13. Physiocracy in Mid-Eighteenth Century

0:00Chapter 13. Physiocracy in Mid-18th Century France 1. The Sect The first self-conscious school of economic thought developed in France shortly after the publication of Cantillon's essay. They called themselves The Economists, but later came to be called The Physiocrats, after their prime politico-economical principle, physiocracy, the rule of nature. The physiocrats had an authentic leader, the creator of the physiocratic paradigm, a leading propagandist and several highly placed disciples and editors of journals.

0:47The physiocrats promoted each other, reviewed each other's prolific works in glowing terms, met frequently and periodically in salons to deliver papers and discuss each other's essays, and generally behaved as a self-conscious movement. They had a cadre of hard-core physiocrats and a penumbra of influential fellow travelers and sympathizers. Unfortunately, the physiocrats soon took on the dimensions of a cult as well as a school, People, heaping lavish and uncritical praise upon their leader, who thus became a guru, as well as the creator of an important paradigm in economic thought. The founder, leader and guru of physiocracy was Dr. François Kenet, 1694-1774, a restless, charismatic and intellectually curious soul who was typical of Enlightenment intellectuals of the 18th Century. Smitten with the physical sciences, as so many intellectuals were in the shadow of the great Isaac Newton, Keney, son of a well-to-do farmer, read widely in his chosen profession of medicine. Gaining fame as a surgeon and physician, Keney wrote medical works and also became expert in agricultural science, writing on its technology.

2:15In 1749, at the age of 55, Kene became personal physician to King Louis XV's mistress, Madame de Pompadour, and a few years later also became personal physician to the king himself. It was in the late 1750s, when in his mid-60s, that Dr. Kene began to dabble in economic topics. The founding of the physiocratic movement may be dated precisely at the moment in July 1757 when the guru met his chief adept and propagandist. For it was then that Dr. Canet met the restless, flighty, enthusiastic and slightly crackpot Victor Ricchetti, the Marquis de Mirabeau, 1715-1789.

3:05in 1989. Mirabeau, a disgruntled aristocrat with plenty of leisure time on his hands, had just published the first several parts of a multi-part work, a grandiloquently entitled best-seller, L'Ami des hommes, The Friend of Man. This work had charmed many Frenchmen through its very flamboyance and lack of system, as well as its curious use of an archaic 17th century style. While writing L'Ami des hommes, Mirabeau was a quasi-disciple of the later Cantillon, glossing and publishing the essay. But contact with Canet soon converted him into the doctor's leading fugleman and propagandist.

3:53The ruminations of one seemingly harmless eccentric physician had now become a school of thought, a force to be reckoned with. The high placement of the two founding physiocrats served their cause well. Canet's crucial place at court, as well as Mirabeau's fame and aristocratic position, gave the movement power and influence. Still, political economy was dangerous in that age of absolutism and censorship, and Canet prudently published his work under pseudonyms or through his disciples. Indeed, Mirabeau was imprisoned for a couple of weeks in 1760 for his book, Theory of Taxes, specifically for his blistering attack on oppressive taxation and on the financial system of tax farming, in which the king sold the rights to tax to private firms or farmers.

4:53He was released, however, by the good offices of Madame de Pompadour. The physiocrats conducted their operations through a succession of journals and through periodic salons, some conducted at the home of Dr. Canet, the most prominent in regular Tuesday evening seminars at the home of the Marquis de Mirabeau. The chief physiocratic figures were Pierre-Francois Mercier de la Rivière, 1720 to 1793, whose The Natural and Essential Order of Political Societies, 1767, was the major work on political philosophy of the school. The Abbé Nicolas Bodeau, 1730-1792, the editor and journalist of the Physiocrats.

5:46Guillaume François Le Trône, 1728-1780, jurist and economist, and the youngest member In no way did the cult aspect of the physiocratic group show itself more starkly than in the adjectives used about their master. His followers claimed that Kene looked like Socrates and they habitually referred to him as the Confucius of Europe.

6:32Indeed, despite the fact that Adam Smith and others spoke of his great modesty, Dr. Kene identified himself with the alleged wisdom and glory of the Chinese sage. Mirabeau went so far as to proclaim that the three greatest inventions in the history of of Mankind were writing, money, and Canet's famous diagram, the tableau économique. The sect lasted for less than two decades, going rapidly downhill after the mid-1770s. Several factors accounted for the precipitate decline. One was the death of Canet in 1774, and the fact that in his later years the physician Men had lost much interest in his cult and had shifted to work on mathematics, where he claimed to have solved the age-old problem of squaring the circle.

7:29Furthermore, the fall from grace as finance minister of their fellow traveler, A. R. J. Turgot, two years later, and the disgrace heaped upon Mirabeau by a public smear campaign launched by his wife and children at about the same time caused physiocracy to fall from influence, and the advent of Smith's wealth of nations in the same year soon led to the unfortunate habit of ignoring all pre-Smithian thought as if the new science of political economy had been created single-handed and ex nihilo by Adam Smith. 2. Laissez-faire and free trade The main stress of the physiocrats was in two areas, political economy and technical economic analysis, and the difference in the quality of their respective contributions is so great as to be almost stupefying. For in general political economy they were usually In political economy, the physiocrats were among the first laissez-faire thinkers, casting aside contemptuously the entire mercantilist baggage.

9:01They called for complete internal and external free enterprise and free trade, unfettered by subsidies, monopoly privileges or restrictions. By removing such restrictions and exactions, commerce, agriculture and the entire economy would flourish. On international trade, while the physiocrats lacked the specie flow price mechanism of of the Brilliant and Sophisticated Cantillon. They were far bolder than he in laying down the gauntlet to all mercantilist fallacies and restrictions. It is absurd and self-contradictory, they pointed out, for a nation to attempt to sell a great deal to foreign countries and to buy very little. Selling and buying are only two sides of the same coin. Furthermore, The physiocrats anticipated the classical economic insight that money is not crucial, that in the long run commodities, real goods, exchange for each other, with money simply an intermediary.

10:10Therefore, the key goal is not to amass bullion or to follow the chimera of a permanently to have a favorable balance of trade, but to have a high standard of living in terms of real products. Seeking to amass species means that people in a nation are giving up real goods in order to acquire mere money. Hence they are losing rather than gaining wealth in real terms. Indeed, the whole point of money is to exchange it for real wealth, and if people insist on When piling up an unused hoard of specie, they will lose wealth permanently. When Turgot became finance minister of France in 1774, his first act was to decree freedom of import and export of grain.

11:05The preamble of his edict, drawn up by his aide, Dupont de Nemours, summed up the laissez-faire 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, of Monopoly by shutting out private license in favor of free and full competition, and by maintaining among different countries that communication of exchange of superfluities for necessities which is so comfortable to the order established by divine providence.

12:02Although the physiocrats were officially in favor of complete freedom of trade, their Their besetting passion, and this reflects their often bizarre economics, were repealing all restrictions on free export of grain. It is understandable that they would concentrate on the elimination of a long-standing restriction, but they seemed to show little zeal for the freedom of importation of grain, or for the freedom of export of manufacturers. All this was wrapped up in the physiocrats' unremitting enthusiasm for high agricultural prices, almost as a good in itself. Indeed, the physiocrats frowned on exports of manufactured products as competing with and lowering the price of agricultural exports.

12:55Dr. Kanae went so far as to write that, happy the land which has no exports of manufacturers, Because agricultural exports maintain farm prices at too high a level to permit the sterile class to sell its products abroad. As we shall see below, sterile, by definition, meant everyone outside agriculture. 3. Laissez-faire forerunner, the Marquis d'Argenson 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.

13:41As we have seen, the laissez-faire concept developed among classical liberal oppositionists to the absolutism of late 17th century France. They included merchants, such as Thomas Legendre, and utilitarian officials like Belébat and Bois-Gilbert. 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. The heir of a long line of ministers, magistrates and entendants, D'Argenson's ambition was to become prime minister and save France from what he saw as impending revolution by instituting laissez-faire.

14:37A voracious reader and prolific writer throughout his life, D'Argenson only published in his In his lifetime, a few articles in his Economic Journal in the early 1750s, and these were not printed but widely circulated in manuscript form. For a long while, d'Argenson was erroneously credited by historians with originating the phrase laissez-faire in one of the articles in his Journal of 1751. While d'Argenson did not originate the term, laissez-faire was his repeated cry to the French authorities, a cry he continued to stress even though his ideas were dismissed as eccentric by all his governmental colleagues.

15:26As entendant in his early years on the Flemish border, d'Argenson was struck with what he saw to be the economic and social superiority of free people and free markets across the of Order in Flanders. He then became greatly influenced by the writings of Fenelon, Belébat, and Bois-Gilbert. Darjean Sainte saw self-love and self-interest as the mainspring of human action, as bringing about energy and productivity in the pursuit of each man's happiness. Human social life, to D'Argent-Saint has the natural tendency to inherit harmony when artificial constraints and artificial harmony and artificial stimuli are removed.

16:15Looking to an enlightened monarch to remove these artificial subsidies and restrictions, D'Argent-Saint pointed out that in the ideal society the sovereign would have very little to do. One spoils everything by meddling too much. The best government is that which governs least. Thereby the Marquis anticipated the famous phrase attributed to Thomas Jefferson. Darjean Sainte concluded that each individual should be left alone to labor on his own behalf instead of suffering constraint and ill-conceived precautions. Then everything will go beautifully. Then, continuing the proto-Hayekian point made by Beleba, it is precisely this perfection of liberty that makes a science of commerce impossible, in the sense that our speculative thinkers understand it.

17:13They want to direct commerce by their orders and regulations, but to do this one would need to be thoroughly acquainted with the interests involved in commerce, from one individual to another. In the absence of such knowledge, it, a science of commerce, can only be much worse than ignorance in its bad effects. Therefore, laissez-faire. 4. Natural Law and Property Rights Not only were the physiocrats generally consistent advocates of laissez-faire, but they also also supported the operation of a free market and the natural rights of person and property.

18:01John Locke and the Levellers in England had transformed the rather vague and holistic notions of natural law into the clear-cut, firmly individualistic concepts of the natural rights of every individual human being. But the physiocrats were the first to apply natural rights and property rights concepts fully to the free market economy. In a sense, they completed the work of Locke and brought full Lockeanism to economics. Keney and the others were also inspired by the typically 18th century enlightenment version of natural law, where the individual's rights of person and property were deeply embedded in a set of natural laws that had been worked out by the Creator and were clearly discoverable in the light of human reason.

18:56In a profound sense, then, eighteenth-century natural rights theory was a refined variant of medieval and post-medieval scholastic natural law. The rights were now clearly individualistic and not societal or pertaining to the State, and the set of natural laws was discoverable by human reason. The 17th century Dutch Protestant, and in essence Protestant scholastic Hugo Grotius, deeply influenced by the late Spanish scholastics, developed a natural law theory which he boldly declared was truly independent of the question of whether God had created them. The seeds of this thought were in St. Thomas Aquinas and in later Catholic scholastics, but never had it been formulated as clearly and as starkly as by Grotius.

19:54Or to put it in terms that had fascinated political philosophers since Plato, did God love the good because it was in fact good, or is something good because God loves it? The former has always been the answer of those who believe in objective truth and objective ethics, that is, that something might be good or bad in accordance with the objective laws of nature and reality. The latter has been the answer of fideists, who believe that no objective rights or ethics exist and that only the purely arbitrary will of God, as expressed in Revelation, can make make things good or bad for mankind.

20:42Grotius was the definitive statement of the objectivist, rationalist position, since natural laws for him are discoverable by human reason, and the 18th century enlightenment was essentially the spinning out of the Grotian framework. To Grotius the enlightenment added Newton and his vision of the world as a set of harmonious, precisely, if not mechanically, interacting natural laws. And while Grotius and Newton were fervent Christians, as was almost everyone in their epoch, the eighteenth century, starting with their premises, easily fell into deism, in which God, the great clockmaker or creator of this universe of natural laws, then disappeared from the Scene and allowed his creation to work itself out.

21:37From the standpoint of political philosophy, however, it mattered little whether Kene and the others, Dupont was of Huguenot background, were Catholics or deists, for given their world outlook, their attitude toward natural law and natural rights could be the same in either case. Mercier de la Rivière pointed out in his Natural Order that the general plan of God's creation had provided natural laws for the government of all things, and that man could surely not be any exception to that rule. Man needed only to know through his reason the conditions that would lead to his greatest happiness and then follow that path.

22:25All ills of mankind follow from ignorance or disobedience of such laws. In human nature, the right of self-preservation implies the right to property, and any individual property in man's products from the soil requires property in the land itself. But the right to property would be nothing without the freedom of using it, and so liberty is derived from the right to property. People flourish as social animals, and through trade and exchange of property, they maximize the happiness of all. Furthermore, since the faculties of human beings are by nature diverse and unequal, an inequality of condition arises naturally from an equal right to liberty of every man. In this way, property rights and free markets, concluded Mercier, is a social is a fundamental order that is natural, evident, simple, immutable, and conducive to the happiness of all.

23:30Or, as Keney declared in his Natural Law, every man has a natural right to the free exercise of his faculties, provided he does not employ them to the injury of himself or others. This right to liberty implies as a corollary the right to property, and the only function of the government is to defend that right. 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. The Dauphin of France once complained to Canet of the difficulty of being a king, and the physician replied that it was really quite simple.

24:17What, then, asked the Dauphin, would you do if you were king? Nothing, was the straightforward, stark, and magnificently libertarian answer of Dr. Canet. But then, who would govern, sputtered the Dauphin? The law, that is, the natural law, was Keney's accurate but no doubt unsatisfying reply. A similar reply was certainly unsatisfactory to Catherine the Great, Tsarina of all the Russia's, who sent for Mercier de la Rivière, jurist and at one time entendant, governor of Martinique, to instruct her on how to govern. Just as to what the law should be grounded on, Mercier answered the Empress, On one thing alone, madam, the nature of things and of man.

25:12But how then can a king know what laws to give to a people, the Tsarina continued. To which Mercier replied sharply, To give or make laws, madam, is a task which God has left to no one. Ah, what is man to think himself capable of dictating laws to beings whom he knows not? The science of government, Mercier added, is to study and recognize the laws which God has so evidently engraven in the very organization of man when he gave him existence. Mercier added the pertinent warning, to seek to go beyond this would be a great misfortune and a Destructive Undertaking.

25:59The Tsarina was polite, but was definitely not amused. Monsieur, she replied curtly, I am very pleased to have heard you. I wish you good day. 5. The Single Tax on Land Natural rights laissez-faire libertarians always confront several problems, or lacunii, in their theory. One is taxation. If every individual is to have inviolable property rights and those rights are to be guaranteed by the government, taxation itself, an infringement of property rights, presents an immediate problem to laissez-faire theorists. For how high should taxes be and who should pay them?

26:49Social liberalism, however inchoate, had been born in France as an opposition to the statist absolutism of King Louis XIV in the latter decades of the seventeenth and the early years of the eighteenth century. A favorite program of these liberals, as set forth by Marshal Vaubin and by the Sûre de de Bois-Gilbert, among others, was a single tax, a proportional tax on all income or property. The idea was that this simple, direct, universal tax would replace the monstrous and crippling network of taxation that had grown up in 17th century France. To solve the problem of taxation, Dr. Canet and the physiocrats came up with their own Original Single Tax, A Single Tax on Land. The idea was that the tax would be low and that it would be proportional and confined only to a tax on land and on landlords. The rationale of the single tax stems from the singular physiocratic view that only land is Productive.

28:04Land produces because it creates matter, whereas all other activities, such as trade, commerce, manufacturing, services, etc., are sterile, although admittedly useful because they only shuffle around or transform matter without creating it. Since only land is productive and all other activities are sterile, it follows, according According to the physiocrats, that any other taxes will wind up being shifted onto land, through the price system. Therefore, the choice is to tax the land indirectly and remotely while crippling and distorting economic activities, or taxing the land openly and uniformly through the single tax, thereby freeing economic activity from a fearsome tax burden.

29:00From the standpoint of economic theory, the famous physiocratic tenet that only land is productive must be considered bizarre and absurd. It is certainly a tremendous loss of insight compared to Catillon, who identified land and labor as original productive factors and entrepreneurs as the motor of the market economy who adjust resources to the demands of consumers and to the uncertainty of the market. It is surely true that agriculture was the chief occupation of the day and that most commerce was the transportation and sale of agricultural products. But this scarcely salvages or excuses the absurdity of the land as only productive factor doctrine.

29:51It is possible that one explanation for this odd doctrine is to apply to the physiocrats the insight of Professor Roger Garrison on the basic world outlook of Adam Smith. Smith, in a less outlandish version of the physiocratic bias, held that only material output, in contrast to intangible services, is productive, while immaterial services are are unproductive. Garrison points out that the contrast here is not really between material and immaterial goods and services, but between capital goods and consumer goods, which are basically either direct services or a stream of services to be available in the future.

30:41Hence, for Smith, productive labor is only effort that goes into capital goods, into to Building up Productive Capacity for the Future. Labor in direct service to consumers is unproductive. In short, Smith, despite his reputation as an advocate of the free market, refuses to accept free market allocations to the production of consumer vis-à-vis capital goods. He would prefer more investment and growth than the market prefers. In the same way, could it not be true that the physiocrats had a similar outlook? The physiocrats, too, stressed material goods, and agriculture was the main material product.

31:30The physiocrats were also greatly concerned with economic growth, with increasing investment and national output, and especially with greater capital investments in agriculture. Indeed, the physiocrats were disgruntled with free market choice and wanted to strengthen consumer demand for agricultural products in particular. High consumption of farm products was beneficial, according to the physiocrats, whereas high consumption of manufactured goods would promote unproductive expenses and crowd out desirable purchases of agricultural products. Some economists have gone so far as to speculate that the physiocrats would have been overjoyed at a policy of farm price supports.

32:21Professor Spiegel believes that if the physiocrats had been faced with a choice between laissez-faire and intervention on behalf of farm price supports, they would have chosen intervention. The means to resolve the economic problem that was foremost in their minds was the development of Domestic Agriculture rather than unconditional reliance on private initiative within a framework of competition. Perhaps the tip-off on applying the Garrison insight is the common attitude of Smith and the physiocrats on usury laws. Despite their generally consistent advocacy of absolute and inviolate property rights and of the freedom to trade within and without a nation, Kene and the physiocrats championed usury laws, denying the freedom to lend and borrow.

33:18Adam Smith had a similar aberration. Smith, as we shall see further below, and as Garrison pointed out, took this position in a conscious effort to divert credit from unproductive, for High-Risk and High-Interest Paying Speculators and Consumers, and Toward Productive, Low-Risk Investors. Similarly, Cannae denounced the restrictions on investment and capital growth resulting from high interest rates and from the competition of unproductive borrowers crowding out credit that would otherwise go into capitalized agriculture. Usury laws were upheld on traditional moralistic grounds of alleged sterility of money.

34:06But to the physiocrats, all activity except agriculture was unproductive, and so the problem was rather the competition such borrowing imposed on the productive sector. As Elizabeth Fox Genovese puts it, Keney argues that the high interest rate constitutes neither more nor less than a tax upon the productive life of the nation, upon those who do not borrow as much as upon those who do. It is true that part of the physiocratic attention here was on government debt, and it is certainly true that government debt raises interest rates and diverts capital from productive to unproductive sectors.

34:53But there are two flaws in such an approach. First, not all non-agricultural debt is state debt, and therefore not all higher interest is a tax on producers. This returns us to the eccentric view of the physiocrats that only land is productive. Usury laws would cripple not only government debt, but also other forms of borrowing. And second, it seems is odd to allow government debt and then try to offset its unfortunate effects by the meat-axe approach of imposing restraints on usury. Surely it would be simpler, more direct and less distorting to tackle the problem at its source and call for the elimination of government debt.

35:44Usury laws only make things worse and injure free and productive credit. And so Keney, himself the son of a well-to-do farmer, was far more interested in subsidizing credit to farmers and keeping out competing borrowers than in stopping government debt. There is another way of explaining the physiocratic attitude towards land as the sole producer, and that is to concentrate on the proposed single tax. More specifically, the physiocrats held that the productive classes were the farmers, who rented the land from the landlords and actually tilled it. The landlords were only partially productive, the partially coming from the capital advances they had made to the farmers.

36:37But the physiocrats were sure that the farmers' returns were all bid away by their competition to Rent Lands, so that in practice, all the net product, the only net product in society, is reaped by the nation's landlords. Therefore, the single tax should be a proportionate tax upon the landlords alone. Professor Norman J. Ware has interpreted physiocracy and its emphasis on the sole productivity of Land as merely a rationalization of the interests of the landlord class. This hypothesis has been taken seriously by many historians of economic thought. But let us ask ourselves, what sort of self-serving doctrine says, please, put all the taxes on me?

37:30The beneficiaries of physiocratic policies would surely be every economic class except The Landlords, including Dr. Keney's own class of farmers. 6. Objective Value and Cost of Production Although the physiocrats had useful insights into political economy and the importance of the free market, their distinctive contributions to technical economics were not only wrong, but in some cases proved to be a disaster for the Future of the Economic Discipline. Thus for centuries the mainstream of economic thought, generally embedded in scholastic treatises, held that the value, and therefore the prices, of goods were determined on the market by utility and scarcity, that is, by consumer valuations of a given supply of a product.

38:31Ludwig and post-scholastic economics had basically solved the age-old value paradox of diamonds and bread or diamonds and water. How is it that bread, so useful to man, is worth very little on the market, whereas diamonds, a mere frippery, are so expensive? The solution was that if quantities of supply are taken into account, the seeming contradiction The question between use-value and exchange-value disappears, for the supply of bread is so abundant that any given loaf will have a negligible value, in use or in exchange, whereas diamonds are so scarce that they will command a high value on the market.

39:19Value then does not pertain in the abstract to a class of goods, it is imparted by consumers refers to specific real units, and such value depends inversely on the supply of a good. The only thing left to complete the explanation was the marginal insight imparted by the Austrians and other neo-classicals in the 1870s. The scholastics saw that the utility of any good diminishes as its stock increases. The only thing lacking was the marginal analysis, that real-world purchases and evaluations focus on the next unit, the marginal unit of the good.

40:07Diminishing utility is diminishing marginal utility. But while the capstone of utility and subjective value theory was yet missing, enough was already in Place to Provide a Cogent Explanation of Value and Price. Despite his troubling injection of intrinsic value as a quantity of land and labor in production, Catillon had continued in this late scholastic Proto-Austrian tradition and had indeed made many contributions to it, particularly in the study of money and entrepreneurship. It was the physiocrats who broke with centuries of sound economic reasoning and contributed to what would become in the hands of Smith and Ricardo a reactionary and obscurantist destruction of the correct analysis of value.

41:03Dr. Keney begins his value analysis by disregarding centuries of value theory and tragically sundering Understanding the Concepts of Use Value and Exchange Value Use value reflects the individual needs and desires of consumers, but, according to Cannae, these use values of different goods have little or no relation to each other, or, therefore, to prices. Exchange value, or relative prices, on the other hand, have no relation to man's needs, were two agreements among bargainers and contractors. Instead, Keney, the would-be scientist, rejected subjective value and insisted that the values of goods are objective and mystically embedded in various goods irrespective of consumers' subjective valuations. This objective embodiment, 7.

42:29The Tableau Economique Not as devastating for the development of economics as his fallacy of the cost of production or productive labor, but more irritating nowadays is Dr. Keney's tableau économique, the very invention that his glorifier Mirabeau called one of the three great human inventions of all time. The Tableau, first published in 1758, was an incomprehensible, jargon-filled chart purporting to depict the flow of expenditures from one economic class to another. Generally dismissed as turgid and irrelevant in its day, it has been rediscovered by 20th century economists, who are fascinated because of its very incomprehensibility.

43:23All the Better to Publish Journal Articles on. Dr. Kanay's tableau économique has been hailed for anticipating many of the most cherished developments of 20th century economics, aggregative concepts, input-output analysis, econometrics, depiction of the circular flow of equilibrium, Keynesian stress on expenditure and consumer demand, and the Keynesian multiplier. In recent years, tens of thousands of words have been lovingly expended on trying to piece together what the tableau had to say, and to reconcile it with its own figures and with the economy of the real world.

44:08To the extent that Canet's tableau anticipates all these developments, so much the worse for both the forerunner and the later product, it is true that the tableau shows that ultimately Real Goods Exchange for Real Goods with Money as an Intermediary, and that everyone is both a consumer and a producer in the market. But these simple facts were known for centuries, and charts, lines, Cannae's cherished zig-zags and numbers can only obscure rather than highlight their importance. At best, the chart elaborates spending and income patterns to no purpose. Furthermore, the tableau is holistic, aggregative, and macroeconomic, with no solid grounding in the methodological individualism of sound microeconomics.

45:04The tableau not only introduced ungrounded and unsound macro thinking into economics, It also laid up mischief for the future by anticipating Keynesianism. For it glorified expenditures, including consumption, and worried about savings, which it tended to regard as crippling the economy by leaking out of the constant circular flow of spending. This stress on the vital importance of maintaining spending was faulty and superficial in ignoring two fundamental considerations. Saving is spent on investment goods, and the key to harmony and equilibrium is price.

45:50Lower spending can always be equilibrated easily on the market by a fall in prices. It can be laid down as a veritable law that any picture or analysis of the economic system that omits prices from considerations can only be crackpot, and the tableau économique was the first, but, alas, not the last, economic model which did precisely that. Dr. Keney, of course, gave to his circular flow model his own physiocratic twist. It was particularly important to keep up spending on productive agricultural products and to to avoid diversion of spending to sterile and unproductive products, that is, to anything else.

46:40Keynes, of course, was to avoid the physiocratic bias when he resurrected a similar analysis. While the analytic merits of macro-concepts, input-output analysis and econometrics are highly dubious at best, they are surely worse than nothing if the numbers are incorrect. 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. 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.

47:34After 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. In his Reply to the Modern Doctors, 1771, Lange begins by ridiculing the idea that the physiocrats were not a cult or sect. Evidence shows it. Your mysterious words, physiocracy, net product, your mystic jargon, order, science, the master, Your titles of honor showered on your patriarchs, your wreaths scattered through the provinces on obscure if excellent persons.

48:27Not a sect. You have a rallying cry, banners, a march, a trumpeter, du pont, a uniform for your books, and a sign like Freemasons. Not a sect. One cannot touch one of you, but all rush to his aid. You all laud and glorify each other and attack and intimidate your opponents in unmeasured terms. Lange then turns his scornful attention to the tableau. You affect an inspired tone and seriously discuss on what particular day the symbol of your faith, the masterpiece, the tableau économique, was born, a symbol so mysterious that huge volumes cannot explain it.

49:14It is like the Koran of Mohammed. You burn to lay down your lives for your principles and talk of your apostleship. You attack the Abbe Galeani and me because we have no reverence for that ridiculous hieroglyphic which is your holy gospel. Confucius drew up a table, the I Ching, of sixty-four terms, also connected by lines, to show the evolution of the elements. And your tableau économique is justly enough compared to it, but it comes three hundred years too late. Both alike are equally unintelligible. The tableau is an insult to common sense, to reason and philosophy, with its columns of figures of net reproduction terminating always in a zero, striking symbol of the fruit of the researches of any one simple enough to try in vain to understand it.

50:128. Strategy and Influence One problem that any laissez-faire liberal thinker must face is, granted that government interference should be minimal, what form should that government take? Who shall govern? To French liberals of the later 17th or 18th centuries, there seemed to be only one answer. Government is and always will be ruled by an absolute monarch. Oppositionist rebels had been crushed in the early and mid-17th century, and from then on only one answer was thinkable. The king must be converted to the truths and wisdom of laissez-faire.

50:58Any idea of inspiring or launching a mass opposition movement against the king was simply out of the question. It was not part of any thinkable dialogue. The physiocrats, like classical liberals earlier in the 18th century, were not simply theorists. The nation had gone awry, and they possessed a political alternative they were trying to promote. And if absolute monarchy was the only conceivable form of government for France, the only strategy for liberals was simple, at least on paper, to convert the king. And so the strategy of classical liberals, from the exertions of the abbé Claude Fleury and his able student, Archbishop Fenelon, in the late 17th century, to the physiocrats in the late eighteenth was to convert the ruler.

51:54The liberals were well placed to pursue the strategy of what might be called their projected revolution from the top, for they were all highly placed at court. Archbishop Fenallon placed his hopes in the dauphin, rearing the Duke of Burgundy as an ardent classical liberal. But we have seen that these carefully laid plans turned to ashes when the Duke died of of Illness in 1711, only four years before the death of Louis himself. A half century later, Dr. Canet, again working through a king's mistress, this time Madame de Pompadour, used his position at court to try to convert the ruler. Success in France was only partial. When Turgot, who agreed with the physiocrats on laissez-faire, became The leading physiocrats were exiled by King Louis XVI. Their journal was quickly suppressed, and Mirabeau was ordered to cancel his famous Tuesday evening seminars.

53:14The physiocrat's strategy proved a failure, and there was more to the failure than the vagaries of a particular monarch. For even if the monarch could be convinced that liberty conduced to the happiness and prosperity of his subjects, his own interests are often to maximize state exactions, and therefore his own power and wealth. Furthermore, the monarch does not rule alone, but as the head of a ruling coalition of bureaucrats, nobles, privileged monopolists and feudal lords. He rules, in short, as the head of a power elite, or ruling class. 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 that will end their power and put them, in effect, out of business.

54:12It certainly did not happen in France, and so, after the failure of the physiocrats and Turgot, came the French Revolution. In any event, the physiocrats did manage to convert some rulers, though not the monarch of France. Their leading disciple among the rulers of the world, and one of the most enthusiastic One of the big and lovable ones was Carl Friedrich, Margrave of the Duchy of Baden, 1728-1811, in Germany. Converted by the works of Mirabeau, the Margrave wrote a praesi of physiocracy and proceeded to try to institute the system in his realm. The Margrave proposed free trade in Corn to the German Diet, and in 1770 he introduced the single tax at 20% of the agricultural net product in three villages of Baden.

55:11Administering the experiment was the Margrave's chief aide, the enthusiastic German physiocrat Johann August Schlettwein, 1731-1802, Professor of Economics at the University of Gießen. The experiment, however, was abandoned in a few years in two villages, although the single tax continued in the village of Dietlingen until 1792. For a few years the Margrave also imported Dupont de Nemours to be his advisor and tutor to His Son. In one notable meeting, the fervent Margrave of Baden asked his master Mirabeau whether or not the physiocratic ideal was making sovereign rulers unnecessary.

55:59Perhaps they might all be reformed out of existence. The Margrave had divined the anarchistic, or at least the republican, core underlying the laissez-faire libertarian and natural rights doctrine. But Mirabeau, dedicated as were all the physiocrats to absolute monarchy, drew back, sternly reminding his younger pupil that while the role of the sovereign would ideally be limited, he would still be the owner of the public domain and the preserver of social order. Several other rulers of Europe at least dabbled in physiocracy. One of the most eager was Leopold II, Grand Duke of Tuscany, later Emperor of Austria, who ordered his ministers to consult with Mirabeau and carried out some of the physiocratic reforms.

56:53A fellow traveler was Emperor Joseph II of Austria. Another physiocratic enthusiast was Gustavus III, King of Sweden, who conferred upon Mirabeau Also the grand cross of the newly founded Order of Wassa in honor of agriculture. DuPont, in turn, was made a Knight of the Order. More practically, when the physiocratic journal was suppressed upon the fall of Turgot, King Gustavus and the Margrave of Baden joined in commissioning DuPont to edit a journal which would be published in their realms. But the physiocratic appeal to monarchy lost what little effect it had after the onset of the French Revolution.

57:40Indeed, after the Revolution, physiocracy, with its pro-agricultural bias and devotion to absolute monarchy, was discredited in France and the rest of Europe. 9. Daniel Bernoulli and the Founding of Mathematical Economics He should not leave the tableau without mentioning a French-Swiss contemporary of Cantillon who prefigured the tableau in one and only one sense. He can be said to be the founder in the broadest sense of mathematical economics. As such, his work contained some of the typical flaws and fallacies of that method.

58:26Daniel Bernoulli, 1700-1782, was born into a family of distinguished mathematicians. His uncle, Jacques Bernoulli, 1654-1705, was the first to discover the theory of probability in his Latin work Ars Conjectandi, 1713, and his father, Jean, 1667-1748, was one of the In 1738, Daniel, trying to solve a problem in probability theory and the theory of gambling by the use of the calculus, stumbled on the concept of the law of diminishing marginal utility of money. Bernoulli's essay was published in Latin as an article in a scholarly volume.

59:23He was presumably not familiar with the arrival at a similar law, albeit in non-mathematical form, by the Spanish Salamanca scholastics Tomas de Marcado and Francisco Garcia nearly two centuries earlier. Certainly he displayed no familiarity whatever with their monetary theories or with any other aspect of economics for that matter. And being a mathematician, he got even his own particular point wrong, introducing the form of the law of diminishing marginal utility that would return to plague economic thought in future centuries. For the use of mathematics necessarily leads the economist to distort reality by making the theory convenient for mathematical symbolism and manipulation.

1:00:17Each takes over and the reality of human action loses out. One fundamental flaw of Bernoulli's formulation was to put his symbolism into a ratio or fractional form. If one insists on putting the concept of diminishing marginal utility of money for each individual into symbolic form, one could say that if a man's wealth or total monetary assets at at any time is x, and utility or satisfaction is designated as u, and if delta is the universal symbol for change, that delta u over delta x diminishes as x increases.

1:01:04But even this relatively innocuous formulation would be incorrect, for utility is not a thing, It is not a measurable entity, it cannot be divided, and therefore it is illegitimate to put it in ratio form, as the numerator in a non-existent fraction. Utility is neither a measurable entity, nor, even if it were, could it be commensurate with the money unit involved in the denominator. Suppose that we ignore this fundamental flaw, and accept the ratio as a kind of poetic version of the True Law. But this is only the beginning of his problem, for then Bernoulli and mathematical economists from then on proceeded to multiply mathematical convenience illicitly by transforming his symbols into the new calculus form.

1:02:01For if these increases of income or utility are reduced to being infinitesimal, one can can use both the symbolism and the powerful manipulations of the differential calculus. Infinitely small increases are the first derivatives of the amount at any given point, and the deltas above can become the first derivatives, D. And then, the discrete jumps of human action can become the magically transformed smooth arcs and curves of the familiar geometric Portrayals of Modern Economic Theory. But Bernoulli did not stop there. Fallacious assumption and method are piled upon each other like Pelion on Assa.

1:02:48The next step towards a dramatic, seemingly precise conclusion is that every man's marginal utility not only diminishes as his wealth increases, but diminishes in fixed inverse 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. 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?

1:03:40None whatever, for this allegedly precise scientist has only pure assertion to offer. There is no reason, in fact, to assume any such constant proportionality. No such evidence can ever be found, because the entire concept of constant proportion in a non-existent entity is absurd and meaningless. Utility is a subjective evaluation, a ranking by the individual, and there is no measurement, no extension and therefore no way for it to be proportional to itself. After coming up with this egregious fallacy, Bernoulli topped it by blithely assuming that every individual's marginal utility of money moves in the very same constant proportion B. Modern economists are familiar with the difficulty, nay the impossibility, of measuring Utilities Between Persons.

1:04:45But they do not give sufficient weight to this impossibility. Since utility is subjective to each individual, it cannot be measured or even compared across persons. But more than that, utility is not a thing or an entity. It is simply the name for a subjective evaluation in the mind of each individual. Therefore, it cannot be measured even within the mind of each individual, much less calculated or measured from one person to another. Even each individual person can only compare values or utilities ordinarily. The idea of his measuring them is absurd and meaningless.

1:05:35And this multi-illegitimate theory Bernoulli concluded fallaciously that there is no doubt that a gain of 1,000 ducats is more significant to a pauper than to a rich man, though both gain the same amount. It depends, of course, on the values and subjective utilities of the particular rich man or pauper, and that dependence can never be measured or even compared by anyone, whether by outside observers or by either of the two people involved. Bernoulli's dubious contribution won its way into mathematics, having been adopted by the great early 19th century French probability theorist Pierre Simon, Marquis de Laplace.

1:06:241749-1827 in his renowned Analytic Theory of Probability, 1812. But it was fortunately completely ignored in economic thought until it was dredged up by Jevons and the mathematically inclined wing of the late 19th century marginal utility theorists. Its neglect was undoubtedly by its having been written in Latin. No German translation appeared until 1896, nor an English one until 1954.