Physiocracy was an economic theory developed in 18th century France that viewed agriculture as the sole source of wealth. Key aspects of Physiocracy included the belief that there is a natural order to the economy governed by natural laws. Agriculture was seen as the only productive sector that created surplus value, while other sectors like manufacturing were seen as sterile. Physiocrats advocated for minimal government intervention, free trade, and a single tax on net agricultural product. Their theories were presented through François Quesnay's Economic Table, which modeled circular cash flows between landowners, farmers, and other classes.

1. PHYSIOCRACY
PROF. PRABHA PANTH,
OSMANIA UNIVERSITY, HYDERABAD

2. PHYSIOCRACY
 Physiocracy is the economic doctrine put forth by a
group of thinkers in France, in the 18th century.
Independent thinkers,
Reaction against Mercantilists policies,
Reaction against oppressive rule of the Louis – kings of
France.
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3.  Discarded the Mercantilist belief that wealth is
money (gold and silver), that comes through
exchange,
 Emphasised the Natural Order and Natural Law.
 Agriculture alone is productive,
 Other occupations are all sterile.
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4. Factors leading to rise of Physiocracy:
 Corruption and degeneration of Court life under Louis XIV, XV,
and XVI.
 Long and wasteful wars against England and Holland,
 Heavy taxes on peasants and farmers. Noblemen and Church
exempted from taxes. Regressive and irrational taxation
 Tax on salt,
 Multiple taxes on manufacturing,
 Tax on land and produce,
 Exploitation by tax collectors, only 1/3 went to the State.
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5. Factors leading to rise of Physiocracy:
 Mercantilist policies gave preference to trade.
But it was agricultural revolution in England which led to its
prosperity.
 Agriculture was the worst sector affected in France.
 Concept of justice: simple laws, scientific temper, such
as Newton’s work - changed the attitude of the French
people.
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6. Physiocratic Doctrines:
1. Concept of Natural Order and Natural Laws
2. Net Product of the economy,
3. Distribution of Wealth – the Table Economic
1. Natural Order:
 Mercantilists created an artificial order – based on man
made laws. Positive approach.
 Natural order was an “Ideal Order arranged in conformity
with the Laws of Nature,”
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7. 1. Natural order
 Leads to well being of the people,
 Natural rights of man,
 Man made laws should not violate natural laws,
 Concept of “laissez faire” – or no Government interference in the
economy,
 Freedom to individuals,
 Secure the greatest amount of pleasure.
 “Nature is the Mother, and Labour is the Father of all wealth.” –
Sir William Petty
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8. 2. Net product:
 Land or Nature is the source of all wealth as seen in
agriculture.
 Nature and Labour produces wealth in agriculture.
 Labour consists of 1) Sterile labour and 2) Productive labour.
 Productive labour produces a surplus over and above the
inputs.
 E.g. in agriculture, with a one good model, no exchange value,
 Output – (wages + seeds) = Surplus
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9.  Commerce and manufacturing are sterile – they do not produce any
surplus.
 But the surplus of agriculture supports them.
 Hence only agriculture is “productive”.
 Surplus is created in agriculture, and paid to artisans and other types of
employment.
 Thus manufacturing and commerce, though important, are not productive, for
they do not generate any “surplus”.
 Hence it is only increase in agricultural production that increases the wealth of a
country.
 Not trade.
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10. 3. Distribution of Net Product:
 Based on the concept of “Net Product” – the Physiocrats formulated
the theory of distribution.
 Quesnay created the Tableau Economique, or Economic Table.
 Agricultural surplus flows through the economy in the form of rent,
wages, and purchases.
 These were the real economic movers:
1. Government regulation impedes the flow of income in the economy, and
also economic development.
2. Taxes on the productive classes such as farmers reduced, higher taxes for
unproductive classes such as landowners should be increased. This is
because their luxurious way of life distorts the income flow.
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11. Assumptions of the Model:
1. Lag Model: Income of one year spent the next year. But can also
use a lead model – income of present year is spent in the present
time period.
2. Stationary State: Self replacement, no growth,
3. Capital: as advances for both working and fixed capital.
4. Classes: three classes
1. Farmers :extract wealth from the soil, produce seed, food and raw materials,
2. Proprietors: Kings, Nobles, and Landlords. Own land, which produces wealth,
so are productive like farmers.
3. Sterile class: manufacturers, artisans, shop keepers, and merchants
(unproductive).
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12. Assumptions continued:
5. All transactions are in money terms – that reflect the
actual output in physical or real terms, money is important
only as a medium of exchange,
6. Free trade and free competition. Not allow merchants, the
sterile class to profit.
The above three classes: Proprietary, productive, and sterile
interact with each other in the economy.
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13. The Tableau Economique: The Economic
Table (Quesnay: 1758)
►Stationary state. State of equilibrium
►Circulation of money within the economy (corresponding to
circulation of blood in the body)
►Three classes: Proprietors of land, farmers and manufacturers.
► Farmers rent land from Landlords or Proprietors,
► All transactions are in money terms. Prices are given.
► All classes consume both food and non-food (manufactured) goods.
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14. The Model: an example:
 Farmers produce agricultural goods worth $5000.
 Out of this, they retain food and raw material (working capital) worth $2000
for themselves,
 They pay $2000 as rent to the Landlord (proprietor),
 And they spend $1000 on manufactured goods.
 Farmers produce $5000 worth of agricultural products, but consume only $2000 of
this output.
 Thus farmers or agriculture produces a Net Surplus.
 Net surplus = $5000 - $2000 = $3000
 This amount is transferred to the landlord as rent, and by both to manufacturers for
their output.
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15.  Proprietors or landlords receive $2000 as rent from
farmers.
 They spend $1000 on food, and $1000 on manufactured
goods.
 Manufacturers receive $2000 ($1000 from farmers and
$1000 from landlords).
 They spend $1000 on food, and $1000 on raw materials,
which they buy from farmers.
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16.  Thus, it is only the agricultural sector that creates a
surplus in real terms – the “net surplus.”
 The other two only recycle the amount they receive as
payment from agriculture.
 However, landlords or proprietor’s income (rent),
considered as legitimate for:
 They own and clear the land, construct drainage and irrigation
which makes land productive.
 Thus property is considered the fundamental feature of Natural
order, the tree of which, other social institutions are branches.
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17. Role of Trade
 Trade – both internal and external - was considered unproductive.
 Only exchange of goods of equal value.
 Encouraged Free Trade, as part of the Natural Order, no restrictions to
ensure best possible prices.
 Import duties raise Ps,
 Export earnings increase supply of money, value of money falls, as prices rise.
Makes domestic goods more expensive
 People prefer to import at lower prices, so gold flows out of the country.
 Not desirable.
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18. Taxation
 To be paid out of the surplus i.e. Net Product. Single
tax on surplus from land.
 No indirect tax, direct tax more economical in collection
 Net product goes to landlord, sole payer of the tax.
 Misery caused by unequal and regression taxation.
 Workers and industrialists receive no profits or surplus
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19. Criticism:
 Stationary state, there is no growth.
 No capital formation, and increase in investments.
 If K is spent on land, it is not original gift of Nature.
 Landlords do not play an active role in production,
they are like capitalists, owning land.
 Possibility of exploitation of labour.
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20. Criticism:
 Sterile class (manufacturers) have capital to produce
output, does not explain how they got the capital.
 No depreciation.
 Price and cost determination is not discussed.
 Vague concept of Natural Law,
 Ignored role of labour, classical economists showed
that labour also contributes to wealth.
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