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Wednesday, June 5, 2013

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 perceptive and made important contributions, whereas in technical economics they introduced egregious and often bizarre fallacies which were to plague economics for a long time to come.

In political economy, the physiocrats were among the first laissez-faire thinkers, casting aside contemptuously the entire mercantilist baggage. They 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 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. Therefore, the key goal is not to amass bullion, or to follow the chimera of a permanently favourable balance of trade, but to have a high standard of living in terms of real products. Seeking to amass specie 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 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. The preamble of his edict, drawn up by his aide Du Pont de Nemours, summed up the laissez-faire policy of the physiocrats – and of Turgot – in a fine and succinct manner: 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 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 comformable to the order established by Divine Providence.1

Although the physiocrats were officially in favour of complete freedom of trade, 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 manufactures. 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. Dr Quesnay went so far as to write that ‘happy the land which has no exports of manufactures 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.

Austrian Perspective on the History of Economic Thought (2 volume set)

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