A new approach to competitive economics originated in Paris among the group of economists who surrounded Vincent Gournay, France's Commissioner for Trade from 1751 to 1758. He himself published little, but the origins of the phrase laissez-faire et laissez-passer have been widely attributed to him.
Economic debate soon centered on the powerful and original contributions of François Quesnay (1694–1774), second doctor to the king, personal physician to Madame de Pompadour, and one of France's most distinguished scientists with honors that included Fellowship of the Royal Society of London. His influence and that of the Physiocratic School, which he created, owed much to the coincidence of his policy proposals with those of Gournay's circle.
France's economists agreed above all that the traditional policy where corn, the principal food of the people, was sold through the state should be replaced by competitive markets. Farmers should be free to sell corn for the highest prices they could obtain, whether in France or overseas. France, with its administered grain markets, suffered repeated famines, while this was unknown in England, where farmers were free to sell corn for the best prices they could get.
Quesnay discovered a coherent logical framework for the school of Gournay's new competitive economics. He showed in detail how a modern capital-intensive agriculture conducted by wealthy entrepreneur-farmers could create a surplus of 100 percent over agricultural costs. Less capital-intensive farming, associated with share-cropping, where landlords provided farmers with the capital they required but took half their crops, yielded a surplus of only 35 percent; while peasants who scratched a bare subsistence from the soil without signifi-cant farm capital produced no surplus at all. The agricultural surplus was the crucial concept in Quesnay's economics. It provided rents for landowners, tithes for the Church and taxes for the state.
Adequate finance for the government required that capital-intensive entrepreneurial farming should predominate. Quesnay presented his argument through the Tableau Economique, which has been widely described as the first economic model. Here, the agricultural surplus is paid in money to the landowners, the Church and the state, who spend it to create the bulk of the economy's effective demand through a multiplier circulation process. Money circulates in the economy like blood in a human body (see Eltis and Vaggi).
In contrast to agriculture, industry and commerce provided one-third of the economy's employment but generated no taxable surplus and depended for their markets on the expenditure of the agricultural surplus. If agriculture created a substantial surplus as in England, industry and commerce would be extensive and prosperous, and the government would obtain large tax revenues. If agriculture yielded only small surpluses, as in Spain and Portugal, industry and commerce would be limited, and governments would command few resources. France fell between these extremes of international wealth and poverty.
In order to raise France's prosperity to the level of England's, French agriculture had to become more profitable to attract wealthy entrepreneurs who would introduce more capital-intensive farming. Quesnay and his physiocrat disciples and those whom they influenced, such as the finance ministers Laverdy and Turgot who held office in 1763–1769 and 1774–1776, believed that there were two means to achieve this.
First, a new freedom to export food would enable farmers to raise their prices, which would increase government revenues at the same time as they raised farm profits from which further agricultural expansion would be financed. Second, farmers as the economy's wealth-creators should face zero taxation.
In pre-Revolutionary France it was politically impossible to achieve the supply-side reform of zero taxation for farmers, but Laverdy and Turgot briefly freed export markets. Both experiments failed because the sharply higher food prices that free markets initially produced led to bread riots, the consequent dismissal of the reforming ministers, and the reversal of their policies.
Quesnay's analysis had a considerable impact on the development of economics. He was a brilliant dialectician and he took his physiocrat followers through each detail of his argument in a regular weekly salon, which was attended in 1765–1766 by Adam Smith, who was touring Europe as tutor to the Duke of Buccleuch. Smith absorbed the new French economics, and in The Wealth of Nations he described Quesnay's system as "the nearest approximation to the truth that has yet been published on the subject of political economy" (p. 667). Intellectually, Quesnay and his disciples had established a new approach to economics. Physiocrats were invited to advise monarchs in Germany and Russia. Quesnay had firmly established the economy's disposable surplus as the key to economic growth or decline, and this became one of the most significant elements in the classical economics that Smith went on to establish. The new French economics also emphasized the advantages of competitive markets. Food prices were not to be forced up artificially. The creation of free markets for food would raise the prices farmers received to the level the prosperity of France required. Two passages underline the classical nature of Quesnay's analysis, which precisely foreshadows Smith's free-market economics. In 1766 Quesnay wrote:
You will come round again to the necessity of accepting the greatest possible freedom of competition in all branches of trade, in order to cut down as far as possible on the burdensome costs involved in them. As soon as you have calculated the effects of this general freedom prescribed by natural right, by virtue of which each person should have the legal power to render his situation as good as he possibly can, without infringing upon the rights of others, it will become self-evident to you that it is an essential condition of the growth of public and private wealth. (Meek 1962, p. 229)
In 1776 Smith included an almost identical statement in The Wealth of Nations:
All systems either of preference or of restraint, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, so long as he does not violate the laws of justice, is left perfectly free to pursue his own interest in his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. (p. 687)
One of Smith's most celebrated insights was that an "invisible hand" would lead individuals, each of whom "intends only his own gain" to work together to promote the interests "of the society" (p. 456). The equivalent statement from Quesnay (and his coauthor, the Marquis de Mirabeau) reads, "The whole magic of well-ordered society is that each man works for others, while believing that he is working for himself" (Meek, p. 70).
While the attempts to apply Quesnay's new competitive economics to France's financial problems for which it was originally created failed, it had a fundamental impact on Adam Smith and through him on the development of classical economics.
SEE ALSO Theories of International Trade.
Eltis, Walter. The Classical Theory of Economic Growth. 2nd edition. Basingstoke, U.K.: Palgrave, 2000.
Meek, Ronald L. The Economics of Physiocracy. London: Allen & Unwin, 1962.
Smith, Adam. An Inquiry into the Nature and Causes of the Wealth of Nations. London: 1776. Reprinted by R. H. Campbell and A.S. Skinner. Oxford, U.K.: Oxford University Press, 1976.
Vaggi, Gianni. The Economics of François Quesnay. Basingstoke, U.K.: Macmillan, 1987.