Physiocracy...

Megan McArdle, Physiocrat, writes:

Megan McArdle: I think I'm crazy too: Economics of Contempt:

Call me crazy, but I think a permanent doubling of food and energy prices would slow our rate of economic growth pretty significantly. How long it would take incomes to recover "at current rates of economic growth" is irrelevant when the doubling of food and energy prices would lower the rate of economic growth.

Given that we and all our machines run on either food or energy, it's a pretty safe bet to say that doubling their prices would have a sizeable impact on growth...

This casts me in mind back to Paris in the late eighteenth century, and to the salon of Anne-Robert-Jacques Turgot; François Quesnay; Pierre Le Pesant, Sieur de Boisguilbert; and Pierre Samuel du Pont de Nemours. They argued:

• Artisans use the food and other products of the agricultural sector to maintain themselves (at a subsistence standard of living) and to make crafts, which they then sell in order to buy the agricultural products they need to survive (at their subsistence standard of living) and to prepare for the next round of production.
• Farmers grow agricultural which they then consume (including in consumption the transformed agricultural goods that are the products of the artisans), pay to the landlords in rent and taxes, and save as raw materials for the next round of production.
• Land-owning aristocrats produce nothing, but they and the government take their rents and their taxes and spend them: on luxury, on war, on bureaucracy, and on works of charity and civil improvement.

It is then plain that the right way to value the economic output of society is via the net product: the difference between the value of farm production and the subsistence requirements of farmers. That net product can be used in many ways:

• to boost the standards of living of peasants and artisans above subsistence, either through lower rents and taxes than the maximum sustainable or through works of charity.
• for war.
• for the luxurious consumption of the landed aristocracy, the bureaucracy, and the court.
• for investment in works of civic improvement

To the Physiocrats, it was clear that the net product could be increased by either (a) boosting the number of farmers (holding the surplus of farm production per worker minus subsistence per worker constant), or (b) boosting the surplus above subsistence per farmer (holding the number of farmworkers constant). The government's role in economic policy should therefore be:

• to discourage people from moving to the country to the city--in the country they add to the net product, but in the city they don't, becoming either workers in the sterile artisanal craft-making sector or flunkies serving as part of elite luxury consumption.
• to encourage farmers and farmworkers to learn the newest and best agricultural techniques--especially those involving the seed drill and the turnip--to increase net product per farmworker.
• to pay no attention whatsoever to the sterile craft-making artisanal sector--it is not "productive."
• to streamline and simplify the tax system by taxing land rent only--taxes levied on anybody else simply lead to increased bureaucratic inefficiency and waste, since ultimately the only place from which the surplus to pay taxes can come from is the net product, and the entire net product comes out of the agricultural sector.

Now what do we think of this analysis? Let's give du Pont de Nemours, Boisguilbert, Quesney, and Turgot a bye on their assumption that the bureaucracy, landed aristocracy, and court of eighteenth-century France were parasitic--that seems a reasonable model-building assumption. But let's note two implicit assumptions in the Tableau Economique that are not correct and not unimportant. They are:

• that the artisanal craft-making sector is sterile, in that the utility value of what farmers (and landlords, court, and bureaucracy) buy from it is equal to the utility value of the agricultural goods the farmers sell to it.
• that the artisanal craft-making sector consumes at a subsistence level.

Make these two assumptions, and the Physiocrats' argument goes through. But it is not the case that what the farmers and the landlords buy from the artisan sector is no more valuable in utility terms than what they sell. It is true that the wagons, clothes, Louis XVI furniture, and marzipan purchased from are together worth the same on the market as the large piles of wheat and wood sold to the craftsmen. But the landlords, bureaucracy, court, and farmers value the first bundle in utility terms more than they value the second--that's why they buy the first and sell the second. And it is definitely not true that the non-agricultural workers of France in the eighteenth century lived at a "subsistence" level. So the Physiocratic model does not go through--as Adam Smith argues at interminable length in Book IV of the Wealth of Nations.

Similarly, Megan McArdle's and the Contemptuous (Contemptible?) Economist's argument that there is something especially key to growth in the food and energy sectors would go through if the rest of the economy were either (a) parasitic (in the sense of the eighteenth-century French bureaucracy, landed aristocracy, and court) or (b) sterile (in the sense the Physiocrats mistook the French craft-making artisanal manufacturing sector to be).

---

Mme. de Pompadour:

Comments

[nemo]

The Physiocrats' reasoning made some sense in a society before the Industrial Revolution (though not a lot, as Adam Smith showed). In such a society, agriculture really did account for a huge part of the economy.

But even by the middle and late part of the 19th century, agriculture had become a much smaller part of the economies of Europe and America. And it's a tiny part now.

The same thing with energy. The 1973 rise in oil prices hit the US hard back in the day. But the same shock today ($125 a barrel, anyone?) has a much, much smaller effect.

The main reason we use energy more efficiently now is because our economy responded to the sharp rise in energy prices in the 70s. Likewise, the main reason we will use energy even more efficiently 20 years from now is because our economy will respond to the rise in energy prices in the coming years. Bring it on!

All this is pretty basic and pretty obvious. Like a lot of Randoids, Megan McArdle is articulate, and like a lot of Randoids, she substitutes that for smart thinking.

[Neil B.]

Brad, I was hoping you'd make a nifty "what's my point in a few words" statement, but I think in general you're saying it's not so big a deal if prices of food and gas go up a lot? Well, money is just an exchange medium but the lower availability of gas certainly downwardly effects overall productivity of the civilization, and the extra effort put to getting food put forth takes away from other things. You guys should look at the predictions for the effects of "peak oil" - it will not be easy for us to continue as we have been. Nemo, it is not a "Randroid" obsession to think we can't just shift around a bit when the supply of oil keeps sinking below the desired use levels (demand) - indeed, the idiot glibertarians like the late crank Julian Simon are the ones who foolishly think sci-tech and "economics" will just somehow pick up the pieces of resource crunches. Well, they won't. I'm disappointed, Brad.

PS: Brad, your huge ungainly front page takes so long to load. For Chrissake, break it off and link to "earlier posts" pages etc, please.

[Barkley Rosser]

Minor anal point, but Boisguillebert was more of a proto-physiocrat, way beforeo their time, dead in 1714. He was more a contemporary, or slightly after really, of Colbert and that gang. His major works written in the late 1690s. The physiocrats were mid-to-late 1700s. Boisguillebert is sometimes credited, by Schumpeter for example, with having been the first to conceive of the (vague) idea of general equilibrium.

[nemo]

How painful will it be to adjust to a permanent doubling of food and energy prices? (In real, not nominal terms, of course.) That all depends upon the time frame, which neither McMegan nor the guy she's quoting address.

Suppose you fall out of 20th story window. It's not the long fall that kills you. It's the sudden stop.

You can achieve the same result -- descending 20 stories -- a lot more slowly, but a lot less painfully by taking the stairs or an elevator.

A permanent doubling of food and energy prices in real terms in one year will be devastating. But those prices are volatile, and a permanent doubling is very unlikely happen that fast.

A permanent doubling of food and energy prices in real terms in one decade may be uncomfortable, but it will not be such a big deal. That gives people and the economy a lot more time to correct the dumb decisions they've made based on unrealistic assumptions about the future.

It's the same principle as bringing housing prices down to more realistic levels relative to rents and incomes. If it happens too fast, it can devastate the economy. But if it happens slowly enough, it's not such a big deal. People and the economy need time to adapt to the new realities.

None of that enters into McMegan's thinking, or what passes for thinking.

[Neil B.]

Once again nemo, adjusting is just not that easy. The increase in population, cars, etc. means that there just isn't going to *be* as much gas (or food) as people want to use. "Adapting" to something like that means just having a less-advanced society, a lower standard of living, etc. Finally, that sort of thing hurts the lower classes the most, and the gulf between them and their "betters" keeps growing.

[Jekabs]

Neil,
Where have you been for the last two hundred years during which the increase in population, increase in "cars" and increase in standards of living have all occurred simultaneously? Have you looked at the facts or are they irrelevant for you?

[Bruce]

Jekabs, which major resource depletion crunches has the industrial world gone through in the last 200 years? There has _always_ been plenty of oil still in the ground and room for agricultural expansion, at least for the wealthy countries - now, not so much, especially with the climate doing increasingly unpredictable stuff. [1]

I don't expect to see large numbers of starving people in the US, but I don't think this is stuff we can just shrug off and say "the market will take care of it!" (To expand on Neil's point, agriculture may be a small part of the US economy, but food and gas for the car to get to work is a non-insignificant part of the income of poor people here in the US, who have, shall we say, a limited amount of ability to make tradeoffs).

In any event, it's the poorer parts of the world that are going to be hit harder by this - it's a lot harder for, say, a Nigerian to adjust to a doubling of food and oil prices, whether it takes a decade or not.

PS - Agriculture isn't that big a part of the US economy, but does anyone have numbers for the food sector as whole?

Bruce

[1] Of course, if food prices go up enough, there will be incentive to open up areas for farming presently not considered cost-effective, and which may be made more productive by global warming: will farming return to parts of New England that have been allowed to go back to wilderness? Will this be enough to compensate if those midwest aquifers run dry? And then there's new technology, but as any cancer sufferer will tell you, the fact there is a demand doesn't necessarily mean the solution will magically arise from a combination of money and research, at least not quickly.

[Jekabs]

Bruce,
You ask a good question - "which major resource depletion crunches has the industrial world gone through in the last 200 years?"

Well - I'm glad you asked. Surely you are familiar with Stanley Jevons. He wrote in "The Coal Question" back in 1865:
-----"I must point out the painful fact that such a rate of growth will before long render our consumption of coal comparable with the total supply. In the increasing depth and difficulty of coal mining we shall meet that vague but inevitable boundary that will stop our progress..." [in a very Malthusian way, he is basically predicting the demise of Britain's economy because of the finite amount of coal in the ground]

There is your answer, my friend. The industrial world has faced a resource depletion crunch of COAL in 1860s and following. What happened? Why didn't our progress stall?? It is because the rising prices of a scarce resource motivated the invention of a new use of some other resource, improving, not worsening, the quality of life of the rising population. You would be well served to learn a lesson from facts.