44 THE CIRCULAR FLOW OF THE ECONOMY
by John Maynard Keynes (p.161)
in the 1930s, when he pointed out
the beneficial effects of a
government spending money
in a depressed economy.
Analyzing the economy
The kinds of questions Quesnay
asked, and the way he went about
answering them, anticipated
modern economics. He was
one of the first to attempt to
uncover general abstract laws that
govern economies, which he did
by breaking economies down
into their constituent parts and
then rigorously analyzing the
relationships between the parts.
His model included inputs, outputs,
and the interdependencies
of different sectors. Quesnay
suggested that these might exist
in a state of equilibrium, an idea
that was later developed by
Léon Walras (p.120), becoming
one of the foundations of
economic theorizing.
Quesnay’s approach to
quantifying economic laws makes
his Economic Table possibly the
first empirical macroeconomic
model. The numbers in his Table
were the result of a close study
of the French economic system,
giving them a firm empirical basis.
This study indicated that farming
technology was sufficient for
farmers to generate a net surplus
of at least 100 percent. In our
example this is what they achieve
—starting with $2 million of corn,
they receive this back plus a net
surplus of $2 million, which is then
paid in rent. Modern economists
use these kinds of empirical results
to think about the impact of policy
changes, and Quesnay used his
Table for a similar purpose. Heargued that if farmers had to pay
too much tax, either directly or
indirectly, they would cut back
their capital investment in farming
technology, and production would
fall below the level needed for the
economy to thrive. This led the
physiocrats to argue that there
should be only one tax: on the
rental value of land.
Based on his empirical
findings, Quesnay made a host
of other policy recommendations,
including investment in agriculture,
the spending of all revenue,
no hoarding, low taxes, and free
trade. He thought capital was
especially important because
his entrepreneur-farmers needed
to borrow cheaply in order to pay
for land improvements.Classical ideas
Quesnay’s idea of sectors being
productive or unproductive has
reappeared throughout the history
of economic thought as economists
consider industry versus services,
and the private sector versus the
government. His sole focus on
agriculture may look narrow to
modern eyes, since it is now
understood that wealth generation
from industry and services is vital
to an economy’s growth. However,
his emphasis on the “real” side of
the economy was an important step
towards modern economic
thinking. He most obviously
anticipated modern national
income accounting, which is used
to assess nations’ macroeconomic
performance. This income
accounting is based on the circular
flow of income and expenditureLet the sum total
of the revenues be
annually returned into
and along the entire
course of circulation.
François QuesnayAccording to the physiocrats,
investment in agriculture was key to
ensuring the national wealth of France.
Free export was a way of sustaining
demand and restricting merchant power.