Physiocratic School of Thought (Economic Theories)

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Overview of The Physiocrats School:

Overview of The Physiocrats School The physiocrats appeared in France toward the end of the mercantilist epoch. First real “school” of economics. Started when 1756, François Quesnay published his first article on economics in Grande Encyclopedie . Ended when 1776, Turgot lost his position in the French government and Adam Smith publishes Wealth of Nations.

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a reaction to mercantilism and to the feudal characteristics of the old regime in France A corrupt and extravagant government made equitable enforcement of the rules impossible. French industry was retarded in its development by the local authorities who imposed internal tolls, taxes and tariffs, thereby impending the movement of goods.

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Peasants were subjected to taxes on land and on the profits of farming, whereas the nobility and the clergy were exempt. export of grain from France was prohibited Introduction of tolls and regulations impeded the trade.

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Natural order:  term physiocrats means “rule of nature” human activities should be brought into harmony with these natural laws. Laissez –faire:  governments should never extend their interference in economic. Emphasis on agriculture:  ariculture produced a surplus industry, trade, professions were useful but sterile

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Taxation of the landowner:  agriculture produced a surplus.  landowner should be taxed. Interrelatedness of the economy: Analyzed the circular flow of goods and money within the economy.

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physiocrats were promoting industry, even not their intention. interested in e ncouraging freer internal grain trade and in stimulating the export of products and the import of manufactured goods.  tax on the surplus produce in agriculture would have lowered land values.  but this belief was erroneous; it was based on the faulty analysis that all taxable surpluses could come only from land.

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Before the industry revolution was extremely ↓productivity. In poor country, the luxury things to be “sterile” and the farming produced bountiful harvest in spite of the primitive method of cultivation. agriculture provided the surpluses. Exp: France, US, Germany, Japan… In promoting laissez-faire, the physiocrats were oppossing opposing obstacles to capiltalistic economic development. emphasizing the productivity of agriculture, the physiocrats more prefer production than exchange as a source of wealth. They also support for direct taxes was a valid reaction to the indirect taxes that pervaded and corroded France society of their time. They also argued for capital accumulation though reduced consumption by the wealthy.

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Taxes used to extract surplus for consumption by lords/King Few capitalist farmers, investment discouraged by taxes; many feudal/mercantilist imposts on trade (like England) Economic as a social science. →Quesnay’s economic table is a precursor to 2 items: economic flow diagram & national income accounting. Law of diminishing returns(Malthus & Ricardo) Analysis of tax shifting Advocating laissez-faire(attention to question of the proper role of government in the economy)

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Guess who is this ancient ??

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Founder of the school A physician before excelled in medicine and surgery Hoped to transform the king into an enlightened despot Law should be harmony and the circulation of wealth and goods in economy was like the circulation of blood in the body Francois Quesnay 1694-1774

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Revenue from food/materials sold to sterile class Cycle continues Revenue from food sold to landlords Revenue from manufactured goods sold to farmers Revenue from farmers Revenue from manufactured goods sold to landlords Rent form last period A B C D E Productive class farmers Proprietary class Landlords Sterile class Manufactured

The Circular-Flow Diagram:

The Circular-Flow Diagram Markets for Factors of Production Households Firms Income Wages, rent, profit Factors of production Labor, land, capital Spending G & S bought G & S sold Revenue Markets for Goods & Services

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Mirror, Mirror on the wall who is this ancient ??

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Anne Robert Jacques Turgot (1727 -1781) A finance minister in France in 1774 Introduced anti-feudal and an anti-mercantilist measures in keeping with physiocratic ideas Believed in an enlightened absolutism Law of diminishing returns appeared in observation sur un Memoire de Saint- Peravy written in 1767

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Summary Physiocratic School only last 20 years (1756-1776) The school lost its living power after guiding in some degree the policy of the French Constituent Assembly, and awakening a few echoes here and there in foreign countries Emphasis on agriculture sector Reform the tax system—single tax on the net product Free trade, particularly in agricultural exports End artificial encouragement of manufacturing

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