Summary History of Economic Thought - Adam Smith, Physiocrats, and others
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Course
ECO 103
Institution
Symbiosis School Of Economics
The Physiocrats, Mercantilists, and Smithians were three influential schools of economic thought that had different views on the role of government in the economy, the source of wealth, and trade policy. Their ideas continue to be debated and discussed today.
We know Adam Smith is widely regarde...
Physiocrats and Adam Smith – similar yet distinctive!
1. Natural order: Role of Government and Laissez-fairre
Physiocrats were the group of French thinkers believing in the supremacy of natural laws- which are to
be withheld if a man wishes to gain their highest well-being. Physiocrats conceptualised natural order
divinely, like mathematical truths- independent of human will. No matter how profoundly physiocrats
believed in the idea of natural order theorised by Quesnay, they failed to bring it out of its abstraction.
Physiocrats believed that individuals knew their best interest and would act more according to the 'law
of nature than would government. The only function of the government that was propounded by the
physiocrats was to protect life, liberty, and property. Physiocrats advocated individualism, and since
Liberty and property origins from it, they advocated that human laws (laws made by the government –
the intervention) should merely be restricted to recognise, formulate, and maintain them. On the other
hand, while not very different from the ideas of physiocrats, Adam Smith defined the role of
government to be of a minimal state. He advocated (not complete) laissez-faire while allowing
exceptions in the system of justice, national defence, and provision of quasi-public goods.
Though Adam Smith and Physiocrats agree that individuals act to the best of their interest, they could
not prove 'rigorously' that markets without or little interference (laissez-faire) lead to the best possible
economic order.
2. Physiocrats and Smith – on land, manufacturers, and merchants
Physiocrats were the first to develop the complete system of economics, unlike inchoate Mercantilism
emphasising narrow trade. Hence, physiocrats were also referred to as 'economists'. The forerunning
theory of physiocracy was that all wealth originated with the land and that only agriculture could
increase and multiply the state's wealth. Though they did not advocate that industry and commerce be
neglected in favour of agriculture, they tried to prove that no economy could be healthy unless
agriculture were given the fullest opportunity. However, Adam Smith argued that identifying
manufacturers and merchants as unproductive and sterile is a chief error. Smith pushed the idea of
assigning value and worth to the productions of manufacturers and the role of commerce in the growth
of capital.
3. The ideas on assigning a value
Smith divided the value theory into value in exchange and value in use. While he explains the value in
exchange as the 'price' of the good (which is the power of the commodity to purchase other goods),
his concept of value in use reflected ambiguity. Value in use is the want satisfying power of the
commodity- its utility. While we now understand the different types of value in use (utility) as Total
utility, Marginal Utility, and Average Utility. Smith focused solely on total utility, hence failing to solve
the diamond-water paradox (why diamond is valued higher than water despite having use-value).
Physiocrats also made the distinction between value in use and value in exchange. Exchange value is
a market relation, and they considered that wealth is dependent upon this exchange value. Quesnay
argues that the general cause of the price of a commodity lies in its scarcity or abundance, as these
find expressions in competition between buyers and sellers (demand and supply). Physiocrats also
mentioned that an individual values goods according to their utility; however, if an individual gains
equal utility, he would assign different values according to the effort required to obtain them. However,
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