WEBVTT NOTE 13. Physiocracy in Mid-Eighteenth Century 1 00:00:00.000 --> 00:00:06.000 Chapter 13. Physiocracy in Mid-18th Century France 2 00:00:07.000 --> 00:00:10.000 1. The Sect 3 00:00:11.000 --> 00:00:19.000 The first self-conscious school of economic thought developed in France shortly after the publication of Cantillon's essay. 4 00:00:20.000 --> 00:00:26.000 They called themselves The Economists, but later came to be called The Physiocrats, 5 00:00:26.000 --> 00:00:34.000 after their prime politico-economical principle, physiocracy, the rule of nature. 6 00:00:34.000 --> 00:00:40.000 The physiocrats had an authentic leader, the creator of the physiocratic paradigm, 7 00:00:40.000 --> 00:00:47.000 a leading propagandist and several highly placed disciples and editors of journals. 8 00:00:47.000 --> 00:00:53.000 The physiocrats promoted each other, reviewed each other's prolific works in glowing terms, 9 00:00:53.000 --> 00:01:00.000 met frequently and periodically in salons to deliver papers and discuss each other's essays, 10 00:01:00.000 --> 00:01:04.000 and generally behaved as a self-conscious movement. 11 00:01:04.000 --> 00:01:13.000 They had a cadre of hard-core physiocrats and a penumbra of influential fellow travelers and sympathizers. 12 00:01:13.000 --> 00:01:19.000 Unfortunately, the physiocrats soon took on the dimensions of a cult as well as a school, 13 00:01:19.000 --> 00:01:25.800 People, heaping lavish and uncritical praise upon their leader, who thus became a guru, 14 00:01:25.800 --> 00:01:31.760 as well as the creator of an important paradigm in economic thought. 15 00:01:31.760 --> 00:01:42.600 The founder, leader and guru of physiocracy was Dr. François Kenet, 1694-1774, a restless, 16 00:01:42.600 --> 00:01:48.200 charismatic and intellectually curious soul who was typical of Enlightenment intellectuals 17 00:01:48.200 --> 00:01:54.840 of the 18th Century. Smitten with the physical sciences, as so many intellectuals were in 18 00:01:54.840 --> 00:02:01.560 the shadow of the great Isaac Newton, Keney, son of a well-to-do farmer, read widely in 19 00:02:01.560 --> 00:02:07.960 his chosen profession of medicine. Gaining fame as a surgeon and physician, Keney wrote 20 00:02:07.960 --> 00:02:15.660 medical works and also became expert in agricultural science, writing on its technology. 21 00:02:15.660 --> 00:02:24.020 In 1749, at the age of 55, Kene became personal physician to King Louis XV's mistress, Madame 22 00:02:24.020 --> 00:02:31.860 de Pompadour, and a few years later also became personal physician to the king himself. 23 00:02:31.860 --> 00:02:39.280 It was in the late 1750s, when in his mid-60s, that Dr. Kene began to dabble in economic 24 00:02:39.280 --> 00:02:41.020 topics. 25 00:02:41.020 --> 00:02:48.500 The founding of the physiocratic movement may be dated precisely at the moment in July 1757 26 00:02:48.500 --> 00:02:53.020 when the guru met his chief adept and propagandist. 27 00:02:53.020 --> 00:03:00.100 For it was then that Dr. Canet met the restless, flighty, enthusiastic and slightly crackpot 28 00:03:00.100 --> 00:03:05.980 Victor Ricchetti, the Marquis de Mirabeau, 1715-1789. 29 00:03:05.980 --> 00:03:13.300 in 1989. Mirabeau, a disgruntled aristocrat with plenty of leisure time on his hands, 30 00:03:13.300 --> 00:03:19.580 had just published the first several parts of a multi-part work, a grandiloquently entitled 31 00:03:19.580 --> 00:03:27.140 best-seller, L'Ami des hommes, The Friend of Man. This work had charmed many Frenchmen 32 00:03:27.140 --> 00:03:34.100 through its very flamboyance and lack of system, as well as its curious use of an archaic 17th 33 00:03:34.100 --> 00:03:36.300 century style. 34 00:03:36.300 --> 00:03:43.160 While writing L'Ami des hommes, Mirabeau was a quasi-disciple of the later Cantillon, glossing 35 00:03:43.160 --> 00:03:45.700 and publishing the essay. 36 00:03:45.700 --> 00:03:53.220 But contact with Canet soon converted him into the doctor's leading fugleman and propagandist. 37 00:03:53.220 --> 00:03:59.300 The ruminations of one seemingly harmless eccentric physician had now become a school 38 00:03:59.300 --> 00:04:03.680 of thought, a force to be reckoned with. 39 00:04:03.680 --> 00:04:08.880 The high placement of the two founding physiocrats served their cause well. 40 00:04:08.880 --> 00:04:15.560 Canet's crucial place at court, as well as Mirabeau's fame and aristocratic position, 41 00:04:15.560 --> 00:04:18.440 gave the movement power and influence. 42 00:04:18.440 --> 00:04:25.320 Still, political economy was dangerous in that age of absolutism and censorship, and 43 00:04:25.320 --> 00:04:31.040 Canet prudently published his work under pseudonyms or through his disciples. 44 00:04:31.040 --> 00:04:39.400 Indeed, Mirabeau was imprisoned for a couple of weeks in 1760 for his book, Theory of Taxes, 45 00:04:39.400 --> 00:04:45.560 specifically for his blistering attack on oppressive taxation and on the financial system 46 00:04:45.560 --> 00:04:53.920 of tax farming, in which the king sold the rights to tax to private firms or farmers. 47 00:04:53.920 --> 00:04:59.440 He was released, however, by the good offices of Madame de Pompadour. 48 00:04:59.440 --> 00:05:04.680 The physiocrats conducted their operations through a succession of journals and through 49 00:05:04.680 --> 00:05:11.660 periodic salons, some conducted at the home of Dr. Canet, the most prominent in regular 50 00:05:11.660 --> 00:05:17.160 Tuesday evening seminars at the home of the Marquis de Mirabeau. 51 00:05:17.160 --> 00:05:27.100 The chief physiocratic figures were Pierre-Francois Mercier de la Rivière, 1720 to 1793, whose 52 00:05:27.100 --> 00:05:34.900 The Natural and Essential Order of Political Societies, 1767, was the major work on political 53 00:05:34.900 --> 00:05:37.300 philosophy of the school. 54 00:05:37.300 --> 00:05:46.460 The Abbé Nicolas Bodeau, 1730-1792, the editor and journalist of the Physiocrats. 55 00:05:46.460 --> 00:05:55.580 Guillaume François Le Trône, 1728-1780, jurist and economist, and the youngest member 56 00:05:55.580 --> 00:06:20.660 In no way did the cult aspect of the physiocratic group show itself more starkly than in the 57 00:06:20.660 --> 00:06:23.980 adjectives used about their master. 58 00:06:23.980 --> 00:06:29.880 His followers claimed that Kene looked like Socrates and they habitually referred to him 59 00:06:29.880 --> 00:06:32.700 as the Confucius of Europe. 60 00:06:32.700 --> 00:06:39.940 Indeed, despite the fact that Adam Smith and others spoke of his great modesty, Dr. Kene 61 00:06:39.940 --> 00:06:45.740 identified himself with the alleged wisdom and glory of the Chinese sage. 62 00:06:45.740 --> 00:06:51.220 Mirabeau went so far as to proclaim that the three greatest inventions in the history of 63 00:06:51.220 --> 00:07:00.340 of Mankind were writing, money, and Canet's famous diagram, the tableau économique. 64 00:07:00.340 --> 00:07:08.500 The sect lasted for less than two decades, going rapidly downhill after the mid-1770s. 65 00:07:08.500 --> 00:07:12.500 Several factors accounted for the precipitate decline. 66 00:07:12.500 --> 00:07:18.940 One was the death of Canet in 1774, and the fact that in his later years the physician 67 00:07:18.940 --> 00:07:24.620 Men had lost much interest in his cult and had shifted to work on mathematics, where 68 00:07:24.620 --> 00:07:29.860 he claimed to have solved the age-old problem of squaring the circle. 69 00:07:29.860 --> 00:07:36.140 Furthermore, the fall from grace as finance minister of their fellow traveler, A. R. J. 70 00:07:36.140 --> 00:07:43.240 Turgot, two years later, and the disgrace heaped upon Mirabeau by a public smear campaign 71 00:07:43.240 --> 00:07:49.760 launched by his wife and children at about the same time caused physiocracy to fall from 72 00:07:49.760 --> 00:07:56.200 influence, and the advent of Smith's wealth of nations in the same year soon led to the 73 00:07:56.200 --> 00:08:02.740 unfortunate habit of ignoring all pre-Smithian thought as if the new science of political 74 00:08:02.740 --> 00:08:10.640 economy had been created single-handed and ex nihilo by Adam Smith. 75 00:08:10.640 --> 00:08:17.080 2. Laissez-faire and free trade 76 00:08:17.080 --> 00:08:23.240 The main stress of the physiocrats was in two areas, political economy and technical 77 00:08:23.240 --> 00:08:29.080 economic analysis, and the difference in the quality of their respective contributions 78 00:08:29.080 --> 00:08:36.200 is so great as to be almost stupefying. For in general political economy they were usually 79 00:08:36.200 --> 00:08:56.580 In political economy, the physiocrats were among the first laissez-faire thinkers, casting 80 00:08:56.580 --> 00:09:01.400 aside contemptuously the entire mercantilist baggage. 81 00:09:01.400 --> 00:09:08.440 They called for complete internal and external free enterprise and free trade, unfettered 82 00:09:08.440 --> 00:09:13.280 by subsidies, monopoly privileges or restrictions. 83 00:09:13.280 --> 00:09:19.800 By removing such restrictions and exactions, commerce, agriculture and the entire economy 84 00:09:19.800 --> 00:09:21.960 would flourish. 85 00:09:21.960 --> 00:09:27.880 On international trade, while the physiocrats lacked the specie flow price mechanism of 86 00:09:27.880 --> 00:09:33.680 of the Brilliant and Sophisticated Cantillon. They were far bolder than he in laying down 87 00:09:33.680 --> 00:09:41.480 the gauntlet to all mercantilist fallacies and restrictions. It is absurd and self-contradictory, 88 00:09:41.480 --> 00:09:47.200 they pointed out, for a nation to attempt to sell a great deal to foreign countries 89 00:09:47.200 --> 00:09:55.080 and to buy very little. Selling and buying are only two sides of the same coin. Furthermore, 90 00:09:55.080 --> 00:10:01.840 The physiocrats anticipated the classical economic insight that money is not crucial, 91 00:10:01.840 --> 00:10:09.000 that in the long run commodities, real goods, exchange for each other, with money simply 92 00:10:09.000 --> 00:10:10.680 an intermediary. 93 00:10:10.680 --> 00:10:17.720 Therefore, the key goal is not to amass bullion or to follow the chimera of a permanently 94 00:10:17.720 --> 00:10:23.560 to have a favorable balance of trade, but to have a high standard of living in terms 95 00:10:23.560 --> 00:10:26.280 of real products. 96 00:10:26.280 --> 00:10:32.080 Seeking to amass species means that people in a nation are giving up real goods in order 97 00:10:32.080 --> 00:10:34.840 to acquire mere money. 98 00:10:34.840 --> 00:10:39.520 Hence they are losing rather than gaining wealth in real terms. 99 00:10:39.520 --> 00:10:46.200 Indeed, the whole point of money is to exchange it for real wealth, and if people insist on 100 00:10:46.200 --> 00:10:54.040 When piling up an unused hoard of specie, they will lose wealth permanently. 101 00:10:54.040 --> 00:11:01.400 When Turgot became finance minister of France in 1774, his first act was to decree freedom 102 00:11:01.400 --> 00:11:05.040 of import and export of grain. 103 00:11:05.040 --> 00:11:11.880 The preamble of his edict, drawn up by his aide, Dupont de Nemours, summed up the laissez-faire 104 00:11:11.880 --> 00:11:41.880 The New Free Trade Policy, it declared, was designed to animate and extend the cultivation of the land, whose produce is the most real and certain wealth of a state, to maintain abundance by granaries and the entry of foreign corn, to prevent corn from falling to a price which would discourage the producer, to remove foreign grain from the land, to prevent corn from falling to a price which would discourage the producer, to remove foreign grain from the land, 105 00:11:41.880 --> 00:11:48.760 of Monopoly by shutting out private license in favor of free and full competition, and 106 00:11:48.760 --> 00:11:54.680 by maintaining among different countries that communication of exchange of superfluities 107 00:11:54.680 --> 00:12:02.660 for necessities which is so comfortable to the order established by divine providence. 108 00:12:02.660 --> 00:12:08.080 Although the physiocrats were officially in favor of complete freedom of trade, their 109 00:12:08.080 --> 00:12:14.360 Their besetting passion, and this reflects their often bizarre economics, were repealing 110 00:12:14.360 --> 00:12:19.040 all restrictions on free export of grain. 111 00:12:19.040 --> 00:12:25.200 It is understandable that they would concentrate on the elimination of a long-standing restriction, 112 00:12:25.200 --> 00:12:31.460 but they seemed to show little zeal for the freedom of importation of grain, or for the 113 00:12:31.460 --> 00:12:34.960 freedom of export of manufacturers. 114 00:12:34.960 --> 00:12:40.920 All this was wrapped up in the physiocrats' unremitting enthusiasm for high agricultural 115 00:12:40.920 --> 00:12:44.680 prices, almost as a good in itself. 116 00:12:44.680 --> 00:12:51.440 Indeed, the physiocrats frowned on exports of manufactured products as competing with 117 00:12:51.440 --> 00:12:55.440 and lowering the price of agricultural exports. 118 00:12:55.440 --> 00:13:03.360 Dr. Kanae went so far as to write that, happy the land which has no exports of manufacturers, 119 00:13:03.360 --> 00:13:13.860 Because agricultural exports maintain farm prices at too high a level to permit the sterile class to sell its products abroad. 120 00:13:13.860 --> 00:13:22.860 As we shall see below, sterile, by definition, meant everyone outside agriculture. 121 00:13:22.860 --> 00:13:29.860 3. Laissez-faire forerunner, the Marquis d'Argenson 122 00:13:29.860 --> 00:13:41.360 While the physiocrats were the first economists to stress and develop the case for laissez-faire, they had distinguished forerunners among statesmen and merchants in France. 123 00:13:41.360 --> 00:13:51.860 As we have seen, the laissez-faire concept developed among classical liberal oppositionists to the absolutism of late 17th century France. 124 00:13:51.860 --> 00:14:00.860 They included merchants, such as Thomas Legendre, and utilitarian officials like Belébat and Bois-Gilbert. 125 00:14:00.860 --> 00:14:20.860 Bridging the gap between turn-of-the-18th-century laissez-faire writers and the physiocrats of the 1760s and 1770s was the eminent statesman René-Louis de Voyer de Poulmi, Marquis d'Argenson, 1694 to 1757. 126 00:14:20.860 --> 00:14:29.580 The heir of a long line of ministers, magistrates and entendants, D'Argenson's ambition was 127 00:14:29.580 --> 00:14:36.620 to become prime minister and save France from what he saw as impending revolution by instituting 128 00:14:36.620 --> 00:14:37.620 laissez-faire. 129 00:14:37.620 --> 00:14:44.660 A voracious reader and prolific writer throughout his life, D'Argenson only published in his 130 00:14:44.660 --> 00:14:51.900 In his lifetime, a few articles in his Economic Journal in the early 1750s, and these were 131 00:14:51.900 --> 00:14:56.760 not printed but widely circulated in manuscript form. 132 00:14:56.760 --> 00:15:02.500 For a long while, d'Argenson was erroneously credited by historians with originating the 133 00:15:02.500 --> 00:15:09.700 phrase laissez-faire in one of the articles in his Journal of 1751. 134 00:15:09.700 --> 00:15:15.860 While d'Argenson did not originate the term, laissez-faire was his repeated cry to the 135 00:15:15.860 --> 00:15:21.860 French authorities, a cry he continued to stress even though his ideas were dismissed 136 00:15:21.860 --> 00:15:26.180 as eccentric by all his governmental colleagues. 137 00:15:26.180 --> 00:15:32.460 As entendant in his early years on the Flemish border, d'Argenson was struck with what he 138 00:15:32.460 --> 00:15:39.180 saw to be the economic and social superiority of free people and free markets across the 139 00:15:39.180 --> 00:15:46.620 of Order in Flanders. He then became greatly influenced by the writings of Fenelon, Belébat, 140 00:15:46.620 --> 00:15:47.940 and Bois-Gilbert. 141 00:15:47.940 --> 00:15:55.860 Darjean Sainte saw self-love and self-interest as the mainspring of human action, as bringing 142 00:15:55.860 --> 00:16:03.100 about energy and productivity in the pursuit of each man's happiness. Human social life, 143 00:16:03.100 --> 00:16:09.740 to D'Argent-Saint has the natural tendency to inherit harmony when artificial constraints 144 00:16:09.740 --> 00:16:15.620 and artificial harmony and artificial stimuli are removed. 145 00:16:15.620 --> 00:16:21.380 Looking to an enlightened monarch to remove these artificial subsidies and restrictions, 146 00:16:21.380 --> 00:16:26.700 D'Argent-Saint pointed out that in the ideal society the sovereign would have very little 147 00:16:26.700 --> 00:16:28.420 to do. 148 00:16:28.420 --> 00:16:32.140 One spoils everything by meddling too much. 149 00:16:32.140 --> 00:16:36.340 The best government is that which governs least. 150 00:16:36.340 --> 00:16:42.900 Thereby the Marquis anticipated the famous phrase attributed to Thomas Jefferson. 151 00:16:42.900 --> 00:16:49.500 Darjean Sainte concluded that each individual should be left alone to labor on his own behalf 152 00:16:49.500 --> 00:16:54.820 instead of suffering constraint and ill-conceived precautions. 153 00:16:54.820 --> 00:16:57.860 Then everything will go beautifully. 154 00:16:57.860 --> 00:17:05.300 Then, continuing the proto-Hayekian point made by Beleba, it is precisely this perfection 155 00:17:05.300 --> 00:17:11.380 of liberty that makes a science of commerce impossible, in the sense that our speculative 156 00:17:11.380 --> 00:17:13.600 thinkers understand it. 157 00:17:13.600 --> 00:17:20.080 They want to direct commerce by their orders and regulations, but to do this one would 158 00:17:20.080 --> 00:17:26.480 need to be thoroughly acquainted with the interests involved in commerce, from one individual 159 00:17:26.480 --> 00:17:33.760 to another. In the absence of such knowledge, it, a science of commerce, can only be much 160 00:17:33.760 --> 00:17:38.760 worse than ignorance in its bad effects. Therefore, laissez-faire. 161 00:17:38.760 --> 00:17:48.480 4. Natural Law and Property Rights 162 00:17:48.480 --> 00:17:54.120 Not only were the physiocrats generally consistent advocates of laissez-faire, but they also 163 00:17:54.120 --> 00:18:01.660 also supported the operation of a free market and the natural rights of person and property. 164 00:18:01.660 --> 00:18:07.120 John Locke and the Levellers in England had transformed the rather vague and holistic 165 00:18:07.120 --> 00:18:14.400 notions of natural law into the clear-cut, firmly individualistic concepts of the natural 166 00:18:14.400 --> 00:18:18.260 rights of every individual human being. 167 00:18:18.260 --> 00:18:24.060 But the physiocrats were the first to apply natural rights and property rights concepts 168 00:18:24.060 --> 00:18:27.460 fully to the free market economy. 169 00:18:27.460 --> 00:18:34.700 In a sense, they completed the work of Locke and brought full Lockeanism to economics. 170 00:18:34.700 --> 00:18:40.740 Keney and the others were also inspired by the typically 18th century enlightenment version 171 00:18:40.740 --> 00:18:47.340 of natural law, where the individual's rights of person and property were deeply embedded 172 00:18:47.340 --> 00:18:54.020 in a set of natural laws that had been worked out by the Creator and were clearly discoverable 173 00:18:54.020 --> 00:18:56.920 in the light of human reason. 174 00:18:56.920 --> 00:19:02.980 In a profound sense, then, eighteenth-century natural rights theory was a refined variant 175 00:19:02.980 --> 00:19:08.220 of medieval and post-medieval scholastic natural law. 176 00:19:08.220 --> 00:19:15.620 The rights were now clearly individualistic and not societal or pertaining to the State, 177 00:19:15.620 --> 00:19:20.840 and the set of natural laws was discoverable by human reason. 178 00:19:20.840 --> 00:19:28.100 The 17th century Dutch Protestant, and in essence Protestant scholastic Hugo Grotius, 179 00:19:28.100 --> 00:19:34.740 deeply influenced by the late Spanish scholastics, developed a natural law theory which he boldly 180 00:19:34.740 --> 00:19:41.700 declared was truly independent of the question of whether God had created them. 181 00:19:41.700 --> 00:19:48.260 The seeds of this thought were in St. Thomas Aquinas and in later Catholic scholastics, 182 00:19:48.260 --> 00:19:54.620 but never had it been formulated as clearly and as starkly as by Grotius. 183 00:19:54.620 --> 00:20:00.580 Or to put it in terms that had fascinated political philosophers since Plato, did God 184 00:20:00.580 --> 00:20:08.580 love the good because it was in fact good, or is something good because God loves it? 185 00:20:08.580 --> 00:20:14.200 The former has always been the answer of those who believe in objective truth and objective 186 00:20:14.200 --> 00:20:21.000 ethics, that is, that something might be good or bad in accordance with the objective laws 187 00:20:21.000 --> 00:20:23.940 of nature and reality. 188 00:20:23.940 --> 00:20:30.420 The latter has been the answer of fideists, who believe that no objective rights or ethics 189 00:20:30.420 --> 00:20:37.900 exist and that only the purely arbitrary will of God, as expressed in Revelation, can make 190 00:20:37.900 --> 00:20:42.500 make things good or bad for mankind. 191 00:20:42.500 --> 00:20:48.580 Grotius was the definitive statement of the objectivist, rationalist position, since natural 192 00:20:48.580 --> 00:20:55.940 laws for him are discoverable by human reason, and the 18th century enlightenment was essentially 193 00:20:55.940 --> 00:20:59.860 the spinning out of the Grotian framework. 194 00:20:59.860 --> 00:21:06.060 To Grotius the enlightenment added Newton and his vision of the world as a set of harmonious, 195 00:21:06.060 --> 00:21:11.620 precisely, if not mechanically, interacting natural laws. 196 00:21:11.620 --> 00:21:17.220 And while Grotius and Newton were fervent Christians, as was almost everyone in their 197 00:21:17.220 --> 00:21:24.220 epoch, the eighteenth century, starting with their premises, easily fell into deism, in 198 00:21:24.220 --> 00:21:31.940 which God, the great clockmaker or creator of this universe of natural laws, then disappeared 199 00:21:31.940 --> 00:21:37.560 from the Scene and allowed his creation to work itself out. 200 00:21:37.560 --> 00:21:42.580 From the standpoint of political philosophy, however, it mattered little whether Kene and 201 00:21:42.580 --> 00:21:49.380 the others, Dupont was of Huguenot background, were Catholics or deists, for given their 202 00:21:49.380 --> 00:21:55.800 world outlook, their attitude toward natural law and natural rights could be the same in 203 00:21:55.800 --> 00:21:58.180 either case. 204 00:21:58.180 --> 00:22:04.900 Mercier de la Rivière pointed out in his Natural Order that the general plan of God's 205 00:22:04.900 --> 00:22:11.500 creation had provided natural laws for the government of all things, and that man could 206 00:22:11.500 --> 00:22:15.540 surely not be any exception to that rule. 207 00:22:15.540 --> 00:22:21.180 Man needed only to know through his reason the conditions that would lead to his greatest 208 00:22:21.180 --> 00:22:25.020 happiness and then follow that path. 209 00:22:25.020 --> 00:22:31.340 All ills of mankind follow from ignorance or disobedience of such laws. 210 00:22:31.340 --> 00:22:37.780 In human nature, the right of self-preservation implies the right to property, and any individual 211 00:22:37.780 --> 00:22:44.700 property in man's products from the soil requires property in the land itself. 212 00:22:44.700 --> 00:22:50.620 But the right to property would be nothing without the freedom of using it, and so liberty 213 00:22:50.620 --> 00:22:54.560 is derived from the right to property. 214 00:22:54.560 --> 00:23:01.040 People flourish as social animals, and through trade and exchange of property, they maximize 215 00:23:01.040 --> 00:23:08.080 the happiness of all. Furthermore, since the faculties of human beings are by nature diverse 216 00:23:08.080 --> 00:23:15.520 and unequal, an inequality of condition arises naturally from an equal right to liberty of 217 00:23:15.520 --> 00:23:23.400 every man. In this way, property rights and free markets, concluded Mercier, is a social 218 00:23:23.400 --> 00:23:30.400 is a fundamental order that is natural, evident, simple, immutable, and conducive to the happiness of all. 219 00:23:30.400 --> 00:23:40.400 Or, as Keney declared in his Natural Law, every man has a natural right to the free exercise of his faculties, 220 00:23:40.400 --> 00:23:45.400 provided he does not employ them to the injury of himself or others. 221 00:23:45.400 --> 00:23:55.400 This right to liberty implies as a corollary the right to property, and the only function of the government is to defend that right. 222 00:23:55.400 --> 00:24:07.400 Many rulers of Europe were either entranced or intrigued by this fashionable new doctrine of physiocracy, and endeavored to find out about it from its major theorists. 223 00:24:07.400 --> 00:24:14.880 The Dauphin of France once complained to Canet of the difficulty of being a king, and the 224 00:24:14.880 --> 00:24:17.840 physician replied that it was really quite simple. 225 00:24:17.840 --> 00:24:22.680 What, then, asked the Dauphin, would you do if you were king? 226 00:24:22.680 --> 00:24:30.320 Nothing, was the straightforward, stark, and magnificently libertarian answer of Dr. Canet. 227 00:24:30.320 --> 00:24:34.100 But then, who would govern, sputtered the Dauphin? 228 00:24:34.100 --> 00:24:43.040 The law, that is, the natural law, was Keney's accurate but no doubt unsatisfying reply. 229 00:24:43.040 --> 00:24:48.680 A similar reply was certainly unsatisfactory to Catherine the Great, Tsarina of all the 230 00:24:48.680 --> 00:24:56.240 Russia's, who sent for Mercier de la Rivière, jurist and at one time entendant, governor 231 00:24:56.240 --> 00:25:01.040 of Martinique, to instruct her on how to govern. 232 00:25:01.040 --> 00:25:07.340 Just as to what the law should be grounded on, Mercier answered the Empress, On one thing 233 00:25:07.340 --> 00:25:12.080 alone, madam, the nature of things and of man. 234 00:25:12.080 --> 00:25:18.420 But how then can a king know what laws to give to a people, the Tsarina continued. 235 00:25:18.420 --> 00:25:25.260 To which Mercier replied sharply, To give or make laws, madam, is a task which God has 236 00:25:25.260 --> 00:25:27.040 left to no one. 237 00:25:27.040 --> 00:25:34.960 Ah, what is man to think himself capable of dictating laws to beings whom he knows not? 238 00:25:34.960 --> 00:25:41.440 The science of government, Mercier added, is to study and recognize the laws which God 239 00:25:41.440 --> 00:25:49.120 has so evidently engraven in the very organization of man when he gave him existence. 240 00:25:49.120 --> 00:25:55.840 Mercier added the pertinent warning, to seek to go beyond this would be a great misfortune 241 00:25:55.840 --> 00:25:59.080 and a Destructive Undertaking. 242 00:25:59.080 --> 00:26:03.200 The Tsarina was polite, but was definitely not amused. 243 00:26:03.200 --> 00:26:07.880 Monsieur, she replied curtly, I am very pleased to have heard you. 244 00:26:07.880 --> 00:26:10.440 I wish you good day. 245 00:26:10.440 --> 00:26:12.240 5. 246 00:26:12.240 --> 00:26:16.520 The Single Tax on Land 247 00:26:16.520 --> 00:26:23.080 Natural rights laissez-faire libertarians always confront several problems, or lacunii, 248 00:26:23.080 --> 00:26:24.960 in their theory. 249 00:26:24.960 --> 00:26:27.080 One is taxation. 250 00:26:27.080 --> 00:26:32.440 If every individual is to have inviolable property rights and those rights are to be 251 00:26:32.440 --> 00:26:39.360 guaranteed by the government, taxation itself, an infringement of property rights, presents 252 00:26:39.360 --> 00:26:43.120 an immediate problem to laissez-faire theorists. 253 00:26:43.120 --> 00:26:49.400 For how high should taxes be and who should pay them? 254 00:26:49.400 --> 00:26:55.600 Social liberalism, however inchoate, had been born in France as an opposition to the statist 255 00:26:55.600 --> 00:27:02.080 absolutism of King Louis XIV in the latter decades of the seventeenth and the early years 256 00:27:02.080 --> 00:27:04.560 of the eighteenth century. 257 00:27:04.560 --> 00:27:10.840 A favorite program of these liberals, as set forth by Marshal Vaubin and by the Sûre de 258 00:27:10.840 --> 00:27:19.800 de Bois-Gilbert, among others, was a single tax, a proportional tax on all income or property. 259 00:27:19.800 --> 00:27:27.040 The idea was that this simple, direct, universal tax would replace the monstrous and crippling 260 00:27:27.040 --> 00:27:33.080 network of taxation that had grown up in 17th century France. 261 00:27:33.080 --> 00:27:39.200 To solve the problem of taxation, Dr. Canet and the physiocrats came up with their own 262 00:27:39.200 --> 00:27:48.160 Original Single Tax, A Single Tax on Land. The idea was that the tax would be low and 263 00:27:48.160 --> 00:27:55.540 that it would be proportional and confined only to a tax on land and on landlords. The 264 00:27:55.540 --> 00:28:02.500 rationale of the single tax stems from the singular physiocratic view that only land 265 00:28:02.500 --> 00:28:04.780 is Productive. 266 00:28:04.780 --> 00:28:12.660 Land produces because it creates matter, whereas all other activities, such as trade, commerce, 267 00:28:12.660 --> 00:28:19.700 manufacturing, services, etc., are sterile, although admittedly useful because they only 268 00:28:19.700 --> 00:28:25.580 shuffle around or transform matter without creating it. 269 00:28:25.580 --> 00:28:31.860 Since only land is productive and all other activities are sterile, it follows, according 270 00:28:31.860 --> 00:28:38.100 According to the physiocrats, that any other taxes will wind up being shifted onto land, 271 00:28:38.100 --> 00:28:39.620 through the price system. 272 00:28:39.620 --> 00:28:46.780 Therefore, the choice is to tax the land indirectly and remotely while crippling and distorting 273 00:28:46.780 --> 00:28:54.820 economic activities, or taxing the land openly and uniformly through the single tax, thereby 274 00:28:54.820 --> 00:29:00.420 freeing economic activity from a fearsome tax burden. 275 00:29:00.420 --> 00:29:05.900 From the standpoint of economic theory, the famous physiocratic tenet that only land is 276 00:29:05.900 --> 00:29:10.580 productive must be considered bizarre and absurd. 277 00:29:10.580 --> 00:29:16.740 It is certainly a tremendous loss of insight compared to Catillon, who identified land 278 00:29:16.740 --> 00:29:24.620 and labor as original productive factors and entrepreneurs as the motor of the market economy 279 00:29:24.620 --> 00:29:31.460 who adjust resources to the demands of consumers and to the uncertainty of the market. 280 00:29:31.460 --> 00:29:37.300 It is surely true that agriculture was the chief occupation of the day and that most 281 00:29:37.300 --> 00:29:42.540 commerce was the transportation and sale of agricultural products. 282 00:29:42.540 --> 00:29:51.460 But this scarcely salvages or excuses the absurdity of the land as only productive factor doctrine. 283 00:29:51.460 --> 00:29:57.460 It is possible that one explanation for this odd doctrine is to apply to the physiocrats 284 00:29:57.460 --> 00:30:03.900 the insight of Professor Roger Garrison on the basic world outlook of Adam Smith. 285 00:30:03.900 --> 00:30:11.140 Smith, in a less outlandish version of the physiocratic bias, held that only material 286 00:30:11.140 --> 00:30:19.260 output, in contrast to intangible services, is productive, while immaterial services are 287 00:30:19.260 --> 00:30:26.640 are unproductive. Garrison points out that the contrast here is not really between material 288 00:30:26.640 --> 00:30:34.060 and immaterial goods and services, but between capital goods and consumer goods, which are 289 00:30:34.060 --> 00:30:41.060 basically either direct services or a stream of services to be available in the future. 290 00:30:41.060 --> 00:30:48.320 Hence, for Smith, productive labor is only effort that goes into capital goods, into 291 00:30:48.320 --> 00:30:52.920 to Building up Productive Capacity for the Future. 292 00:30:52.920 --> 00:30:57.800 Labor in direct service to consumers is unproductive. 293 00:30:57.800 --> 00:31:03.800 In short, Smith, despite his reputation as an advocate of the free market, refuses to 294 00:31:03.800 --> 00:31:11.120 accept free market allocations to the production of consumer vis-à-vis capital goods. 295 00:31:11.120 --> 00:31:16.840 He would prefer more investment and growth than the market prefers. 296 00:31:16.840 --> 00:31:22.600 In the same way, could it not be true that the physiocrats had a similar outlook? 297 00:31:22.600 --> 00:31:30.440 The physiocrats, too, stressed material goods, and agriculture was the main material product. 298 00:31:30.440 --> 00:31:36.520 The physiocrats were also greatly concerned with economic growth, with increasing investment 299 00:31:36.520 --> 00:31:42.920 and national output, and especially with greater capital investments in agriculture. 300 00:31:42.920 --> 00:31:49.080 Indeed, the physiocrats were disgruntled with free market choice and wanted to strengthen 301 00:31:49.080 --> 00:31:54.080 consumer demand for agricultural products in particular. 302 00:31:54.080 --> 00:32:00.000 High consumption of farm products was beneficial, according to the physiocrats, whereas high 303 00:32:00.000 --> 00:32:07.480 consumption of manufactured goods would promote unproductive expenses and crowd out desirable 304 00:32:07.480 --> 00:32:11.480 purchases of agricultural products. 305 00:32:11.480 --> 00:32:17.240 Some economists have gone so far as to speculate that the physiocrats would have been overjoyed 306 00:32:17.240 --> 00:32:21.120 at a policy of farm price supports. 307 00:32:21.120 --> 00:32:27.280 Professor Spiegel believes that if the physiocrats had been faced with a choice between laissez-faire 308 00:32:27.280 --> 00:32:34.040 and intervention on behalf of farm price supports, they would have chosen intervention. 309 00:32:34.040 --> 00:32:40.160 The means to resolve the economic problem that was foremost in their minds was the development 310 00:32:40.160 --> 00:32:47.480 of Domestic Agriculture rather than unconditional reliance on private initiative within a framework 311 00:32:47.480 --> 00:32:50.560 of competition. 312 00:32:50.560 --> 00:32:56.040 Perhaps the tip-off on applying the Garrison insight is the common attitude of Smith and 313 00:32:56.040 --> 00:33:00.160 the physiocrats on usury laws. 314 00:33:00.160 --> 00:33:06.200 Despite their generally consistent advocacy of absolute and inviolate property rights 315 00:33:06.200 --> 00:33:10.760 and of the freedom to trade within and without a nation, 316 00:33:10.760 --> 00:33:18.600 Kene and the physiocrats championed usury laws, denying the freedom to lend and borrow. 317 00:33:18.600 --> 00:33:21.640 Adam Smith had a similar aberration. 318 00:33:21.640 --> 00:33:26.520 Smith, as we shall see further below, and as Garrison pointed out, 319 00:33:26.520 --> 00:33:31.960 took this position in a conscious effort to divert credit from unproductive, 320 00:33:31.960 --> 00:33:41.960 for High-Risk and High-Interest Paying Speculators and Consumers, and Toward Productive, Low-Risk Investors. 321 00:33:41.960 --> 00:33:49.960 Similarly, Cannae denounced the restrictions on investment and capital growth resulting from high interest rates 322 00:33:49.960 --> 00:33:58.960 and from the competition of unproductive borrowers crowding out credit that would otherwise go into capitalized agriculture. 323 00:33:58.960 --> 00:34:06.460 Usury laws were upheld on traditional moralistic grounds of alleged sterility of money. 324 00:34:06.460 --> 00:34:13.460 But to the physiocrats, all activity except agriculture was unproductive, 325 00:34:13.460 --> 00:34:20.460 and so the problem was rather the competition such borrowing imposed on the productive sector. 326 00:34:20.460 --> 00:34:23.960 As Elizabeth Fox Genovese puts it, 327 00:34:23.960 --> 00:34:31.000 Keney argues that the high interest rate constitutes neither more nor less than a tax upon the 328 00:34:31.000 --> 00:34:37.000 productive life of the nation, upon those who do not borrow as much as upon those who 329 00:34:37.000 --> 00:34:38.560 do. 330 00:34:38.560 --> 00:34:45.140 It is true that part of the physiocratic attention here was on government debt, and it is certainly 331 00:34:45.140 --> 00:34:51.000 true that government debt raises interest rates and diverts capital from productive 332 00:34:51.000 --> 00:34:53.660 to unproductive sectors. 333 00:34:53.660 --> 00:35:00.780 But there are two flaws in such an approach. First, not all non-agricultural debt is state 334 00:35:00.780 --> 00:35:08.220 debt, and therefore not all higher interest is a tax on producers. This returns us to 335 00:35:08.220 --> 00:35:15.220 the eccentric view of the physiocrats that only land is productive. Usury laws would 336 00:35:15.220 --> 00:35:22.260 cripple not only government debt, but also other forms of borrowing. And second, it seems 337 00:35:22.260 --> 00:35:29.140 is odd to allow government debt and then try to offset its unfortunate effects by the meat-axe 338 00:35:29.140 --> 00:35:33.900 approach of imposing restraints on usury. 339 00:35:33.900 --> 00:35:39.380 Surely it would be simpler, more direct and less distorting to tackle the problem at its 340 00:35:39.380 --> 00:35:44.620 source and call for the elimination of government debt. 341 00:35:44.620 --> 00:35:51.180 Usury laws only make things worse and injure free and productive credit. 342 00:35:51.180 --> 00:35:58.380 And so Keney, himself the son of a well-to-do farmer, was far more interested in subsidizing 343 00:35:58.380 --> 00:36:06.420 credit to farmers and keeping out competing borrowers than in stopping government debt. 344 00:36:06.420 --> 00:36:13.280 There is another way of explaining the physiocratic attitude towards land as the sole producer, 345 00:36:13.280 --> 00:36:17.980 and that is to concentrate on the proposed single tax. 346 00:36:17.980 --> 00:36:23.580 More specifically, the physiocrats held that the productive classes were the farmers, who 347 00:36:23.580 --> 00:36:28.340 rented the land from the landlords and actually tilled it. 348 00:36:28.340 --> 00:36:34.580 The landlords were only partially productive, the partially coming from the capital advances 349 00:36:34.580 --> 00:36:37.320 they had made to the farmers. 350 00:36:37.320 --> 00:36:43.600 But the physiocrats were sure that the farmers' returns were all bid away by their competition 351 00:36:43.600 --> 00:36:51.720 to Rent Lands, so that in practice, all the net product, the only net product in society, 352 00:36:51.720 --> 00:36:58.600 is reaped by the nation's landlords. Therefore, the single tax should be a proportionate tax 353 00:36:58.600 --> 00:37:02.400 upon the landlords alone. 354 00:37:02.400 --> 00:37:08.640 Professor Norman J. Ware has interpreted physiocracy and its emphasis on the sole productivity 355 00:37:08.640 --> 00:37:15.440 of Land as merely a rationalization of the interests of the landlord class. 356 00:37:15.440 --> 00:37:21.400 This hypothesis has been taken seriously by many historians of economic thought. 357 00:37:21.400 --> 00:37:28.260 But let us ask ourselves, what sort of self-serving doctrine says, please, put all the taxes 358 00:37:28.260 --> 00:37:30.000 on me? 359 00:37:30.000 --> 00:37:37.040 The beneficiaries of physiocratic policies would surely be every economic class except 360 00:37:37.040 --> 00:37:43.560 The Landlords, including Dr. Keney's own class of farmers. 361 00:37:43.560 --> 00:37:53.300 6. Objective Value and Cost of Production Although the physiocrats had useful insights 362 00:37:53.300 --> 00:37:59.240 into political economy and the importance of the free market, their distinctive contributions 363 00:37:59.240 --> 00:38:05.160 to technical economics were not only wrong, but in some cases proved to be a disaster 364 00:38:05.160 --> 00:38:08.840 for the Future of the Economic Discipline. 365 00:38:08.840 --> 00:38:14.880 Thus for centuries the mainstream of economic thought, generally embedded in scholastic 366 00:38:14.880 --> 00:38:21.360 treatises, held that the value, and therefore the prices, of goods were determined on the 367 00:38:21.360 --> 00:38:29.160 market by utility and scarcity, that is, by consumer valuations of a given supply of a 368 00:38:29.160 --> 00:38:31.400 product. 369 00:38:31.400 --> 00:38:37.840 Ludwig and post-scholastic economics had basically solved the age-old value paradox 370 00:38:37.840 --> 00:38:42.320 of diamonds and bread or diamonds and water. 371 00:38:42.320 --> 00:38:48.920 How is it that bread, so useful to man, is worth very little on the market, whereas diamonds, 372 00:38:48.920 --> 00:38:52.200 a mere frippery, are so expensive? 373 00:38:52.200 --> 00:38:58.800 The solution was that if quantities of supply are taken into account, the seeming contradiction 374 00:38:58.800 --> 00:39:05.880 The question between use-value and exchange-value disappears, for the supply of bread is so 375 00:39:05.880 --> 00:39:14.280 abundant that any given loaf will have a negligible value, in use or in exchange, whereas diamonds 376 00:39:14.280 --> 00:39:19.760 are so scarce that they will command a high value on the market. 377 00:39:19.760 --> 00:39:27.200 Value then does not pertain in the abstract to a class of goods, it is imparted by consumers 378 00:39:27.200 --> 00:39:36.200 refers to specific real units, and such value depends inversely on the supply of a good. 379 00:39:36.200 --> 00:39:42.820 The only thing left to complete the explanation was the marginal insight imparted by the Austrians 380 00:39:42.820 --> 00:39:50.500 and other neo-classicals in the 1870s. The scholastics saw that the utility of any good 381 00:39:50.500 --> 00:39:54.040 diminishes as its stock increases. 382 00:39:54.040 --> 00:40:01.340 The only thing lacking was the marginal analysis, that real-world purchases and evaluations 383 00:40:01.340 --> 00:40:07.280 focus on the next unit, the marginal unit of the good. 384 00:40:07.280 --> 00:40:12.000 Diminishing utility is diminishing marginal utility. 385 00:40:12.000 --> 00:40:18.880 But while the capstone of utility and subjective value theory was yet missing, enough was already 386 00:40:18.880 --> 00:40:24.880 in Place to Provide a Cogent Explanation of Value and Price. 387 00:40:24.880 --> 00:40:32.720 Despite his troubling injection of intrinsic value as a quantity of land and labor in production, 388 00:40:32.720 --> 00:40:40.300 Catillon had continued in this late scholastic Proto-Austrian tradition and had indeed made 389 00:40:40.300 --> 00:40:46.960 many contributions to it, particularly in the study of money and entrepreneurship. 390 00:40:46.960 --> 00:40:53.280 It was the physiocrats who broke with centuries of sound economic reasoning and contributed 391 00:40:53.280 --> 00:40:59.700 to what would become in the hands of Smith and Ricardo a reactionary and obscurantist 392 00:40:59.700 --> 00:41:03.600 destruction of the correct analysis of value. 393 00:41:03.600 --> 00:41:12.480 Dr. Keney begins his value analysis by disregarding centuries of value theory and tragically sundering 394 00:41:12.480 --> 00:41:18.060 Understanding the Concepts of Use Value and Exchange Value 395 00:41:18.060 --> 00:41:25.760 Use value reflects the individual needs and desires of consumers, but, according to Cannae, 396 00:41:25.760 --> 00:41:32.580 these use values of different goods have little or no relation to each other, or, therefore, 397 00:41:32.580 --> 00:41:34.720 to prices. 398 00:41:34.720 --> 00:41:40.920 Exchange value, or relative prices, on the other hand, have no relation to man's needs, 399 00:41:40.920 --> 00:41:49.440 were two agreements among bargainers and contractors. Instead, Keney, the would-be scientist, rejected 400 00:41:49.440 --> 00:41:56.880 subjective value and insisted that the values of goods are objective and mystically embedded 401 00:41:56.880 --> 00:42:05.280 in various goods irrespective of consumers' subjective valuations. This objective embodiment, 402 00:42:05.280 --> 00:42:29.080 7. 403 00:42:29.080 --> 00:42:32.920 The Tableau Economique 404 00:42:32.920 --> 00:42:38.440 Not as devastating for the development of economics as his fallacy of the cost of production 405 00:42:38.440 --> 00:42:47.140 or productive labor, but more irritating nowadays is Dr. Keney's tableau économique, the very 406 00:42:47.140 --> 00:42:53.260 invention that his glorifier Mirabeau called one of the three great human inventions of 407 00:42:53.260 --> 00:42:55.260 all time. 408 00:42:55.260 --> 00:43:03.140 The Tableau, first published in 1758, was an incomprehensible, jargon-filled chart purporting 409 00:43:03.140 --> 00:43:09.940 to depict the flow of expenditures from one economic class to another. 410 00:43:09.940 --> 00:43:16.100 Generally dismissed as turgid and irrelevant in its day, it has been rediscovered by 20th 411 00:43:16.100 --> 00:43:23.100 century economists, who are fascinated because of its very incomprehensibility. 412 00:43:23.100 --> 00:43:27.100 All the Better to Publish Journal Articles on. 413 00:43:27.100 --> 00:43:33.500 Dr. Kanay's tableau économique has been hailed for anticipating many of the most cherished 414 00:43:33.500 --> 00:43:42.300 developments of 20th century economics, aggregative concepts, input-output analysis, econometrics, 415 00:43:42.300 --> 00:43:48.740 depiction of the circular flow of equilibrium, Keynesian stress on expenditure and consumer 416 00:43:48.740 --> 00:43:52.840 demand, and the Keynesian multiplier. 417 00:43:52.840 --> 00:43:59.040 In recent years, tens of thousands of words have been lovingly expended on trying to piece 418 00:43:59.040 --> 00:44:05.480 together what the tableau had to say, and to reconcile it with its own figures and with 419 00:44:05.480 --> 00:44:08.840 the economy of the real world. 420 00:44:08.840 --> 00:44:14.740 To the extent that Canet's tableau anticipates all these developments, so much the worse 421 00:44:14.740 --> 00:44:21.000 for both the forerunner and the later product, it is true that the tableau shows that ultimately 422 00:44:21.000 --> 00:44:28.320 Real Goods Exchange for Real Goods with Money as an Intermediary, and that everyone is both 423 00:44:28.320 --> 00:44:31.960 a consumer and a producer in the market. 424 00:44:31.960 --> 00:44:39.560 But these simple facts were known for centuries, and charts, lines, Cannae's cherished zig-zags 425 00:44:39.560 --> 00:44:45.440 and numbers can only obscure rather than highlight their importance. 426 00:44:45.440 --> 00:44:52.000 At best, the chart elaborates spending and income patterns to no purpose. Furthermore, 427 00:44:52.000 --> 00:44:58.760 the tableau is holistic, aggregative, and macroeconomic, with no solid grounding in the 428 00:44:58.760 --> 00:45:04.480 methodological individualism of sound microeconomics. 429 00:45:04.480 --> 00:45:11.440 The tableau not only introduced ungrounded and unsound macro thinking into economics, 430 00:45:11.440 --> 00:45:17.120 It also laid up mischief for the future by anticipating Keynesianism. 431 00:45:17.120 --> 00:45:23.760 For it glorified expenditures, including consumption, and worried about savings, which it tended 432 00:45:23.760 --> 00:45:31.840 to regard as crippling the economy by leaking out of the constant circular flow of spending. 433 00:45:31.840 --> 00:45:39.000 This stress on the vital importance of maintaining spending was faulty and superficial in ignoring 434 00:45:39.000 --> 00:45:42.320 two fundamental considerations. 435 00:45:42.320 --> 00:45:50.160 Saving is spent on investment goods, and the key to harmony and equilibrium is price. 436 00:45:50.160 --> 00:45:56.820 Lower spending can always be equilibrated easily on the market by a fall in prices. 437 00:45:56.820 --> 00:46:03.600 It can be laid down as a veritable law that any picture or analysis of the economic system 438 00:46:03.600 --> 00:46:10.740 that omits prices from considerations can only be crackpot, and the tableau économique 439 00:46:10.740 --> 00:46:18.040 was the first, but, alas, not the last, economic model which did precisely that. 440 00:46:18.040 --> 00:46:25.760 Dr. Keney, of course, gave to his circular flow model his own physiocratic twist. It was 441 00:46:25.760 --> 00:46:32.360 particularly important to keep up spending on productive agricultural products and to 442 00:46:32.360 --> 00:46:40.360 to avoid diversion of spending to sterile and unproductive products, that is, to anything else. 443 00:46:40.360 --> 00:46:48.360 Keynes, of course, was to avoid the physiocratic bias when he resurrected a similar analysis. 444 00:46:48.360 --> 00:46:56.360 While the analytic merits of macro-concepts, input-output analysis and econometrics are highly dubious at best, 445 00:46:56.360 --> 00:47:01.360 they are surely worse than nothing if the numbers are incorrect. 446 00:47:01.360 --> 00:47:16.360 But Canet's figures are spurious, for the France of his day or for any other epoch, and the would-be great mathematician made many simple mistakes in arithmetic in the portrayals of his beloved tableau. 447 00:47:16.360 --> 00:47:34.360 At best, then, the tableau was elaborate frippery, at worst, false, mischief-making and deceptive, and in no sense did the tableau do anything but detract and divert attention from genuine economic analysis and insight. 448 00:47:34.360 --> 00:47:55.360 After contemplating this piece of egregious folly, it is a relief to turn to the blistering satirical attack on the tableau by a conservative statist opponent of the physiocrats, the attorney Simon Nicolas Henri Lange, 1736-1794. 449 00:47:55.360 --> 00:48:07.360 In his Reply to the Modern Doctors, 1771, Lange begins by ridiculing the idea that the physiocrats were not a cult or sect. 450 00:48:07.360 --> 00:48:18.360 Evidence shows it. Your mysterious words, physiocracy, net product, your mystic jargon, order, science, the master, 451 00:48:18.360 --> 00:48:24.360 Your titles of honor showered on your patriarchs, your wreaths scattered through the provinces 452 00:48:24.360 --> 00:48:27.640 on obscure if excellent persons. 453 00:48:27.640 --> 00:48:28.980 Not a sect. 454 00:48:28.980 --> 00:48:36.360 You have a rallying cry, banners, a march, a trumpeter, du pont, a uniform for your books, 455 00:48:36.360 --> 00:48:38.880 and a sign like Freemasons. 456 00:48:38.880 --> 00:48:40.320 Not a sect. 457 00:48:40.320 --> 00:48:44.560 One cannot touch one of you, but all rush to his aid. 458 00:48:44.560 --> 00:48:50.680 You all laud and glorify each other and attack and intimidate your opponents in unmeasured 459 00:48:50.680 --> 00:48:53.040 terms. 460 00:48:53.040 --> 00:48:57.760 Lange then turns his scornful attention to the tableau. 461 00:48:57.760 --> 00:49:04.080 You affect an inspired tone and seriously discuss on what particular day the symbol 462 00:49:04.080 --> 00:49:11.160 of your faith, the masterpiece, the tableau économique, was born, a symbol so mysterious 463 00:49:11.160 --> 00:49:14.420 that huge volumes cannot explain it. 464 00:49:14.420 --> 00:49:20.900 It is like the Koran of Mohammed. You burn to lay down your lives for your principles 465 00:49:20.900 --> 00:49:27.700 and talk of your apostleship. You attack the Abbe Galeani and me because we have no reverence 466 00:49:27.700 --> 00:49:34.500 for that ridiculous hieroglyphic which is your holy gospel. Confucius drew up a table, 467 00:49:34.500 --> 00:49:42.320 the I Ching, of sixty-four terms, also connected by lines, to show the evolution of the elements. 468 00:49:42.320 --> 00:49:48.280 And your tableau économique is justly enough compared to it, but it comes three hundred 469 00:49:48.280 --> 00:49:50.440 years too late. 470 00:49:50.440 --> 00:49:53.640 Both alike are equally unintelligible. 471 00:49:53.640 --> 00:49:59.120 The tableau is an insult to common sense, to reason and philosophy, with its columns 472 00:49:59.120 --> 00:50:06.240 of figures of net reproduction terminating always in a zero, striking symbol of the fruit 473 00:50:06.240 --> 00:50:12.920 of the researches of any one simple enough to try in vain to understand it. 474 00:50:12.920 --> 00:50:17.880 8. Strategy and Influence 475 00:50:17.880 --> 00:50:23.740 One problem that any laissez-faire liberal thinker must face is, granted that government 476 00:50:23.740 --> 00:50:31.640 interference should be minimal, what form should that government take? Who shall govern? 477 00:50:31.640 --> 00:50:39.120 To French liberals of the later 17th or 18th centuries, there seemed to be only one answer. 478 00:50:39.120 --> 00:50:44.960 Government is and always will be ruled by an absolute monarch. 479 00:50:44.960 --> 00:50:50.020 Oppositionist rebels had been crushed in the early and mid-17th century, and from then 480 00:50:50.020 --> 00:50:53.160 on only one answer was thinkable. 481 00:50:53.160 --> 00:50:58.720 The king must be converted to the truths and wisdom of laissez-faire. 482 00:50:58.720 --> 00:51:04.800 Any idea of inspiring or launching a mass opposition movement against the king was simply 483 00:51:04.800 --> 00:51:06.440 out of the question. 484 00:51:06.440 --> 00:51:10.440 It was not part of any thinkable dialogue. 485 00:51:10.440 --> 00:51:17.400 The physiocrats, like classical liberals earlier in the 18th century, were not simply theorists. 486 00:51:17.400 --> 00:51:22.840 The nation had gone awry, and they possessed a political alternative they were trying to 487 00:51:22.840 --> 00:51:24.200 promote. 488 00:51:24.200 --> 00:51:31.060 And if absolute monarchy was the only conceivable form of government for France, the only strategy 489 00:51:31.060 --> 00:51:36.480 for liberals was simple, at least on paper, to convert the king. 490 00:51:36.480 --> 00:51:42.280 And so the strategy of classical liberals, from the exertions of the abbé Claude Fleury 491 00:51:42.280 --> 00:51:48.720 and his able student, Archbishop Fenelon, in the late 17th century, to the physiocrats 492 00:51:48.720 --> 00:51:54.400 in the late eighteenth was to convert the ruler. 493 00:51:54.400 --> 00:51:59.800 The liberals were well placed to pursue the strategy of what might be called their projected 494 00:51:59.800 --> 00:52:05.320 revolution from the top, for they were all highly placed at court. 495 00:52:05.320 --> 00:52:11.120 Archbishop Fenallon placed his hopes in the dauphin, rearing the Duke of Burgundy as an 496 00:52:11.120 --> 00:52:13.440 ardent classical liberal. 497 00:52:13.440 --> 00:52:18.560 But we have seen that these carefully laid plans turned to ashes when the Duke died of 498 00:52:18.560 --> 00:52:25.560 of Illness in 1711, only four years before the death of Louis himself. 499 00:52:25.560 --> 00:52:32.040 A half century later, Dr. Canet, again working through a king's mistress, this time Madame 500 00:52:32.040 --> 00:52:38.880 de Pompadour, used his position at court to try to convert the ruler. Success in France 501 00:52:38.880 --> 00:52:45.560 was only partial. When Turgot, who agreed with the physiocrats on laissez-faire, became 502 00:52:45.560 --> 00:53:08.520 The leading physiocrats were exiled by King Louis XVI. Their journal was quickly suppressed, 503 00:53:08.520 --> 00:53:14.360 and Mirabeau was ordered to cancel his famous Tuesday evening seminars. 504 00:53:14.360 --> 00:53:19.460 The physiocrat's strategy proved a failure, and there was more to the failure than the 505 00:53:19.460 --> 00:53:22.100 vagaries of a particular monarch. 506 00:53:22.100 --> 00:53:27.320 For even if the monarch could be convinced that liberty conduced to the happiness and 507 00:53:27.320 --> 00:53:34.680 prosperity of his subjects, his own interests are often to maximize state exactions, and 508 00:53:34.680 --> 00:53:37.800 therefore his own power and wealth. 509 00:53:37.800 --> 00:53:49.300 Furthermore, the monarch does not rule alone, but as the head of a ruling coalition of bureaucrats, nobles, privileged monopolists and feudal lords. 510 00:53:49.300 --> 00:53:55.300 He rules, in short, as the head of a power elite, or ruling class. 511 00:53:55.300 --> 00:54:06.800 It is theoretically conceivable, but scarcely likely, that a king and the rest of the ruling class will rush to embrace a philosophy and a political economy 512 00:54:06.800 --> 00:54:12.160 that will end their power and put them, in effect, out of business. 513 00:54:12.160 --> 00:54:17.880 It certainly did not happen in France, and so, after the failure of the physiocrats and 514 00:54:17.880 --> 00:54:22.120 Turgot, came the French Revolution. 515 00:54:22.120 --> 00:54:28.160 In any event, the physiocrats did manage to convert some rulers, though not the monarch 516 00:54:28.160 --> 00:54:29.900 of France. 517 00:54:29.900 --> 00:54:34.760 Their leading disciple among the rulers of the world, and one of the most enthusiastic 518 00:54:34.760 --> 00:54:43.640 One of the big and lovable ones was Carl Friedrich, Margrave of the Duchy of Baden, 1728-1811, 519 00:54:43.640 --> 00:54:50.840 in Germany. Converted by the works of Mirabeau, the Margrave wrote a praesi of physiocracy 520 00:54:50.840 --> 00:54:57.440 and proceeded to try to institute the system in his realm. The Margrave proposed free trade 521 00:54:57.440 --> 00:55:06.760 in Corn to the German Diet, and in 1770 he introduced the single tax at 20% of the agricultural 522 00:55:06.760 --> 00:55:11.120 net product in three villages of Baden. 523 00:55:11.120 --> 00:55:17.520 Administering the experiment was the Margrave's chief aide, the enthusiastic German physiocrat 524 00:55:17.520 --> 00:55:27.440 Johann August Schlettwein, 1731-1802, Professor of Economics at the University of Gießen. 525 00:55:27.440 --> 00:55:33.160 The experiment, however, was abandoned in a few years in two villages, although the single 526 00:55:33.160 --> 00:55:39.360 tax continued in the village of Dietlingen until 1792. 527 00:55:39.360 --> 00:55:45.920 For a few years the Margrave also imported Dupont de Nemours to be his advisor and tutor 528 00:55:45.920 --> 00:55:48.320 to His Son. 529 00:55:48.320 --> 00:55:53.800 In one notable meeting, the fervent Margrave of Baden asked his master Mirabeau whether 530 00:55:53.800 --> 00:55:59.440 or not the physiocratic ideal was making sovereign rulers unnecessary. 531 00:55:59.440 --> 00:56:03.680 Perhaps they might all be reformed out of existence. 532 00:56:03.680 --> 00:56:09.960 The Margrave had divined the anarchistic, or at least the republican, core underlying 533 00:56:09.960 --> 00:56:14.800 the laissez-faire libertarian and natural rights doctrine. 534 00:56:14.800 --> 00:56:22.680 But Mirabeau, dedicated as were all the physiocrats to absolute monarchy, drew back, sternly reminding 535 00:56:22.680 --> 00:56:28.640 his younger pupil that while the role of the sovereign would ideally be limited, he would 536 00:56:28.640 --> 00:56:35.440 still be the owner of the public domain and the preserver of social order. 537 00:56:35.440 --> 00:56:40.080 Several other rulers of Europe at least dabbled in physiocracy. 538 00:56:40.080 --> 00:56:47.000 One of the most eager was Leopold II, Grand Duke of Tuscany, later Emperor of Austria, 539 00:56:47.000 --> 00:56:52.720 who ordered his ministers to consult with Mirabeau and carried out some of the physiocratic 540 00:56:52.720 --> 00:56:53.720 reforms. 541 00:56:53.720 --> 00:56:59.000 A fellow traveler was Emperor Joseph II of Austria. 542 00:56:59.000 --> 00:57:05.680 Another physiocratic enthusiast was Gustavus III, King of Sweden, who conferred upon Mirabeau 543 00:57:05.680 --> 00:57:12.720 Also the grand cross of the newly founded Order of Wassa in honor of agriculture. 544 00:57:12.720 --> 00:57:17.280 DuPont, in turn, was made a Knight of the Order. 545 00:57:17.280 --> 00:57:23.000 More practically, when the physiocratic journal was suppressed upon the fall of Turgot, King 546 00:57:23.000 --> 00:57:29.320 Gustavus and the Margrave of Baden joined in commissioning DuPont to edit a journal which 547 00:57:29.320 --> 00:57:32.600 would be published in their realms. 548 00:57:32.600 --> 00:57:38.400 But the physiocratic appeal to monarchy lost what little effect it had after the onset 549 00:57:38.400 --> 00:57:40.440 of the French Revolution. 550 00:57:40.440 --> 00:57:46.980 Indeed, after the Revolution, physiocracy, with its pro-agricultural bias and devotion 551 00:57:46.980 --> 00:57:53.680 to absolute monarchy, was discredited in France and the rest of Europe. 552 00:57:53.680 --> 00:57:55.560 9. 553 00:57:55.560 --> 00:58:01.600 Daniel Bernoulli and the Founding of Mathematical Economics 554 00:58:01.600 --> 00:58:08.060 He should not leave the tableau without mentioning a French-Swiss contemporary of Cantillon who 555 00:58:08.060 --> 00:58:13.400 prefigured the tableau in one and only one sense. 556 00:58:13.400 --> 00:58:19.520 He can be said to be the founder in the broadest sense of mathematical economics. 557 00:58:19.520 --> 00:58:26.360 As such, his work contained some of the typical flaws and fallacies of that method. 558 00:58:26.360 --> 00:58:34.740 Daniel Bernoulli, 1700-1782, was born into a family of distinguished mathematicians. 559 00:58:34.740 --> 00:58:43.360 His uncle, Jacques Bernoulli, 1654-1705, was the first to discover the theory of probability 560 00:58:43.360 --> 00:58:54.800 in his Latin work Ars Conjectandi, 1713, and his father, Jean, 1667-1748, was one of the 561 00:58:54.800 --> 00:59:08.840 In 1738, Daniel, trying to solve a problem in probability theory and the theory of gambling 562 00:59:08.840 --> 00:59:14.720 by the use of the calculus, stumbled on the concept of the law of diminishing marginal 563 00:59:14.720 --> 00:59:23.960 utility of money. Bernoulli's essay was published in Latin as an article in a scholarly volume. 564 00:59:23.960 --> 00:59:30.440 He was presumably not familiar with the arrival at a similar law, albeit in non-mathematical 565 00:59:30.440 --> 00:59:38.280 form, by the Spanish Salamanca scholastics Tomas de Marcado and Francisco Garcia nearly 566 00:59:38.280 --> 00:59:41.240 two centuries earlier. 567 00:59:41.240 --> 00:59:46.800 Certainly he displayed no familiarity whatever with their monetary theories or with any other 568 00:59:46.800 --> 00:59:50.160 aspect of economics for that matter. 569 00:59:50.160 --> 00:59:56.360 And being a mathematician, he got even his own particular point wrong, introducing the 570 00:59:56.360 --> 01:00:02.760 form of the law of diminishing marginal utility that would return to plague economic thought 571 01:00:02.760 --> 01:00:04.960 in future centuries. 572 01:00:04.960 --> 01:00:11.560 For the use of mathematics necessarily leads the economist to distort reality by making 573 01:00:11.560 --> 01:00:17.880 the theory convenient for mathematical symbolism and manipulation. 574 01:00:17.880 --> 01:00:23.740 Each takes over and the reality of human action loses out. 575 01:00:23.740 --> 01:00:30.080 One fundamental flaw of Bernoulli's formulation was to put his symbolism into a ratio or fractional 576 01:00:30.080 --> 01:00:31.560 form. 577 01:00:31.560 --> 01:00:38.440 If one insists on putting the concept of diminishing marginal utility of money for each individual 578 01:00:38.440 --> 01:00:45.800 into symbolic form, one could say that if a man's wealth or total monetary assets at 579 01:00:45.800 --> 01:00:55.000 at any time is x, and utility or satisfaction is designated as u, and if delta is the universal 580 01:00:55.000 --> 01:01:04.320 symbol for change, that delta u over delta x diminishes as x increases. 581 01:01:04.320 --> 01:01:12.000 But even this relatively innocuous formulation would be incorrect, for utility is not a thing, 582 01:01:12.000 --> 01:01:18.200 It is not a measurable entity, it cannot be divided, and therefore it is illegitimate 583 01:01:18.200 --> 01:01:24.960 to put it in ratio form, as the numerator in a non-existent fraction. 584 01:01:24.960 --> 01:01:30.840 Utility is neither a measurable entity, nor, even if it were, could it be commensurate 585 01:01:30.840 --> 01:01:35.720 with the money unit involved in the denominator. 586 01:01:35.720 --> 01:01:41.840 Suppose that we ignore this fundamental flaw, and accept the ratio as a kind of poetic version 587 01:01:41.840 --> 01:01:44.000 of the True Law. 588 01:01:44.000 --> 01:01:50.520 But this is only the beginning of his problem, for then Bernoulli and mathematical economists 589 01:01:50.520 --> 01:01:57.680 from then on proceeded to multiply mathematical convenience illicitly by transforming his 590 01:01:57.680 --> 01:02:01.360 symbols into the new calculus form. 591 01:02:01.360 --> 01:02:08.040 For if these increases of income or utility are reduced to being infinitesimal, one can 592 01:02:08.040 --> 01:02:14.600 can use both the symbolism and the powerful manipulations of the differential calculus. 593 01:02:14.600 --> 01:02:20.680 Infinitely small increases are the first derivatives of the amount at any given point, and the 594 01:02:20.680 --> 01:02:28.740 deltas above can become the first derivatives, D. And then, the discrete jumps of human action 595 01:02:28.740 --> 01:02:35.700 can become the magically transformed smooth arcs and curves of the familiar geometric 596 01:02:35.700 --> 01:02:39.980 Portrayals of Modern Economic Theory. 597 01:02:39.980 --> 01:02:42.820 But Bernoulli did not stop there. 598 01:02:42.820 --> 01:02:48.860 Fallacious assumption and method are piled upon each other like Pelion on Assa. 599 01:02:48.860 --> 01:02:55.660 The next step towards a dramatic, seemingly precise conclusion is that every man's marginal 600 01:02:55.660 --> 01:03:03.160 utility not only diminishes as his wealth increases, but diminishes in fixed inverse 601 01:03:03.160 --> 01:03:26.160 in its proportion to his wealth, so that if b is a constant and utility is y instead of u, presumably for convenience in putting utility on the y-axis and wealth on the x-axis, then dy over dx is equal to b over x. 602 01:03:26.160 --> 01:03:40.160 What evidence does Bernoulli have for this preposterous assumption, for his assertion that an increase in utility will be inversely proportionate to the quantity of goods already possessed? 603 01:03:40.160 --> 01:03:48.160 None whatever, for this allegedly precise scientist has only pure assertion to offer. 604 01:03:48.160 --> 01:03:54.520 There is no reason, in fact, to assume any such constant proportionality. 605 01:03:54.520 --> 01:04:01.280 No such evidence can ever be found, because the entire concept of constant proportion 606 01:04:01.280 --> 01:04:06.880 in a non-existent entity is absurd and meaningless. 607 01:04:06.880 --> 01:04:14.040 Utility is a subjective evaluation, a ranking by the individual, and there is no measurement, 608 01:04:14.040 --> 01:04:21.040 no extension and therefore no way for it to be proportional to itself. 609 01:04:21.040 --> 01:04:27.220 After coming up with this egregious fallacy, Bernoulli topped it by blithely assuming that 610 01:04:27.220 --> 01:04:34.380 every individual's marginal utility of money moves in the very same constant proportion 611 01:04:34.380 --> 01:04:42.120 B. Modern economists are familiar with the difficulty, nay the impossibility, of measuring 612 01:04:42.120 --> 01:04:45.160 Utilities Between Persons. 613 01:04:45.160 --> 01:04:49.960 But they do not give sufficient weight to this impossibility. 614 01:04:49.960 --> 01:04:58.120 Since utility is subjective to each individual, it cannot be measured or even compared across 615 01:04:58.120 --> 01:04:59.220 persons. 616 01:04:59.220 --> 01:05:04.400 But more than that, utility is not a thing or an entity. 617 01:05:04.400 --> 01:05:10.920 It is simply the name for a subjective evaluation in the mind of each individual. 618 01:05:10.920 --> 01:05:18.480 Therefore, it cannot be measured even within the mind of each individual, much less calculated 619 01:05:18.480 --> 01:05:22.760 or measured from one person to another. 620 01:05:22.760 --> 01:05:29.560 Even each individual person can only compare values or utilities ordinarily. 621 01:05:29.560 --> 01:05:35.320 The idea of his measuring them is absurd and meaningless. 622 01:05:35.320 --> 01:05:41.760 And this multi-illegitimate theory Bernoulli concluded fallaciously that there is no doubt 623 01:05:41.760 --> 01:05:49.060 that a gain of 1,000 ducats is more significant to a pauper than to a rich man, though both 624 01:05:49.060 --> 01:05:51.560 gain the same amount. 625 01:05:51.560 --> 01:05:58.900 It depends, of course, on the values and subjective utilities of the particular rich man or pauper, 626 01:05:58.900 --> 01:06:05.620 and that dependence can never be measured or even compared by anyone, whether by outside 627 01:06:05.620 --> 01:06:11.140 observers or by either of the two people involved. 628 01:06:11.140 --> 01:06:16.620 Bernoulli's dubious contribution won its way into mathematics, having been adopted by the 629 01:06:16.620 --> 01:06:24.100 great early 19th century French probability theorist Pierre Simon, Marquis de Laplace. 630 01:06:24.100 --> 01:06:34.420 1749-1827 in his renowned Analytic Theory of Probability, 1812. But it was fortunately 631 01:06:34.420 --> 01:06:41.080 completely ignored in economic thought until it was dredged up by Jevons and the mathematically 632 01:06:41.080 --> 01:06:48.820 inclined wing of the late 19th century marginal utility theorists. Its neglect was undoubtedly 633 01:06:48.820 --> 01:06:59.820 by its having been written in Latin. No German translation appeared until 1896, nor an English one until 1954.