A little bit of French political history

Economic liberalism as the creation and fostering of free markets, the lowering of tariffs and of taxes, was actually a kind of French intellectual invention. The expression “laisser faire, laisser passer” is a testimony of this period – the 18th century- during which French economists were leading , despite (or because) the difficult state of the French economy itself. Adam Smith has been strongly influenced by this French economic thought and notably by the so-called Physiocrats (also called “la Secte des economistes”!).

This liberal economic thought developed in reaction to the partial failure of the mercantilist economic policies (in their French version, their English counterparts were more of a success during the 17th century) under Colbert, minister of Louis XIV. Mercantilism was the name given by Smith to a whole range of “economists” (actually people writing on economic issue but being lawyers, bankers, doctors, adventurers…) who developed an idea of economics as the servant of the power of the King (from the 15th to the 17th century). In a period of centralization (at least in the successful cases of England, France, Spain), the kings needed money – and the parallel development of an urban class of merchants and bankers was really welcome.

Mercantilist economists defended the idea that the best way to provide the King with the large quantities of gold and silver (the money of the time) he needed to fund his military and administrative expenses was to foster a positive trade balance of his State by favoring the local business class. The mercantilist philosophy was therefore “pro-business” but very interventionist – in order to strategically orientate the economic activity of the Kingdom towards the export of value-added (i.e. luxury) products and the import of raw materials and agricultural goods to be transformed at home. They promoted a strategic industrial and commercial policy – and helped in a modernization process (e.g. the development of accounting techniques to measure the country relations with other partners). They contribute to the development of the arsenal of tools still used today to control and orientate trade flows, as tariffs, quotas, subsidies… They did not believe that the laisser faire would lead to an optimal situation – and they went as far as controlling the quality of products produced by “manufactures”, many of them set up by the State (i.e. the King himself) (and more so in France than in England). Being a net exporter will allow for a net entrance of gold and silver in the Kingdom. If it was spent – and so the mercantilists were in favor of spending money by the rich classes of society – it could also be taxed and return to the Treasury. As this policy required a minimal geographical size (size did matter), they contributed to the creation of internal markets despite their pessimistic view on international relations (trade is for them a zero-sum game as they assumed a fixed amount of gold and silver, and every country will try to capture it). In this sense they were modernizers (and the economic side of the political centralization by the King). In this respect, it is often contented that the English version of mercantilism was wiser, more advanced and more effective than France. Mercantilism was after all also a strategy of development, but the policy led by Louis XIV – the building of Versailles, the launching of several wars and the expulsion of the Protestant Huguenots, many of them being craftsmen or merchants - did not help at all. The French public finances were in a worrying state at the early stage of the 18th century, the population oppressed both politically and fiscally. If the “rentiers” (rent-seekers) (nobility, clergy) did not pay taxes, the peasants and the bourgeoisie paid a lot.

The French economic liberalism that developed during the 18th century was a reaction to this desolate situation, notably in the key sector of France at the time: agriculture. The French form of liberalism will be agricultural as well. Boisguillebert, a magistrate from Rouen, defended at the end of the 17th century and early 18th century the idea that if one wants to restore the French public finances, one has to restore the economy as a whole, and first of all the agricultural sector. Boisguillebert was a forerunner of economic liberalism but also of its more progressive side (the Keynesian view). He indeed tended to think that the crisis was also a crisis due to under-consumption – the latter being caused by a lack of purchasing power due to too heavy taxes on the majority of the (poor) population. He therefore defended an agenda of fiscal reforms – lowering the rate of tax, liberating the purchasing power, thanks to an enlargement of the number of people subjected to those taxes. This idea was in fact synonymous with the end of the (fiscal) privileges. It proved impossible to enforce during all of the 18th century, leading in the end to a political upheaval in 1789. Boisguillebert was also in favor of restoring a stable and sufficient level of prices thanks to an (internal) opening of the markets. Corn, wheat must circulate without being taxed all the times. Roads, canals should be improved to foster the economic integration of France.

Later in the 18th century, Quesnay systematized this vision and generalized it. His school, the Physiocracy, was the first self-proclaimed school of economic thought. It promoted the free competition and free markets in all dimensions, also with other countries. This school was also the first to develop a first (even if basic) macro-dynamic model of the French economy (the so-called Tableau économique in 1758). Quesnay tried to identify the key conditions for economic growth – and stressed the key role of the nobility as owners of the most precious capital in physiocrats’ eyes: land. He promoted the setting up of large farms, that must be managed in a “capitalist” (for-profit) way, as was the case in England (his role model, even if not in political terms). Markets should be opened in order to obtain more stable and better prices for agricultural goods. Taxes should be lowered. This will allow more investments (“advances”) and by the way, thanks to the natural fertility of land, a surplus: the net product.

Quesnay promoted the consumption of agricultural goods because this sector was the only one apt to generate a surplus. The manufacture only produces goods of the same value as the one of the inputs (just a transformation). Quesnay was in favor of free trade and competition but by the way also in favor of a strong centralized state, only able to ensure the domination of the collective interest upon the categorical ones. He was also a promoter of “enlightened despotism”.

This apparently naïve French economic thought nevertheless exerted a strong influence. When travelling in France as the preceptor of the Scottish Duke of Buccleugh, Adam Smith met the Physiocrats and read them during the 60s of the 18th century. From a professor of logics and philosophy, he became, in 1776, the first economist for our Anglo-Americans neighbors (despite the work of the very liberal economist Rothbard to rehabilitate the French early economic thought). The French influence was largely forgotten.