Karl Smith Needs to Avoid the Siren Embrace of the Latter-Day Physiocrats

Karl Smith wrestles with the Latter-Day Physiocrats…

Back in the mid-eighteenth century, the Physiocrats--Turgot, Quesney, Boisguilbert and a number of others about whom Michael Perelman has forgotten more than I will ever know--worried about the state of the French economy. They argued as follows:

1. Agriculture takes the sun, the rain, the soil--the bounties of nature--and uses human labor to produce new value, the "net product" of the economy, some of which the farmers and their farmworkers consume.
2. The rest of the "net product" of the economy is consumed by the (unproductive) landlords who receive their rents and by the state which receives its direct and indirect taxes.
3. One of the things that the state and the aristocrats do as they consume the net product is to employ non-agricultural workers: personal servants to dress them, cooks to feed them, craftsmen to make their furniture, merchants to bring them goods from far away.
4. These other non-idle but non-agricultural workers are not productive of value but they are rather transformative: they transform value from its agricultural form--wheat, milk, cheese, vegetables, etc.--into another form--clothes, furniture, buildings, imported luxuries, personal services--that has the same value but is more useful to the upper class.

From this they drew the conclusion that:

1. A healthy economy was one that had a large, productive agricultural sector.
2. Anything that diminished employment in French agriculture was surely bad.

After all, they thought, the value of the net product was maximized by having as many (productive) farmers as possible. Better to have more productive surplus-producing farmers and to trade food for manufactures with Holland than to reduce the number of productive agricultural workers to turn some of them into transformative-but-unproductive craftworkers.

The eighteenth-century Physiocrats were wrong: not just farmers and miners but builders and manufacturers are productive.

The twenty-first-century Physiocrats are wrong: not just builders and manufacturers but internet gurus and yoga instructors are productive.