Wednesday, January 27, 2010

Religious admonitions against avarice and the accumulation of wealth.

One of the challenges to the development of economics was religious admonitions against avarice and the accumulation of wealth. An example in the New Testament of the Christian Bible is:

Matthew 19:21
New International Version (©1984)
Jesus answered, "If you want to be perfect, go, sell your possessions and give to the poor, and you will have treasure in heaven. Then come, follow me."

Saturday, January 9, 2010

Ayn Rand versus Christianity

Many supporters of free markets and laissez-faire capitalism use Ayn Rand's novel, Atlas Shrugged, and her philosophy of objectivism to support their cause without being aware of her hostility toward Christianity and other religions.

And the case can be made that her philosophies are in direct contradiction to the teachings of Jesus Christ. For example, "Jesus Christ versus Ayn Rand" argues Rand's pursuit of self-interest is contrary to the New Testament lessons of love and compassion for others.

Thursday, January 7, 2010

Stossel - January 7, 2010 - Ayn Rand's Atlas Shrugged

Libertarian journalist John Stossel examines Ayn Rand's 1957 novel, Atlas Shrugged on his January 7, 2010 self-titled program on the Fox Business Network. The book surged in popularity during the economic recession of 2007-2010 and became a popular talking point among conservatives and libertarians as justification for reducing or eliminating government regulation of markets.

Stossel - January 7, 2010 - Part 1 of 6
John Stossel interviews John Allison (Chairman, BB&T Bank).

Stossel - January 7, 2010 - Part 2 of 6
Professor C. Bradley Thompson (Clemson University), Yaron Brook (President of the Ayn Rand Institute), and John Allison (Chairman, BB&T Bank) discuss Ayn Rand's novel Atlas Shrugged.

Stossel - January 7, 2010 - Part 3 of 6
Audience members ask questions to Stossel, Thompson, Brook and Allison.

Stossel - January 7, 2010 - Part 4 of 6
Stossel interviews Nick Gillespie (an editor for and Reason TV) and Jeffrey Klein (New York State Senator)

Stossel - January 7, 2010 - Part 5 of 6
Stossel interviews audience members.

Stossel - January 7, 2010 - Part 6 of 6
Stossel's perspective on Ayn Rand's Atlas Shrugged.

Friday, January 1, 2010

François Quesnay's Tableau Économique provides a good explanation of François Quesnay's Tableau Économique .

The foundation of the Physiocrats’ economic theories was first described in François Quesnay's Tableau Économique, which was published in 1759. (3, p. 189) The model Quesnay created consisted of three economic movers.
1. The “Proprietary” class, which consisted of just the landowners
2. The “Productive” class, which contained all agricultural laborers
3. The “Sterile” class, which contained artisans (craftsmen) and merchants
The flow of production and/or cash between the three classes started with the Proprietary class because they own the land and they buy from both of the other classes. The process has these steps (consult Figure 1).

1. The farmer produces 1500 food on land leased from the landlord. Of that 1500, he retains 600 food to feed himself, his livestock, and any laborers he hires. He sells the remaining 900 in the market for $1 per unit of food. He keeps $300 ($150 for himself, $150 for his laborer) to buy non-farm goods (clothes, household goods, etc) from the merchants and artisans. This produces $600 of net profit, to which Quesnay refers as “produit net.” (3, p. 189)

2. The artisan produces 750 units of crafts. To produce at that level, he needs 300 units of food and 150 units of foreign goods. He also has subsistence need of 150 units of food and 150 units of crafts to keep himself alive during the year. The total is 450 units of food, 150 units of crafts, and 150 units of foreign goods. He buys $450 of food from the farmer and $150 of goods from the merchant, and he sells 600 units of crafts at the market for $600. Because the artisan must use the cash he made selling his crafts to buy raw materials for the next year’s production, he has not net profit.

3. The landlord is only a consumer of food and crafts and produces no product at all. His contribution to the production process is the lease of the land the farmer uses, which costs $600 per year. The landlord uses $300 of the rent to buy food from the farmer in the market and $300 to buy crafts from the artisan. Because he is purely a consumer, Quesnay considers the landlord the prime mover of economic activity. It is his desire to consume which causes him to expend his entire lease income on food and crafts and which provides income to the other classes.

4. The merchant is the mechanism for exporting food in exchange for foreign imports. The merchant uses the $150 he received from the artisan to buy food from the market, and it is assumed that he takes the food out of the country to exchange it for more foreign goods.

Figure 1 Production Flow Diagram for Quesnay’s Tableau (4) [Click on the diagram to enlarge it.]

The Tableau shows the reason why the Physiocrats disagreed with Cantillon about exporting food. The economy produces a surplus of food, and neither the farmer nor the artisan can afford to consume more than a subsistence level of food. The landlord is assumed to be consuming at a level of satiation; therefore, he cannot consume any more. Since food cannot be stored easily, it is necessary to sell it to someone who can use it. This is where the merchant provides value.

The merchant is not a source of wealth, however. The Physiocrats believed that “neither industry nor commerce generates wealth.” (5, p. 858) A “plausible explanation is that the Physiocrats developed their theory in light of the actual situation of the French economy…” (5, p. 858) France was an absolute monarchy with the land owners constituting 6-8% of the population and owning 50% of the land. (5, p. 859) Agriculture contributes 80% of the country’s wealth (5, p. 858), and the non-land owning segment of the population “practises a subsistence agriculture that produces the essential minimum, with virtually all income being absorbed by food requirements.” (5, p. 859) Additionally, exports consisted mostly of agricultural-based products, e.g. wine. (5, p. 859) Given the massive effect of agriculture on France’s economy, it was more likely they would develop an economic model that used it to the king’s advantage.

The Physiocrats are at the beginning of the anti-mercantilist movement. Quesnay’s argument against industry and international trade as alternatives to his doctrine is two fold. First, industry produces no gain in wealth; therefore, redirecting labor from agriculture to industry will in effect decrease the nation’s overall wealth. Additionally, population expands to fill available land and food supply; therefore, population must go down if the use of land does not produce food. Second, the basic premise of the Mercantilists is that a country must export more than it imports to gain wealth, but that assumes it has more of a tradeable resource than it needs for internal consumption. France did not have a colony with the ability to produce finished or semi-finished goods like England (i.e. India) or Holland (i.e. North America, Africa, South America). It’s main colonial presence was in the Caribbean, southern North America, and southeast Asia, and like France, the colonies had agricultural-based economies. The only good which France had in enough excess to export was food; therefore, international trade based on industrial production would not yield as much wealth.

Quesnay was not anti-industry, however. He was just realistic in his assessment that France was not in good position to incubate a strong industrial market. His argument was that artisans and manufacturers would come to France only in proportion to the size of the internal market for their goods. (6, p. 153) Quesnay believed “a country should concentrate on manufacturing only to the extent that the local availability of raw materials and suitable labor enabled it to have a cost advantage over its overseas competitors.” (6, p. 153) Anything above that amount should be purchased through trade.

(1.) Why Americans Value Rural Life by David B. Danbom
(2.) Webster's Revised Unabridged Dictionary, published 1913 by C. & G. Merriam Co., (full database can be found at
(3.) The Growth of Economic Thought, Henry William Spiegel, Revised and Expanded Edition, pub. 1983, Duke University Press
(4.) The History of Economic Thought Website, The New School of Social Research. 6 Feb. 2006,
(5.) The Political Failure of an Economic Theory: Physiocracy, Yves Charbit; Arundhati Virmani, Population (English Edition, 2002-), Vol. 57, No. 6. (Nov. - Dec., 2002), pp. 855-883., Stable URL:
(6.) Quesnay's Theory of Growth: A Comment, A. L. Muller, Oxford Economic Papers, New Series, Vol. 30, No. 1. (Mar., 1978), pp. 150 156., Stable URL:

The Physiocrats provides a good summary of the Physiocrats:

The Physiocrats were a group of economists who believed that the wealth of nations was derived solely from agriculture. Their theories originated in France and were most popular during the second half of the 18th century. Physiocracy was perhaps the first well developed theory of economics.

Historian David B. Danbom explains, "The Physiocrats damned cities for their artificiality and praised more natural styles of living. They celebrated farmers." [1]

They called themselves économistes (economists) but are generally referred to as Physiocrats in order to distinguish them from the many schools of economic thought that followed them. Physiocrat is derived from the Greek for "Government of Nature".

The principles of Physiocracy were first put forward by Richard Cantillon, an Irish banker living in France, in his 1756 publication Essai sur la nature du commerce en géneral (Essay on the Nature of Commerce in General). The ideas were later developed by thinkers such as François Quesnay and Jean Claude Marie Vincent de Gournay into a more systematic body of thought held by a united group of thinkers.

The Physiocrats saw the true wealth of a nation as determined by the surplus of agricultural production over and above that needed to support agriculture (by feeding farm labourers and so forth). Other forms of economic activity, such as manufacturing, were viewed as taking this surplus agricultural production and transforming it into new products, by using the surplus agricultural production to feed the workers who produced the extra goods. While these manufacturers and other non agricultural workers may be useful, they were seen as 'sterile' in that their income derives ultimately not from their own work, but from the surplus production of the agricultural sector.

The Physiocrats strongly opposed mercantilism, which emphasized trade of goods between countries, as they pictured the peasant society as the economic foundation of a nation's wealth.

The Physiocrats enjoyed some support from the French monarchy and frequently met at Versailles. Adam Smith, who visited France as a tutor and mentor to the Earl of Buccleigh's son's Grand Tour, was heavily influenced by the ideas of the Physiocrats, and Karl Marx cites them as a reference in Das Kapital; they popularized the modern version of the labor theory of value.

There are several key concepts that lay the foundation of the Physiocratic doctrine.
Quesnay’s Tableau Économique
Individualism and Laissez faire regulation of commerce
Private Property
Diminishing returns
The need for working capital and reinvestment of capital

Quesnay’s Tableau Économique

Individualism and Laissez Faire

The Physiocrats, especially Turgot, believed that self-interest was the motivating reason for each segment of the economy to play its role. Each individual was best suited to determine what goods he wanted and what work would provide him with what he wanted out of life. While a person might labor for the benefit of others, he will work harder for the benefit of himself; however, each person’s needs are being supplied by many other people. The system works best when there is a complementary relationship between one person’s needs and another person’s desires, and trade restrictions place an unnatural barrier to achieving one’s goals.

Private Property

None of the theories concerning the value of land could work without strong legal support of ownership private property. Combined with the strong sense of individualism, private property becomes a critical component of the workings of the Tableau.

Diminishing Returns

Turgot was one of the first to recognize that “successive applications of the variable input will cause the product to grow, first at an increasing rate, later at a diminishing rate until it reaches a maximum” (3, p. 195) This was a recognition that the productivity gains required to increase national wealth had an ultimate limit, and, therefore, wealth was not infinite.

Investment Capital

Both Quesnay and Anne Robert Jacques Turgot, Baron de Laune recognized that capital was needed by farmers to start the production process, and both were proponents of using some of each year’s profits to increase productivity. Capital was also needed to sustain the laborers while they produced their product. Turgot recognizes that there is opportunity cost and risk involved in using capital for something other than land ownership, and he promotes interest as serving a “strategic function in the economy.” (3, p. 196)

Famous Physiocrats:
Richard Cantillon
François Quesnay
Anne Robert Jacques Turgot
Jean Claude Marie Vincent de Gournay
Victor de Riqueti, marquis de Mirabeau
Count de Mirabeau
Pierre Samuel du Pont de Nemours
Stanisław Staszic

(1.) Why Americans Value Rural Life by David B. Danbom
(2.) Webster's Revised Unabridged Dictionary, published 1913 by C. & G. Merriam Co., (full database can be found at
(3.) The Growth of Economic Thought, Henry William Spiegel, Revised and Expanded Edition, pub. 1983, Duke University Press
(4.) The History of Economic Thought Website, The New School of Social Research. 6 Feb. 2006,
(5.) The Political Failure of an Economic Theory: Physiocracy, Yves Charbit; Arundhati Virmani, Population (English Edition, 2002-), Vol. 57, No. 6. (Nov. - Dec., 2002), pp. 855-883., Stable URL:
(6.) Quesnay's Theory of Growth: A Comment, A. L. Muller, Oxford Economic Papers, New Series, Vol. 30, No. 1. (Mar., 1978), pp. 150 156., Stable URL: