Eighteenth-Century France - History of Economic Thought - Lecture Slides, Slides of Economics

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Eighteenth-Century France

Eighteenth-Century France

• Colbert‘s Mercantilist Policies

• Critics of Mercantilism in France

• Cantillon

• Physiocracy

• Turgot

• Conclusions

Colbert‘s Mercantilist Policies

• An important goal was to increase exports and

reduce imports, in order to increase the inflow of

gold and silver

• Colbert‘s policies
  • encouraged population growth,
  • Encouraged immigration of skilled workers,
  • Discouraged emigration, and
  • Extended corvée or forced labor throughout France in 1738
• Why? To keep wages low, so that French exports would be cheap.
• The state heavily regulated French businesses in an effort to boost the quality of France‘s exports - Colbert once announced that fabric from Dijon and Selangey must contain 1,408 threads.

Colbert‘s Mercantilist Policies

(contd.)

• Tax rates were raised — and tax farming was practiced — to pay for wars - Tax farming: the right to collect taxes in a specific region was given to an individual (the tax farmer) who got to keep all taxes collected over and above an amount that had to be paid to the state
• The allocation of monopoly rights and the use of tariffs were also employed to enrich political allies and increase their power

Critics of Mercantilism in France

• Pierre le Pesant, Seigneur de Boisguilbert

(1646-1714) was an important critic of

mercantilism.

• He blamed the decline in French output during

the reign of Louis XIV to high taxes

• He knew—as did William Petty—that income, output and expenditure were all equal.
• The French tax system took money from the poor and gave it to the rich.
• As the poor spent their money while the rich saved it, total spending fell.
• This led to a fall in French output.

Boisguilbert on Taxes

• He pointed out that taxes reduce the productivity

of the economy, and that

• more tax revenues for the government did not

necessarily mean less after-tax income for

taxpayers.

• If the tax system is designed in a way that takes

care to reduce the negative effects of taxes on

productivity, the government could earn more

tax revenues without reducing the after-tax

incomes of the citizens.

• This idea is nowadays championed by a

group of economists called supply-siders.

John Law (1671 – 1729)

• Mercantilists—including Boisguilbert—had

argued that increases in the quantity of money

stimulated demand and led to increases in

output

• But they equated money with gold and silver.
• Boisguilbert argued that paper money would

work just as well as coins.

• This undercut the Mercantilist support for trade surpluses
• John Law then argued that the paper money

could be backed by land just as well as by gold

or silver

Richard Cantillon (c. 1680/90 –

1734?)

• The classical school is distinguished by its

focus on the macroeconomic interconnections

between different sectors of the economy, such

as farmers, landowners and manufacturers.

• This orientation was derived not from pre-

classical economics but from early (that is, pre-

Adam Smith) classical writers, foremost among

whom was Cantillon

Cantillon: Land Theory of Value

• Before Cantillon, Sir William Petty (1623-1687) had formulated a Land-and-Labor Theory of Value.
• Petty had argued that capital goods and raw materials were themselves made out of land and labor and could be regarded as labor and land in disguised form.
• So the (long-run) price of a good really is the cost of the land and labor used directly in the production of the good and the land and labor used to make the capital goods and raw materials that were used to make the good.
• This was as far as Petty got.
• It was not good enough because he could not explain how the cost of the land and the labor embodied in, say, a shirt was to be measured.

Cantillon: Land Theory of Value

• Cantillon solved the problem by going further and arguing that
  • (a) labor is a produced good too; just like any other produced good such as a shirt, and that
  • (b) labor is made out of land.
• Therefore, in Cantillon‘s theory, the labor, the capital goods and the raw materials used in the manufacture of, say, shirts are really all disguised forms of land alone.
• Shirts are seen to be made out of just one resource: land.
• Since the (long-run) price of a shirt is equal to its cost of production, that price can then be measured by the amount of land used in the making of the shirt.
• This was Cantillon‘s Land Theory of Value.

Cantillon: iron law of wages

• Let‘s say that, at a minimum, a worker needs 2 tons of wheat a year to survive.
• If workers earn less than 2 tons of wheat a year, they will either emigrate or start dying of hunger; workers will become scarce and their wages will rise.
• If they earn more than 2 tons of wheat a year, immigration and rising birth rates will follow; there will be a surplus of workers and wages will fall.
• So, in the long run workers will earn a wage of precisely 2 tons of wheat a year, not more, not less. - This wage is called the subsistence wage and the theory that workers will earn a subsistence wage, a wage that is barely enough to keep you alive, is called the iron law of wages .)
• Let‘s assume that half an acre of land is needed to make 2 tons of wheat a year.
• One could then say that the cost of a year‘s labor by a worker is half an acre of land.
• And since the price of any commodity is in the long run equal to its cost of production, the price of a year‘s labor by a worker is half an acre of land.

Cantillon: land

• A related idea of Cantillon is that land is the source of all

wealth.

• Cantillon was aware that a country‘s total production

depends on both land and labor.

• But the availability of labor depends on the availability of

land and, therefore, cannot be considered an independent source of a nation‘s wealth.

• Without adequate land, the labor force will either starve

to death or be forced to migrate.

• Therefore, a nation‘s prosperity depends only on its

endowment of land.

• This idea was further developed by the Physiocrats.

Cantillon: the invisible hand

• Cantillon informally argued that an

economy with many households and

businesses would produce the same

outcome as an economy run by a

benevolent, all-powerful dictator.

• This idea was further developed by Adam

Smith who went on to solidify the idea in

our consciousness through his metaphor

of the ‗invisible hand‘.

Cantillon: monetary theory

• A monetary theory is supposed to say what would happen if the quantity of money circulating in the economy were to change.
• In Cantillon‘s monetary theory, the purchasing power of money (that is, the value of money) does not change when the quantity of money changes.
• In Cantillon‘s time, money consisted of gold and silver coins.
  • This is called commodity money.
• Since gold is a commodity like any other commodity, its value, according to Cantillon‘s Land Theory of Value, is measured by the amount of land embodied in the production of a unit of gold.
• As long as the way gold is produced does not change, its value in terms of land cannot change and therefore its purchasing power (measured in terms of the amount of any good that a gold coin can buy) cannot change.