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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: