient management at
the level of the producer and/or the household Xenophon, writing some four
hundred years after Hesiod, took the concepts of efficient management much
farther than Hesiod and applied them at the level of the household, the
producer, the military, and the public administrator. This brought him insights
into how efficiency can be improved by practicing a division of labor.
Attention to the division of labor was continued by other Greek writers,
including Aristotle, and, later, by the scholastics.
·
Aristotle is
important not only for his contributions to philosophical thinking but for the
impact he had on economic ideas during the period of scholasticism. It was to
Aristotle’s views that St. Thomas Aquinas and other churchmen reacted in the
period 1300 to 1500. Democritus (c. 460-c. 370 BC) had not only argued for a
division of labor but also advocated the private ownership of property as an
incentive that would lead to greater economic activity.
·
Aristotle’s
teacher, Plato, had argued that the ruling class of his ideal society, the
soldiers and philosophers, should not possess private property but should hold
communal property, to avoid conflicts over property that might divert their
attention from more important issues. However, Aristotle believed that private
property served a useful function in society and that no regulations should be
made to limit the amount of property in private hands.
·
Aristotle’s
main contributions to economic thinking concerned the exchange of commodities
and the use of money in this exchange. People’s needs, he said, are moderate,
but people’s desires are limitless. Hence the production of commodities to
satisfy needs was right and natural, whereas the production of goods in an
attempt to satisfy unlimited desires was unnatural. Aristotle conceded that
when goods are produced to be sold in a market, it can be difficult to
determine if this activity is satisfying needs or inordinate desires; but he
assumed that if a market exchange is in the form of barter, it is made to
satisfy natural needs and no economic gain is intended. Using the medium of
money, however, suggests that the objective of the exchange is monetary gain,
which Aristotle condemned.
·
One of the
interesting points Aristotle made is that the problem of scarcity can be
addressed by reducing consumption, by changing human attitudes. This is a
powerful idea for the various Utopians and socialists who hope to end societal
conflicts by eliminating the conflicts that are inherent in scarcity.
·
There was no
separate formal economic analysis as there is today; rather, the medieval
Islamic scholars examined economic issues in the broader context of their
religious views. Al-Ghazali (1058-1111) was among the most significant
intellectuals of medieval Islam, and his writings are known to have influenced
St. Thomas Aquinas.
·
His
description of the evolution of markets through voluntary exchange is
remarkably perceptive for one writing in the eleventh century, as was his
insight into how markets link and coordinate economic activities with the
evolution of specialization and division of labor.
·
Realizing
that increasing specialization and division of labor result in economic
exchange, al-Ghazali was able to point to the difficulties of barter and the
consequent need for a currency to facilitate these exchanges. He also examined
a host of other economic topics: public expenditures, taxation, and borrowing;
coinage and the debasement of coins; interest and usury; and how best to levy
taxes to appropriately spread the tax burden on society.
·
Possibly Ibn
Khaldun (1332-1406)’s most interesting insight into economic issues arises in
his broad, sweeping examination of how his society appeared to have what we
would today call a developmental cycle, moving from rural desert-life society
with low income, low craft skills, and small economic surplus to a nonnomadic
society in which agriculture predominated, with higher labor productivity and
incomes, economic surpluses, and population growth. From today’s vantage point,
one can see many “economic” topics being examined by Ibn Khaldun: population,
profits, supply, demand, price, luxury, aggregate surpluses, and capital
formation.
·
Scholastic
economic doctrine is best understood in the context of its time, extending from
before the fall of the Roman Empire to the beginnings of mercantilism in
Western Europe. Although the scholastics, in attempting to adapt to the nascent
economic changes of their times, produced a somewhat diverse body of economic
ideas, they essentially addressed the same core economic issues: the
institution of private property and the concepts of just price and usury.
·
Early
scholastic writers had long struggled to establish that some ownership of
private property by laymen was not incompatible with religious teaching. In the
thirteenth century, after Aristotle’s writings had been reintroduced into
Western Europe, Thomas Aquinas, adapting Aristotelian thought to his own
writing, was able to argue convincingly that private property is not contrary
to natural law. Although he conceded that under natural law all property is
communal, he maintained that the growth of private property was an addition,
not a contradiction, to natural law. Aquinas argued that to be naked was in
accordance with natural law and that clothing was an addition to natural law
and devised for the benefit of man. The same reasoning applied to private
property.
·
Aquinas and
other scholastics were also concerned with another aspect of greater economic
activity, the price of goods. Unlike modern economists, they were not trying to
analyze the formation of prices in an economy or to understand the role that
prices play in the allocation of scarce resources. They focused on the ethical
aspect of prices, raising issues of equity and justice. When exchanges take
place in the market to meet the needs of the trading parties (using Aristotle’s
conception of need), Aquinas concluded, no ethical issues are involved. But
when individuals produce for the market in anticipation of gain, they are
acting virtuously only if their motives are charitable and their prices are
just.
Historians
of economic theory differ in their interpretations of the scholastic notion of
just price. Some hold that the scholastics, including Aquinas, considered a
just price to be an equivalent in terms of labor cost. Others say that it is an
equivalent in terms of utility, and still others regard it as an equivalent in
terms of total cost of production. Thus, the scholastic concept of just price
is seen alternatively as a forerunner of the Ricardian-Marxian labor theory of
value, the marginal utility position, and the notion implicit in
classical-neoclassical theory that competitive markets yield ideal just prices.
Another widely held view regards the scholastic notion of just price as an
integral part of the set of social and economic forces that maintained the
hierarchy of feudalism.
The lack
of economic analysis in scholasticism makes it difficult to judge exactly what
was
meant by “just price.
·
A corollary
to the concept of just price was the scholastic notion of usury. The meaning of
the term usury has changed since the time of scholasticism. As used today, it
denotes charging an excessive rate of interest, but in scholastic doctrine, it
has the biblical and Aristotelian sense of any taking of interest. Scholastic
usury doctrine was itself derived largely from the Bible and the writings of
Aristotle.
The
biblical condemnation of usury rose from the danger that the strong would take
advantage of the weak. Moreover, Aristotle had argued that the taking of
interest on loans was unnatural, since money is barren. The scholastic view
gradually moderated from a fairly strict prohibition of interest early in the
period to its acceptance—at least for business purposes—later.
Chapter 3: Mercantilism, Physiocracy,
and other Precursors of Classical Economic Thought
Mercantilism: 1500 –
1750
Physiocracy: 1750 –
1780
Mercantilism
·
Mercantilism
is the name given to the economic literature and practice of the period between
1500 and 1750.
·
The
mercantilistic literature from 1650 to 1750 was of distinctly higher quality
which was characterized by an increase in economic activity
·
The economic theory of mercantilism was the work of
merchant businessmen. The literature they produced focused on questions of
economic policy and was usually related to a particular interest the
merchant-writer was trying to promote. Furthermore, each writer tended to concentrate on one
topic, and no single writer was able to synthesize these contributions
impressively enough to influence the subsequent development of economic theory.
·
Mercantilism can best be understood as an intellectual reaction
to the problems of the times. In this period of the decline of the manor and the rise
of the nation-state, the mercantilists tried to determine the best policies for
promoting the power and wealth of the nation.
·
The mercantilists proceeded on the assumption that the
total wealth of the world was fixed. Using the same assumption, the scholastics
had reasoned that when trade took place between individuals, the gain of one
was necessarily the loss of another. The mercantilists applied this reasoning
to trade between nations, concluding that any increase in the wealth and
economic power of one nation occurred at the expense of other nations. Thus,
the mercantilists emphasized international trade as a means of increasing the
wealth and power of a nation and, in particular, focused on the balance of
trade between nations.
·
The goal of economic activity, according to most
mercantilists, was production—not consumption, as classical economics would
later have it. Although the mercantilists laid great
stress on production, a plentiful supply of goods within a country was
considered undesirable. High levels of production along with low domestic
consumption would permit increased exports, which would increase the nation’s
wealth and power.
·
According to mercantilistic thinking, a country should
encourage exports and discourage imports by means of tariffs, quotas,
subsidies, taxes, and the like, in order to achieve a so-called favorable
balance of trade. Many early mercantilists, who defined the wealth of a
nation not in terms of the nation’s production or consumption of goods but in
terms of its holdings of precious metals, argued for a favorable balance of
trade because it would lead to a flow of precious metals into the domestic
economy to settle the trade balance.
·
The first mercantilists argued that a favorable balance
of trade should be struck with each nation. A number of subsequent writers,
however, argued that only the overall balance of trade with all nations was
significant.
·
A related issue concerned the export of precious metals
or bullion. The early mercantilists recommended that the export of bullion be
strictly prohibited. Later writers suggested that exporting bullion might lead
to an improvement in overall trade balances if the bullion were used to
purchase raw materials for export goods.
·
A central feature of mercantilist literature is its
conviction that monetary factors, rather than real factors, are the chief
determinants of economic activity and growth. Mercantilists maintained that an
adequate supply of money is particularly essential to the growth of trade, both
domestic and international. Changes in the quantity of money, they believed,
generate changes in the level of real output—in yards of cloth and bushels of
grain.
All this would change with the advent of Adam Smith and
classical economics, which
would contend that the level of economic activity and its
rate of growth depend upon
a number of real factors: the quantity of labor, natural
resources, capital goods, and the
institutional structure. Any changes in the quantity of
money, classical economists averred, would influence the level of neither
output nor growth, but only the general level of prices. Adam Smith devoted
nearly two hundred pages of Wealth of Nations to a harsh and only partly
justifiable criticism of mercantilistic theory and practice, particularly its
equating of the wealth of a nation with the stock of precious metals internally
held.
·
Because Smith and other classical economists stressed the
real forces that determine the level of output, their theories focused almost
exclusively on supply. However, because Keynes emphasized the role of aggregate
demand, he found some common bonds between his theory and that of the
mercantilists. He was sympathetic to their under consumptionist views and
declared sound their belief that increases in the quantity of money would
increase output. The mercantilists, Keynes said, held that a favorable balance of
trade would increase domestic spending and thereby raise the level of income
and employment.
·
Many mercantilists saw a highly mechanical causality in
the economy and believed that if one understood the rules of this causality,
one could control the economy. It followed that legislation, if wisely enacted,
could positively influence the course of economic events and that economic
analysis would indicate what forms of government intervention would affect a
given end.
·
The mercantilists believed there was a basic conflict
between private interests and the public welfare. Therefore, they considered it
necessary for government to channel private self-interest into public benefits.
Classical economists, on the other hand, found a basic harmony in the system
and saw public good as flowing naturally from individual self-interest.
Thomas Mun
·
He believed
that government should regulate foreign trade to achieve a favorable balance,
encourage importation of cheap raw materials, encourage exportation of
manufactured goods, enact protective tariffs on imported manufactured goods,
and take other measures to increase population and keep wages low and
competitive.
William Petty
·
Petty
apparently was the first to explicitly advocate the use of what we would call
statistical techniques to measure social phenomena. He tried to measure
population, national income, exports, imports, and the capital stock of a
nation. His methods were crude almost beyond belief, leading Adam Smith to
indicate that he had little use for political arithmetic.
Bernard Mandeville
·
Mandeville
argued that selfishness was a moral vice but that social good could result from
selfish acts if these actions were properly channeled by the government. To
Mandeville, the end result of private virtue is economic depression.
·
The
mercantilist view toward labor is in sharp contrast to that of the classicals;
Mandeville’s position on labor is particularly clear and, from a modern view,
alarming. Because the goal of society is production—not consumption, as
advocated by the classicals—Mandeville advocated a large population and child
labor, and he condemned idleness. A large population with high
labor-force-participation rates results in low wages, which gives the nation a
competitive advantage in exports and international trade. Low wages also
ensure an adequate supply of labor, for Mandeville saw a downward-sloping labor
supply curve. Higher wages reduce labor supply, in Mandeville’s view.
David Hume
·
Hume was a
close personal friend of Adam Smith; their joint intellectual output is awesome
in terms of its impact on following generations. Like many of his
contemporaries, Hume could be called a liberal mercantilist; he had one foot in
mercantilism, but with the other stepped forward into classical political
economy.
·
Hume took the
insights of John Locke, who saw that the level of economic activity in an
economy depends on the quantity of money and its velocity, and presented a
reasonably complete description of the interrelationships among a country’s
balance of trade, the quantity of money, and the general level of prices. In
international trade theory Hume’s contribution has become known as the price
specie-flow mechanism. Hume pointed out that it would be impossible for an
economy to maintain a favorable balance of trade continuously, as many
mercantilists advocated. A favorable balance of trade would lead to an increase
in the quantity of gold and silver (specie) within an economy. An increase in
the quantity of money would lead to a rise in the level of prices in the
economy with the favorable balance of trade. If one country has a favorable
balance of trade, some other country or countries must be having an unfavorable
balance, with a loss of gold or silver and a subsequent fall in the general
level of prices. Exports will decrease and imports will increase for the
economy with the initial favorable trade balance because its prices are
relatively higher than those of other economies. The opposite tendencies will
prevail in an economy with an initial unfavorable balance. This process will
ultimately lead to a self-correction of the trade balances.
·
The
mercantilists had argued that changes in the money supply could increase real
output. The classicals maintained that real output depended not on the quantity
of money but on real forces: labor supply, natural resources, capital goods,
and the institutional structure. Changes in the money supply would change only
the general level of prices. Hume believed that although the absolute level of
money in a nation would not influence real output, a gradual increase in the
money supply would lead to an increase in output.
·
Hume
maintained that the growth of economic freedom went hand in hand with the
growth of political freedom.
Richard Cantillon
·
In 1881
William Stanley Jevons rediscovered Cantillon’s book and heaped praise on it,
describing it as “the first systematic treatment in political economy” and “the
cradle of political economy.”
·
Cantillon was
part mercantilist (mostly in his views on foreign trade), part physiocrat (in
his emphasis on the primary role of agriculture in the economy), and part
physiocrat- classical (in his vision of the interrelatedness of the various
sectors of the economy).
·
Cantillon
himself acknowledged the influence of John Locke, for his theory of money, and
William Petty, for his emphasis on the importance of measuring economic
phenomena. Unlike Petty, who produced works of a practical nature exploring
various topics in economics, Cantillon was modern in that (1) he started with
the goal of establishing basic principles of economics through the process of
reasoning, and, more important, (2) he wanted to collect data to use in the
process of verifying his principles. Unfortunately, his statistical work is
lost.
·
Cantillon’s
seminal vision, which was to a lesser extent possessed by some of the
physiocrats and liberal mercantilists, was of a market system that coordinated
the activities of producers and consumers through the medium of individual
self-interest. The key actors in this self-regulating system were
entrepreneurs, who, in their pursuit of profit, produced social results
superior to ones that could be produced by government interference. Given
competitive markets in which entrepreneurs pursue customers in final goods
markets and compete with one another in factor markets, Cantillon was able to
point to the adjustment processes as demands, costs, technology, and other
factors change. He did not make the plea for laissez faire with the force of
Smith, however, which may account for his neglected recognition.
·
His
explanation of the forces that determine prices was surprisingly modern in that
he distinguished between market prices, determined by short-run factors, and
what he called intrinsic value, long-run equilibrium prices. He was able to
apply his analysis of prices and markets to international trade and view the
adjustment processes that take place there.
·
He divided
the economy into sectors and analyzed the flow of income between them; although
he did not explicitly formulate an economic table to represent these flows, he
clearly influenced Quesnay, who did.
·
It is possible that had Cantillon not been
murdered by a servant he had fired, he, not Smith, would be known as the father
of modern economics.
Physiocracy
·
Although
mercantilism was much in evidence in eighteenth-century France, a new but
short-lived movement called physiocracy began there around 1750.
·
Physiocracy
had an acknowledged intellectual leader, Frangois Quesnay (1694-1774), whose
ideas were accepted virtually without question by his fellow physiocrats. Their
own writings were mainly designed to convince others of the merit of Quesnay’s
economics.
·
Adam Smith
was influenced during his travel in France by a group of French writers who
have become known as the physiocrats. They perceived the interrelatedness of
the sectors of the economy and analyzed the working of nonregulated markets.
·
The
physiocrats’ unique idea concerned the role of natural law in the formulation
of policy. They maintained that natural laws governed the operation of the
economy and that, although these laws were independent of human will, humans
could objectively discover them—as they could the laws of the natural sciences.
·
The
mercantilists and the scholastics perceived a fundamental conflict in the
economy, viewing exchange as a process in which one party gains at the expense
of another. Therefore, both advocated intervention in the economy by either
government or church. The physiocrats, on the other hand, perceived the
working-out of the conflicts inherent in relative scarcity as basically
harmonious. They called not for intervention in the economy but for laissez
faire, and thus were an important influence on Adam Smith and the subsequent
development of economic policy.
·
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.
·
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. 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.
·
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.
Comments
Post a Comment