The discovery of the circular flow of economic life

50 economic doctrine and method

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The discovery of the circular flow of economic life

physiocrats quesnay violent

1. We have seen that our science like all others originated in individual researches into striking facts which appeared as problems even to the layman. As long as men confined themselves to such research and as long as the central phenomenon of economics itself remained more or less in the darkness of instinctive and practical knowledge, scientific analysis could never fully set to work, it could not, as it were, make full use of its vital powers. It was impossible to build up a basic stock of knowledge of principles, nor could a staff of expert workers really form itself. It was necessary to derive an explanatory principle from each separate complex of facts--as it were in a gigantic struggle with them--and it was at best possible merely to sense the great general contexts, an understanding of which is essential--even from a practical point of view--for the explanation of the more subtle effects and counter-effects of economic phenomena. It is these general contexts which science can add to the knowledge of a clear-minded and well-informed practical man. In all the best minds in our field we have seen established a tendency to bring to light these general contexts, to make their investigation their main concern and to treat the conclusions emerging from such an investigation as the main part of economics. It was, however, the Physiocrats or 'Economists' who made the great breach, through which lay all further progress in the field of analysis, by the discovery and intellectual formulation of the circular flow of economic life. This is not to say that the fact itself in its popular meaning--the periodical sowing and harvesting for instance--could ever have been unknown, but here we are concerned with the economic sense and the economic formulation of the phenomenon: the task was to ascertain how each economic period becomes the basis for the subsequent one, not only in a technical sense but also in the sense that it produces exactly such results as induce and enable the members of the economic community to repeat the same process in the same form in the next economic period; how economic production comes about as a social process, how it determines the consumption of every individual and how the latter in its turn determines further production, how every act of production and consumption influences all other acts of production and consumption, and how, as it were, every element of economic energy completes a definite route year in year out under the influence of definite motive forces. Only with the help of such an analysis was it possible for further knowledge of the economic life process of society to develop and were scholars enabled to survey all the general factors and their functions as well as all the elements which have to be considered in every individual problem as far as it is purely economic. As long as economic periods were viewed merely as a technical phenomenon, and the fact of the economic cycle through which they move had not been recognized, the connecting link of economic causality and an insight into the inner necessities and the general character of economics were missing. It was possible to consider the individual acts of exchange, the phenomenon of money, the question of protective tariffs as economic problems, but it was impossible to view with clarity the total process which unfolds itself in a particular economic period. Before the Physiocrats appeared on the scene only local symptoms on the economic body, as it were, had been perceived, while they enabled us to conceive this body physiologically and anatomically as an organism with a uniform life process and uniform conditions of life, and it was they who presented to us the first analysis of this life process. On this point only platitudes had existed before them, they were the first to direct their attention to the inner workings of the social exchange of goods and the phenomenon of their constant self-renewal.

It is no mere accident that they formed at the same time the first genuine economic 'school', since only a total conception could form the basis for one. The historian of economic thought is rarely in a position to name the founder of a school with such certainty as he can do in this case. All essential ideas and at the same time all the vigour of an outstanding personality were combined in Francois Quesnay, who had created these ideas from within himself to a far greater degree than any other economist had done. He was one of the greatest and most original thinkers in our field. Those who joined him were or became his pupils and subordinated themselves to him in a way for which we have no other example in our field. Only the most important names and works may be mentioned: Quesnay himself (1694-1774) exercised above all a personal influence. Of his scattered publications (edited by Oncken in 1888) we should like to mention only his Droit naturel (1765), which contains his sociology and his Tableau economique (1758), which contains a systematic presentation of his basic conceptions. Clearly bearing in mind the state of affairs in our field at about 1750 we realize that we feel ourselves nowhere else in economic literature so near to creative genius as when we regard the conception of this work alone which, as Madame Pompadour correctly predicted, would appear to most critics at best as a harmless intellectual toy.

The zeal of the disciples tried to counteract the complete lack of understanding with which the Tableau' was met. Above all we must mention here Le Trosne (De Vordre social, 1777), Baudeau {Premiere introduction г la philosophic economique, 1771), in the third place Lemercier de la Riviere (L'ordre naturel et essential des societes politiques, 1767), finally, Dupont de Nemours (Physiocratie ou constitution naturelle du gouvernement le plus avantaguex au genre kumain, 1767). The elder Mirabeau, who, after Quesnay's death, was regarded as the head ofthe small group, had already created for himself a well defined system of ideas without the help of Quesnay--but probably not without that of Cantillon (JJami des hommes, first part, 1763). It was only later that he became dependent on Quesnay (continuations of L!ami des hommes, Philosophic moral ou economie generale et politique de Vagriculture, 1763), but because of this never quite so completely as did the others. Turgot {Reflexions sur la formation et la distribution des richesses, published in 1769, Sur les prets d'argent, 1769, Valeurs et monnaies, Lettres sur la liberte du commerce des grains, 1770, and others) was very close to the group without actually belonging to it. The Physiocrats did not meet with genuine understanding or with adversaries worthy of them. The controversy with Forbonnais was barren and just as superficial as Voltaire's mockery in his Homme aux quarante ecus. Galiani, whom we have met already in his Dialogues (1770), did not approach the problem fundamentally, just as the whole controversy about the corn duties, the temporary abolition of which was much debated in France, did not bear much theoretical fruit. Condillac (Le commerce et le gouvernement, 1776) deserves mention not because of his criticism of the Physiocrats but because of his positive achievements. Mably (Doutes proposes aux philosophes economiques, 1768, essentially a critical review of Lemercier) cannot be rated as an economist, and Morellet is of importance merely as a man dealing with practical problems.

Most supporters of the Physiocrats grasped the inner meaning of their doctrines as little as did their enemies. Amongst the Germans pride of place belongs to Margrave Carl Friedrich von Baden Durloch (Abrege des principes de Г economie politique, 1786) and to Mauvillon (PhysiokratischeBriefe an Professor Dohm), 1780; others like Schlettwein, Schmalz (died 1831), Krug (died 1843) and the Swiss Iselin merely kept to superficialities. Matters were similar in Italy where Neri, Beccaria, Filangieri, Verri and others appropriated one or the other statement to which they had taken a fancy. In England, too, there is a small number of physiocratic writings. More important than these, however, is the influence which the Physiocrats exercised on Adam Smith and on a group of later writers, amongst whom was Karl Marx. It was precisely the originality of their system which prevented them from becoming immediately and widely effective. Their firm conviction by its very obstinacy obtained respect and praise, but on looking more closely we find that their great momentary success with Parisian society did not mean very much. All novel theoretical thought is at first always absorbed in a merely superficial sense which in most cases has nothing in common with its true significance. Many readers naively saw in the matter simply a glorification of agriculture, and all those to whom this appealed declared themselves as supporters of the system. It is impossible to give here a more detailed account of what happened to the Physiocrats and their writings.

The physiocratic doctrine, as has already been stated, is a branch of the large family of systems of Natural Law and must be approached in very much the same way as the latter. It intended to be not merely an economic theory but also a general sociology which consisted, however, of economic material and which placed economic considerations into the foreground. Nevertheless we propose to limit ourselves to the economic theory proper as it was outlined by the Physiocrats. This obviously was an analytical achievement: the Physiocrats sought to comprehend intellectually the general character of the economic process on the basis of generally known facts of experience without considering it necessary to carry out a systematic collection of individual facts. Denis called their method an inductive one, at any rate it was theoretical in exactly the same sense as it was for instance in the case of Ricardo. This is quite clear, but in the case of the Physiocrats as with all teachers of Natural Law there was superimposed the idea that a definite and concrete economic order and a definite behaviour in practical questions of economic policy corresponded to the economic essence of the matter. This order which was always before their eyes and which once and for all had to be considered as ideal and in support of which they sought to adduce every possible sanction, even a divine one, is their ordre naturel. This in fact gives the whole system an unscientific finalist character. If the Physiocrats employed metaphysical statements or any practical postulates within their analytical system of thought and if they based their results on them their doctrine would in consequence lose its scientific character, but this is not the case. The nucleus of their argumentation is entirely free from such elements, as we can easily convince ourselves if we use the decisive criterion of omitting the statements concerned and of replacing the finalist construction of some other statements by a causal one. Thus it is possible to separate their scientific analysis of the facts from the statement of their opinion that the result of this analysis is at the same time the best possible concrete order of things under a divine plan. Once we have realized this and have recognized that their statements are based directly on their examination of fundamental economic facts, it becomes senseless to search for theological or philosophic determining causes. The moment when Quesnay for instance in examining the nature of capital says to us: 'Parcourez les fermes et ateliers et voyez ..etc. (Dialogue sur le commerce, edited by Daire, 1846), he vindicated the scientific character of his argumentation. Whether in so doing he was a Deist or not, whether a Free Trader or not, whether bureaucratic absolutism or self-government pleased him more--all this was very important to him, so important in fact that Turgot could declare he was no Physiocrat 'because he much rather had no king', it is moreover actually the main point for any history of contemporary thought, but for our purposes it is irrelevant and does not affect Quesnay's scientific importance one way or the other. Nevertheless, it was to his credit that he made an analysis of facts the main point, while his contemporaries, e.g. even Steuart, were mainly concerned with giving practical advice to the statesman.

The Physiocrats were in practice well aware of the analytical method, even if they did not see in their doctrine merely an intellectual recreation of real events--as the classical writers were to do already. They believed that this intellectual recreation expressed in sharply defined terms, which were free from other elements, certain basic patterns of the facts. In addition, however, they saw in their doctrine also an ideal picture in a practical sense. In this context we must not forget that this juxtaposition of different elements occurs much more frequently in the early stages of scientific effort than later, especially since the Physiocrats lacked the conception of social progress, so that the theoretical picture of reality could be considered as immutable and could, in consequence, become an absolute ideal and an element of a divine world order much more easily than could have happened if they had been conscious of the changeability of social facts. The Physiocrats created, if we may be allowed to express it in this way, a doctrine of the economic nature of the matter, of the factual causes of economic life. Yet it is impossible to talk in any other sense of a natural doctrine of the Physiocrats, certainly not in the sense that they, mistaking the peculair character of the social sphere, made the amateurish attempt to force upon it a conception which was derived from natural science and which gave the wrong impression of exactness. Their theory is merely an attempt to think systematically about that store of general knowledge which every practical man accumulates and which he uses as the basis of his behaviour, moreover, they tried to weld it into a uniform and consistent whole. To point out superficial resemblances or to stress the fact that scientific training could be acquired--at least at this period--only in the field of natural science is no proof to the contrary. In order to prove an illegitimate influence from the field of natural science it would be necessary to show in every particular instance, in every theoretical proposition, that they could be explained not by the arguments of an economic character, which had been or could be adduced in their support, but owed their existence to an artificial parallelism between natural science and the science of the mind (fieisteswissenschaft).

It is true that the Physiocrats continued the practice, established in the seventeenth century, of speaking of natural laws of economics and of the whole of social life. In order to understand the importance of this custom it is necessary to distinguish two points: Firstly, what they themselves meant by it consciously and, secondly, what we, after a century and a half, must see in these laws as regards their concrete content. As far as the first point is concerned we cannot expect the Physiocrats to have taken up a position which we could accept, since this question has remained controversial to this day. In the first place their conception of law was influenced by their finalism. They proceeded from the belief that the will of Providence is bound to reveal itself to the researching mind in the analysis of facts. Therefore, they saw in laws not merely rules applied to facts but something that stands outside the facts and to which man must subordinate himself. These laws implied commandments for human action and a system of duties. Besides, the Physiocrats showed no understanding for the difference between social and scientific laws of nature. Indeed the latter appeared to them--as they did to Newton--under exactly the same point of view. In the second place we shall see that the so-called laws of the Physiocrats are exactly what we describe today as such without being contradicted, just because neither the theological nor the naturalist element was really the point from which they started. They merely expressed the results of economic analysis in this theological or naturalist form after they had established them. In view of their great achievement to have recognized definitely that economic life is subject to certain necessary factors which can be comprehended in their general character, and that in this field also causeshavetheireffects,wemustnotjudgetooseverely thenumerous shortcomings of this diagnosis. Besides, even then, Montesquieu (1749) on one side and Turgot on the other arrived already at more perfect formulations. Moreover, we may mention the fact that this period was already familiar with methodological controversies. Many opponents of the Physiocrats fought against their method as 'unrealistic' and too 'absolute', and it was Galiani in particular who in his dialogues pointed out how inadmissible general rules were for economic policy. This, it is true, did not invalidate the theory of the Physiocrats, but Galiani rejected the theory together with its practical consequences which seemed offensive to him and which seemed to follow inevitably from it. This practice became customary later on and has been continued until modern times. Turgot's attitude, too, which often almost amounted to dislike, can partly be explained by his view that the Physiocrats established general laws where there were none and thus did violence to the multiformity of life. Naturally, this attitude did not turn either Galiani or Turgot into representatives of a strictly historical relativism, since both of them did essentially theoretical work; but they occupied an intermediate position.

The Physiocrats approached their great task of presenting the general forms of the economic cycle merely with the already existing resources without adding anything themselves. They wished to combine the facts of economic needs with the general facts of the environment and to establish laws that could be applied to economic events. Their psychology was strictly individualist, rationalist and extremely simple. It can be summed up in the assumption of a desire for the greatest possible satisfaction of individual needs with the smallest possible exertion. In consequence the economic principle as formulated consciously and clearly by Quesnay formed their point of departure. Their sociology likewise was simple. They accepted the social organization as they saw it before their eyes, partly as a matter of course, partly as sufficiently typical. It has already been mentioned that such procedure was to be expected in the early stages. We must further add that the over-estimation of actions that were in accordance with Reason and the incompleteness of a psychological analysis, as well as that atomistic approach which saw in the--essentially unchangeable--individual the key to all social happenings was least harmful in economic investigations. Although these factors make it impossible for people to see beyond a certain point and must lead in many respects to a caricature of reality as well, just for the formulation of a 'logic of economic facts', that is to say precisely for that achievement of the Physiocrats which concerns us most, they represent in part necessary and useful assumptions. We must, however, not try and build upon them alone a theory of the life process of society, a sociology. For their sociology and also for their practical insight into reality all these ideas were fatal, however much they talked of the 'homme social' and the Vie collective' while their contributions to basic problems of economics was not thereby invalidated.

In this field their achievements were great. Ungenerous and unppreciative criticism has for a long time prevented a just estimate of their performance and obscured the fact that all subsequent work was based on theirs. Moreover, certain peculiarities which stood out grotesquely have been emphasized again as if they constituted the essential points of the physiocratic doctrine, the refutation of which ended the matter. Adam Smith already started with this and only recently have we penetrated more deeply into the economic system of thought of the Physiocrats.

The total survey of the economic process which the Physiocrats achieved, the 'economic point of view' which they adopted, even though they started from the individual on the one side and from the natural 'milieu' on the other, is clearly expressed in three conceptions which assumed the greatest importance for economics: the conceptions of circulation, of the social product and that of its 'distribution'. The first was known already to popular discussions and to the Mercantilists, but it was merely the surface phenomenon of the circulation of money that had been thought of. Quesnay and his followers were the first to push aside the 'monetary veil' energetically, and a circulation of a different kind was revealed to them: They showed how during every economic period a quantity of commodities newly enters into the economy--in their way of thinking from the inexhaustible treasure of Nature--and is taken over and passed on to the final stage of consumption by the various groups of members of the economy. These groups are characterized by special functions, and the process of passing on the commodities is effected by exchange. Acts of exchange form the links in the chain which connects these groups or classes. Thus the economic life of a nation presents itself as a system of exchange relations which, renewing themselves periodically, fill the space between production and consumption. The quantity of goods produced during the economic period within the economic system is regarded as a social product which is being distributed every time.

This idea is so familiar to us today that we no longer regard it as striking, but it contained a bold abstraction and an innovation which was methodologically most important. This social product does not exist as such anywhere in reality, and is in itself an artificial intellectual creation. Yet it was the creation of this theoretical sum total which for the first time made possible, or at least facilitated, a deeper comprehension of the co-operation between the individual economies and of their mutual dependence. Moreover, the identification on principle of the social product with the wealth of the nation--the emphasis given to the point of view of the periodical circulation of commodities--gave to the conception of national wealth a precision which had been lacking before. In fact it clearly illuminated the relation between national wealth and production once and for all. These foundations have been preserved to this day and have proved themselves useful, as can be seen e.g. in the doctrine of A. Marshall.

This is the framework within which the wealth of the nation (richesse) develops and has its being. Cantillonhad shown remarkable insight when he wrote: 'La richesse en elle-meme n'est autre chose que la nourriture, les commodites et les agrements de la vie', in his Essaisur le commerce en general, 1753, p. ** The Physiocrats certainly did not improve on this statement when they defined wealth as the sum total of the economic goods produced yearly ('biens commerєables', Quesnay, Oevres, ed. by Oncken). We know already its motive force and its explanatory principle: 'le desire de jouir' according to an expression used by Lemercier. Thus we only have to stress one other essential factor: the physiocratie theory of the nature and function of capital. Before them a precise theory of capital had not existed, not only because mercantilist errors stand in the way of such a theory but also because before them the basic economic factors as such had not at all been analysed in detail. Such an analysis, however, is necessary for a precise conception of the part played by capital in the economic life of the nation in opposition to its importance for the individual economy, recognized in everyday life. Quesnay--and with him his true disciples--saw the function of capital in the necessity to maintain the worker during the period of production, in the avances fancies--the expenses for the clearing of the ground for cultivation--and in the avarices annuelles--or better finds des avances which are partly embodied in the produced means of production. The avances annuelles reproduce themselves yearly together with the interests on the avances primitives. The substance of capital, therefore, is represented as that part of the social product of preceding economic periods which maintains the production of the current period-- of temporarily particular importance as part of the circulation of commodities.

The development as conceived by the Physiocrats can best be expressed in the words of the Margrave of Baden, Abrege, 1786, p. 7: The cyclical movement of labour and expense is made more perfect by more efficient labour. The latter increases the means of subsistence, the increase of which leads to an increase of the espece humaine, which in turn increases the needs of the community and consequently the depenses. Thus economic civilization develops from a primitive state of search for food (Vhomme vivoit des fruits epars et spontanes de la terre) in which it was just this search for food which constituted labour, corresponding to the depenses de la subsistence and representing the performance which procured the subsistence. In this context the Physiocrats naturally talked of 'duty' and 'right', but while they used language of the Law of Nature they meant exactly what we just expressed.

It is now, however, appropriate to deal more closely with those characteristics of the physiocratic system which in the history of economic doctrine have always been wrongly placed into the foreground. These characteristics did not effect the essence of the basic ideas outlined above and represented merely a somewhat premature attempt at elaborating them in a certain direction, but nevertheless for the Physiocrats themselves and for the fate of their theory they were of great importance. Once we have established these fundamental conceptions and are now looking for a firm point in the economic cycle, it is possible for our attention to be directed to the technical origin of the circular flow of economic life. We notice that in every economic period a certain quantity of materials enters into the social world from the lap of Nature on which directly or indirectly the whole community must live. It is this quantity which in a certain sense in fact circulates in a community and the periodical replacement of which enables us to distinguish the economic periods from each other. This point of departure was in itself an obvious one, it was bound to be specially familiar to Quesnay because of the analogy to the nutritional process of organic bodies. It is entirely superfluous to seek for any metaphysical reasons why the Physiocrats should have seized upon it, as if it represented an otherwise quite inexplicable aberration. It simply constituted the observation of a completely undeniable 'physical5 fact--'Interet Social', as Le Trosne called it.

The Physiocrats admittedly became obsessed with this idea, once they had conceived it and they overrated its importance considerably. If we, however, think it out consistently and remember that it was merely formulated in order to explain the facts under observation, we realize that it became quite natural to confine the conception of production to that of original production, or, more strictly speaking, to that of the production of materials which could be repeated yearly ad infinitum--which meant that mining was excluded. It was, therefore, a matter of course that all labour not used for this original production was called unproductive. This did not constitute a special thesis but merely an analytical proposition in Kant's sense, the proposition: Labour not employed for original production does not produce new original products. The necessity and usefulness of such labour was not denied. If Le Trosne wrote: 'Le travail porte partout ailleurs que sur la terre, est sterile absolument, car l'homme n'est pas createur,' he simply meant that human labour cannot create new matter, which as far as economics is concerned is only relevant if the conclusion is drawn which is implicit in the definition. If we want to see a special proposition in the statement quoted above it could merely be considered as correct.

The Physiocrats, however, on the one hand based too much on it and on the other, under the spell of their conception, closed their eyes to other more rewarding vistas. It redounded in the first place to their credit that they comprehended, with the help of theoretical principles, different classes as groups with special social interests and investigated their interaction, instead of merely empirically distinguishing them according to their different social functions, as had been done already previously. This achievement, together with the methodological conception of 'distribution', remained indeed а ктща dg del of economics. It was unfortunate, however, that the Physiocrats applied these correct efforts to that factor which later analysis proved to be of secondary importance. The productive class, e.g. those participants in the economic process who apply labour and capital to production in the physiocratic sense retain for themselves part of the produce, of which in turn they pass apart to the sterile (industrial, etc.) class. The latter adds value to the product by their manufacture, but does so merely to the extent to which its members themselves consume; in consequence, they do not really produce value. The productive class passes this part of the produce to the sterile class by exchanging food and raw materials for industrial products. Since the latter, however, contain food and raw materials from former exchanges, and that to exactly the same amount, the value which had been passed on returns to the productive classes. That which is being passed on, and of which in a certain sense it can be said that it returns to the productive class, is raw material. If this movement of raw materials, however, is to have any economic sense, it must be paralleled by a movement of purchasing power. In consequence, we have a gap in the argument because it is suddenly assumed that value is being passed backwards and forwards and that in every exchange identical values are handed over, since otherwise a gain in value would have to result from the loss suffered by the partner in the transaction. If we were inclined to talk of a 'fundamental' error of the Physiocrats we should see it in this jump from raw material to value and in the view that value is merely the monetary expression for the amount of raw materials contained in commodities. This error spoiled the theory of value and exchange and barred the way to an insight into essential phenomena.

The rest of the product which alone represents a net return, neutralized by no claim for compensation, the produit net, falls to the landlord, who uses it partly for the maintenance and improvemerit of the avarices foncieres, partly for the discharge of social duties amongst which the payment of taxes is the most important. For the rest he can hand it on or, as the case may be, back to the productive and the sterile classes. The part handed over to the sterile class in its turn returns likewise to the productive class. Thus the circle is closed, all products are paid for and all yearly advances together with a part of the original outlay have been replaced.

The produit net has often been considered a theoretical monster which can be proved as non-existing by the most casual glance at reality. Yet this is not the case, and the argument that the net return could disappear-even in agriculture is based on a misunderstanding. First of all, the existence of the produit net as conceived by the Physiocrats is established beyond a doubt. It is quite true that it is original production only which brings physically new factors into the world of commodities. Furthermore, there is altogether a great deal which is correct in the mistaken theory of value held by the Physiocrats. Above all they recognized correctly the tendency under free competition for prices to be pushed down to the level of costs--understood here entirely in the popular sense--they also saw just as correctly the problem resulting from this fact: how to explain the fluctuations of returns which nevertheless rose above the level referred to. If they localized these fluctuations of returns in the creative force of Nature, they only saw one side of the problem, but not more so than did for instance Karl Marx; they also confused physical productivity and rise in values. In doing so they had left unexplained the most important fluctuation of value, the profit of the entrepreneur, but they laid firm foundations for a theory of 'surplus value5 which, seen from the point of view of the period, was by no means so absurd. In the first place, however, they sensed correctly one tendency of the exchange traffic between classes and recognized the main features of this traffic clearly. Quesnay wrote with some justification: 'La marche de ce commerce entre les differents classes et ses conditions essentielles ne sont point hypothetiques. Quiconque voudra у reflechir, verra qu'elles sont fidelement copiees d'apres la nature.' (Oeuvres, p. 60.)

In the theory of wages, too, they made great progress, not only in spite of their starting point but in fact because of it. First of all, the conception that all workers live on advances is in itself already a wage theory in nuce. From this basis we are bound to arrive at the arguments which were later embodied in the wage fund theory, even if the Physiocrats themselves did not achieve a precise formulation. Turgot, it is true, uses the expression fonds des salaires, but he talks about it only in a common place manner which lacked the characteristic content of the wage fund theory. Furthermore, from the system of the Physiocrats there emerged the 'brazen' theory of wages, which was likewise formulated in a precise form for the first time by Turgot. The Physiocrats did not merely accept a contemporary opinion already in existence, but from the foundations of their system there follows the proposition that each worker could add to the product merely the value of the means of subsistence consumed by him and that--as Quesnay himself stresses --wages settled down upon this point because of the competition amongst the workers.

Their theory of interest came off worst. In this respect the specifically physiocratic point of view was naturally most harmful, and we find accordingly that the Physiocrats showed the least understanding for this phenomenon. The gain produced by industrial capital has no foundation at all and should really have been logically described as a gain at the expense of the produit net. This conclusion, however, is drawn with complete clarity only by the elder Mirabeau in his plan for the abolition of industrial interests. In all genuine Physiocrats however, we find the opinion that the sole source of interest is the return from land, and furthermore that it is* the fact of the produit net alone which makes saving--and with it industrial progress--possible. Turgot later tried to fill the gap and said many things that were correct about the establishment of rates of interests as the result of supply and demand without, however, going very deeply into the matter. In spite of his proposition that interest is the price for the temporary use of a unit of value we find that in his search for a more penetrating explanation he entrenches himself behind the expedient of all Physiocrats which assumes that competition, as it were, adds interest to capital, since the capitalist would otherwise buy land. This proposition follows from the principles of the Physiocrats, although we found it already in Hutcheson.

Commercial interest is nothing but gain at the expense of the other partner. We must make a distinction between industry and commerce in the sense in which the Physiocrats used these terms, but this distinction is never completely explained. As far as industry is concerned, there is, if not a creation of value, at least an addition of value--the value of the raw materials and of the means of subsistence of the workers having been added during the process of production--note the analogy with Marx--and its usefulness is not denied. Although it cannot be imagined why we should not be able to say exactly the same thing of trade, it must be remembered that the Physiocrats considered trade as an evil which had to be limited as much as was feasible. It is possible that in this context the popular idea played its part that intermediary trade increased the price of commodities and consequently upset, as it were, the normal exchange relation and the economic ordre naturel.

However this may be, it is certain that the system of the Physiocrats in its essential features represented an enormous advance. Even that one feature to which it owed its wholly unfortunate name did not by any means spoil everything--in this case as in so many others some disciple had considered that part of the system of the master most important which was in fact least valuable. The Physiocrats were to suffer much more from the misrepresentations and quite superficial objections of contemporaries and later writers than from justifiable criticism. Most of the various objections, particularly those which were raised against their theoretical propositions, merely redound to the discredit of those who raised them. The inner logic of the system is to a rare degree free from mistakes and most things that at first glance appear strange and incomprehensible can be satisfactorily explained by a more penetrating study. We cannot go into this problem, however, any more than we can deal with their practical conclusions in any other way than very briefly.

The order natural is the state of affairs which is most advantageous for mankind. Every individual accordingly acts in the interests of the whole if he pursues his personal interests. This proposition in its application to economic conditions is both valuable and false in the same sense as is the theory that the maximum of utility can be achieved by free competition on the basis of individual self-interest, which later was to play such an important role and which in substance is identical with the physiocratic position. Because of this fact and because all classes are interested in the largest possible size of the produit net on which indeed all progress depends, a harmonious conception of the relations of class interests with each other resulted. The favourable interpretation of the consequences of free competition, therefore, did not entirely result from the premises derived from the Law of Nature with which the argument was adorned, but from an analysis of the economic process itself. This provided the Physiocrats with a definite approach to the problems of the period, but it is outside the limits of our task to describe its high lights. We must, however, in any case name the following scientific achievements: The refutation of the belief in a favourable balance of trade, in connection with which they stressed the fact that the accumulation of money in any country merely leads to a rise in prices. Furthermore, it was Quesnay already who demolished the popular catchword that tariffs were simply borne by foreign countries and who pointed out that aggressive tariffs could in certain circumstances harm the country which imposed them more than the opponents against whom they were directed. It was understandable that the Physiocrats found in these conclusions a confirmation of their fundamental belief in the advantages of freedom of exchange and of labour and in the harmfulness of interference by the State in private decisions concerning production and consumption.

We must, however, never overlook the fact that in spite of this principle and with a correct estimate of its limits they ascribed as essential for the life process of society fairly far-reaching functions to the State (which amongst other things had to make avances souveraines for road construction etc.), to legislation and finally to morals and customs (particularly in the use made of the produit net). Conditions of the period forced them to stress the former point of view particularly strongly, but the latter was not lacking in their scientific system. Practical slogans, however, have to be brief and pregnant and cannot be formulated scrupulously. But we are not concerned here with laisser-faire.

Their theory of taxation contained some very important conclusions. It is based on the idea that poverty, though it is generally caused by arbitrary and violent diversions of the economic stream from its natural course, is in the first place the result of the particular systems of taxation of the period. The phenomenon of poverty, therefore, does not, as is the case in many other systems, appear as an integral element of economic life, nor can it be explained by certain fundamental tendencies of human nature, but must be understood to result from acts of interference with the economic process and from external causes of disturbance. From this the conclusion followed that if the most important causes of disturbance were removed and the burden of taxation was concentrated on the produit net a considerable cause of poverty would disappear. This is the theoretical significance of the physiocratie theory of taxation which can claim the credit of having discovered for the first time in a systematic way essential advantages in direct taxation. Their single tax on land, however, was not allowed to exhaust the whole produit net because by doing so it would substantially destroy the right of property in land. In view of the importance of the produit net for saving (already mentioned by us), for the increase of the avances fonderes and for progress in general this would mean that the economic system, if for the landowner the motive for cleaning and improving the soil disappeared, would be harmed in a similar way as if property rights as such were limited, which would disturb the economic behaviour of individuals. In this there can be discovered the economic core of the physiocratic theory of property, while its other aspects of a sociological character and derived from the Law of Nature (the latter used in the sense of a belief in inborn rights) do not concern us here.

In the discussion of topical problems of economic policy, in which they participated and which partly caused them to develop their views, the Physiocrats and their intellectual neighbours developed their world of ideas and stepped from their studies into the fresh air of party controversy. For the Physiocrats in particular the controversy about the French corn laws, which was not merely a principal theme of economic writing, but indeed a main topic of social conversation, was the most important problem. It was in fact at this point that the two sources of economics united. Never again has the investigation of basic theoretical truths by the practical man and (shall we say) by the philosopher been separated: even if in the literature dealing with special problems both groups can, of course, always be distinguished. With this the basis for a modern theory of economics was firmly established.

6. In these discussions the voices of the scholars were listened to. Public interest turned to them and large circles sensed the need for the new science. Yet it was not easy to come to terms either with the complete and inaccessible systems of the scholars or with the multitude of investigations by people in practical life, the value of which was so uneven and could be judged only with difficulty. The period demanded a balanced synthesis of the existing elements, a reliable guidance by expert hands. This synthesis was bound to come and its product could not be arbitrary: however many people attempted it successfully and however independent these people might have been of each other, they were bound to arrive at very similar results. Yet it was difficult to solve the problem since this demanded on the one hand a philosophical-historical and general scientific training and on the other an open mind for current tendencies as well as for results outside the philosophic circle.

Two authors stand out clearly: they fulfilled these conditions to an eminent degree, they had originality and an open mind, they were able to adapt themselves and were independent and, finally, may it be said at once, they possessed that degree of superficiality which such tasks demand since otherwise the zeal of the scholar would lead them into fields of inquiry of no interest to the large public. All others who attempted the task remained stuck at some point since they merely saw one side of the problem, or they could not attract any attention at all. The first of the two authors referred to was Turgot, whose brilliant talent, formerly underestimated, is today so much the more recognized, indeed almost excessively so, since nothing recommends an author more to the historian of ideas than the fact that he has to fight for him. For this reason it must be said at once that if we remove the magnifying glass through which people usually look at his achievements, admittedly a great deal remains, although all the points which we could quote specifically can be found also in non-physiocratic writings, particularly in the English literature of the period. Moreover, his prestige is, at least in part, based on the fact that a great deal has been interpreted into his fluent propositions. Fundamentally he was a Physiocrat and it was on to the physiocratie system, which in spite of everything represented his daily bread, though he never really deeply penetrated into it, that he grafted other ideas which the practical life and the literature of the period inspired in him, although he never unduly worried about their inner connection. Even though he recognized in capital a factor of production, much could be said against this 'conception', apart from the fact that we find it in him in the same form as in Hutcheson and in a form which was not essentially different from that of Locke. He had a better insight into the phenomenon of value, but he did not see it nearly as clearly as did Condillac a little later, and no more clearly than Cantillon or Galiani had done. We have already mentioned some of his individual achievements. In this context it is merely necessary to mention the comprehensive character of his efforts to arrive at a synthesis. This fact and the insight into magnificent plans which his correspondence opens to us probably justify the judgment that a life work from his pen might have become a second Wealth of Nations

7. The other author who must be mentioned here is Adam Smith, who achieved decisive success in a way in which few had succeeded before him. He approached his task with great resources. He employed a life-time in gaining complete mastery of the philosophical-historical, to a lesser degree of the scientific and to a still lesser degree of the legal knowledge of his time. He opened the gates of his mind to all tendencies accessible to him. In him we find fewer gaps and prejudices than in any other economist with the exception of John Stuart Mill. His main works, The Theory of Moral Sentiments (1759), a theory of ethics, and the Wealth of Nations, are nothing but fragments of a range of interests, the extent of which even his remaining publications, which need not be mentioned here, merely indicate. In a letter written in 1785, he spoke of the grandiose idea of a philosophical history of all the different branches of literature and of a theory and history of law and government. But such great plans remained in the background and did not disturb the even course of his detailed investigations to which he devoted himself with imperturbable and genuine philosophical serenity and which he accumulated without haste while pursuing his work as a teacher. The methodical habits of the professor and scholar stood him in this respect in good stead, as did a sober somewhat jejune approach which summed up with assurance a system or a phenomenon without ever dwelling too much on details. He was not troubled by a plethora of ideas, nor was he misled by them into paths where only few would have managed to follow him. He was a man of systematic work and balanced presentation, not of great new ideas, but a man who above all carefully investigates the given data, criticizes them coolly and sensibly, and co-ordinates the judgment arrived at with others which have already been established. Thus this man with a crystal-clear mind created his magnificent life-work from existing material and by treading on familiar paths.

He expressed the spirit of his age and gave to it exactly what it needed, no less and no more. This fact and the external and internal merits of his achievements account for his success. Had he dug more deeply, he would not have been understood. His masterly presentation has been praised justifiably and yet this is not altogether a compliment. Nobody dreams of praising or blaming the style of Newton or Darwin. They stand above such merits or defects, while Smith does not. It is true that somebody once was rash enough to compare the Wealth of Nations with the Bible, but soon a calmer and juster estimate asserted itself. Smith suffered comparatively little from the favour or hatred of the parties; in Roscher's book we read already an appraisal to which nothing need be added. Today we can be under no illusions about Smith's intellectual dimensions since we can clearly enough distinguish between pedestal and monument. The Wealth of Nations resulted from a part of his lectures on moral philosophy which he delivered at the University of Glasgow during the period from 1751 to 1764 and which even in their outward form closely followed those of his teacher Hutcheson. The notes, which were produced in 1763 and have come down to us, show us that he hardly altered more in his teacher's system than any lively pupil would have done. In 1764 he went with a fairly complete system to France where he established contact with the Physiocrats. In the serene years in Kirkcaldy he added those points in their system which we have described as essential to his own so that he burst its frame with the result that symmetry suffered seriously. In this respect, however, it must not be forgotten to what extent he proved his intellectual independence and superiority in the choice of the elements which he adopted--in fact this in itself constituted an independent achievement. In the third place we must mention the influence exerted by Mandeville. Mandeville had given a grotesque form to a profound conception in his Grumbling Hive (1705, a new enlarged edition appeared in 1714 under the title The Fable of the Bees), a moralizing poem which attracted attention without being taken really seriously. In this form, however, is contained the best and most lucid presentation of the idea that the selfish interest of the individual performs a social function in the economic sphere. Now there were sufficient other sources for similar thoughts, but many a phrase in Adam Smith points to the fact that he was influenced by Mandeville in particular. Finally Smith owed much to Hume and Harris as well.