The Economics Book

42

I

n economics one can think
small—microeconomics—or
one can think as large as the
entire system: this is the study of
macroeconomics. In 18th-century
France a group known as the
physiocrats tried to think big—they
wanted to understand and explain
the whole economy as a system.
Their ideas form the foundation
of modern macroeconomics.

The physiocrats
Physiocracy is an ancient Greek
word meaning “power over nature.”
The physiocrats believed that
nations gained their economic

rights, and low government debt.

Where the mercantilists said that

wealth came from treasure,

Quesnay and his followers viewed

it as being rooted in what modern

economists call the “real” economy

—those sectors that create real

goods and services. They believed

that agriculture was the most

productive of these sectors.

The physiocrats were influenced

by the thinking of an earlier French

landowner, Pierre de Boisguilbert.

He said that agriculture is superior

to manufacturing, and

consumables are more valuable

than gold. He said the more goods

consumed, the more money moves

in the system, making

consumption the driving force in

the economy. He also said that a

little money in the hands of the

poor (who spend it) is worth far

more to the economy than in the

hands of the rich (who hoard it).

The movement, or circulation,

of money is all-important.

The Economic Table

The physiocratic system of circulation

was set out in Quesnay’s Economic

Table, which was published and

revised several times between 1758

and 1767. This is a diagram that

illustrates, through a series of

crossing and connecting lines, the

flow of money and goods between

three groups in society: landowners,

farmers, and artisans. The goods

are agricultural and manufactured

products (produced by the farmers

and artisans). Although Quesnay

used corn as his example of an

agricultural product, he said

that this category could include

anything produced from the land,

including mining products.

Quesnay’s model is best

understood through an example.

Imagine each of the three groups

starts with $2 million. The

THE CIRCULAR FLOW OF THE ECONOMY

IN CONTEXT

FOCUS

The macroeconomy

KEY THINKER

François Quesnay

(1694–1774)

BEFORE

1664–76 English economist

William Petty introduces the

concepts of national income

and expenditure.

1755 Irish merchant banker

Richard Cantillon’s Essay, first

published in France, discusses

the circulation of money from

the city to the countryside.

AFTER

1885 Karl Marx’s Capital

describes the circulation of

capital using a model inspired

by Quesnay.

1930s Russian-American

economist Simon Kuznets

develops modern national

income accounting.

Madame de Pompadour (the mistress

of Louis XV) installed Quesnay at

Versailles as her physician. To him

her lifestyle must have epitomized the

lavish surplus of landowners’ wealth.

wealth from nature, through their

agricultural sector. Their leader,

François Quesnay, was surgeon

and physician to King Louis XV’s

mistress, Madame de Pompadour.

His complicated model of the

economy was thought by some

to reflect the circulation of blood

in a human body.

The mercantilist approach

(pp.34–35) dominated economic

thinking at the time. Mercantilists

thought the state should behave

like a merchant, growing business,

acquiring gold, and actively

interfering with the economy

through taxes, subsidies, controls,

and monopoly privileges. The

physiocrats took the opposite view:

they argued that the economy was

naturally self-regulating and

needed only to be protected from

bad influences. They favored free

trade, low taxes, secure property