master of philosophy (economics)

7/29/2019 MASTER OF PHILOSOPHY (ECONOMICS)

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MEC - 103 ECONOMIC THOUGHT

Apex eLearning Technologies Pvt .Ltd, Bangalore-79.Website: www.onlineglobalcampus.com

MASTER OF PHILOSOPHY

(ECONOMICS)

ECONOMIC THOUGHT


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SYLLABUS

Unit I:

Nature and Significance of Economic Thought Hebrew, Greek, Plato, Roman EconomicThought.

Economic Thought in Ancient India Kautilyas views Economic ideas of Thiruvalluvar

Comaparison between the two views.

Unit II

Medieval Economic Thought St.Thomas Aquinas Mercantilism and its policies

Physiocratic doctrines Net Product Circulation of wealth Practical policies.

Classical School Features Adam Smith Economic Ideas David Ricardo Theory of

Rent Malthusian Theory of Population J.B.Say, J.S.Mill Stationary State The

Nationalists Thought Adam Muller Fredrich List.

Unit III

Karl Marx Theory of Class struggle Surplus value Marxian predictions concerning

capitalism Scientific socialism.

Austrian School of Thought Alfred Marshall Consumers surplus, Elasticity of Demand

Representative firm Welfare Economics Pigou, Walras, Pareto.

Unit - IV

Neo Classicism Knut Wicksell J.B.Clark Dynamic theory of profit Irving Fisher

Quantity theory of money Taussigs Economic Ideas.

Institutional School Economic ideas of Veblen Theory of leisure class W.C.Mitchell.

Unit V

Keynesian Revolution Theory of Employment, Keynesian Vs Classicism

Recent Indian Economic Thought R.C.Dutt Naoroji M.G.Randade M.K.Gandhiji

Dr.B.R.Ambedkar Rajaji Nehru V.K.R.V.Rao C.N.Vakil D.R.Gadgil Indira

Gandhi Nobel Laureates Since 1990 Amarthya Kumarsen.


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Reference Books:

1. Loganathan - History of Economic Thought

2. Alexander Grey - Development of Economic Doctrines

3. E.Roll - History of Economic Thought

4. L.H.Haney - History of Economic Thought

5. Dr.Shanmuga - Indian Economic Thought

6. V.B.Singh - From Naoroji to Nehru

7. Sankaran.S - A History of Economic Thought

8. Sundram - Development and Policies


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UNIT 1

NATURE OF SIGNIFICANCE OF ECONOMIC THOUGHT

Nature of Economic Thought:

In the earlier stages of the development of civilisation, economic thought sub served

other goals and interests and under the circumstances, no one would blame the ancient

thinkers for having failed to develop a systematic body of economic doctrines. the real

breakthrough came with the ushering in of the commercial era and the establishment of

mercantile states in the 15th century. This not only led to the replenishment of economic

ideas but also led to the development of various economic institutions which governed

human life and progress and still do so. A study of these ideas from the earliest times to

the present day is the concern of the subject History of Economic Thought.

A History of Economic Thought, as the title itself suggests is a probe into the origin and

growth of economic ideas. It is a historical account of the development of economic

doctrines as also of their impact on economic institutions and activities. Professor Haney

has defined it as a critical account of the manifestation. According to Bell, it is a study

of the heritage left by writers on economic subjects.

Schumpeter holds that economic thought is the sum total of all the opinions and desires

concerning economic subjects, especially concerning public policy bearing upon these

subjects that at any given time and place, float in the public mind. Thus, a History of

Economic thought traces out the historical changes of attitudes, mentioning analytical

performances in passing. Such a history would need to display the close association that

exists within the attitudes of the public mind in the sense defined; with the kind of

problems that at any given time interest analysis and from general attitude of spirit in

which they approach their problems.

History of Economics, Economic History and History and History of Economic

Thought:

History of Economic Thought should not be confused with History of Economics and

Economic History. Although, they are all studies of the constituents of subject matters

and varying in emphasis, they are separate branches of study having different subject


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matters and varying in emphasis on different aspects of the subject matter. Whereas

Economic History is an objective study of the development of economic life of a

particular society, History of Economic and History of Economic life of a particular

society, History of Economics and History of Economic Thought have an element of

subjectivity in studies relating to them. Economic History studies the origin and growth

of commerce, manufacture, trade, banking, transportation and other economic

phenomena and institutions, i.e., it deals with the ideas men have concerning economic

facts and forces. In short, Economic History treats of facts; History of Economics and

History of Economic Thought treat of the theory of these facts.

Though Economic History and History of Economic Thought constitute separate branches

of study, they are closely related. Economic ideas are directly or indirectly motivated by

the economic conditions and environment of a country. When these ideas become

ingrained and are widely accepted, they begin to influence economic polices and thus

reshape economic environment. In fine, both ideas and environment act and react upon

each other and it through their mutual interaction that the growth and development of a

nation takes place. Moreover, no economist can look at contemporary problems in a

detached way. He is bound to become involved in them. Thus modern economists are

concerned with problems of growth, population, economic planning, monopoly,

unemployment etc, which their predecessors would have hardly felt interested in. While

developing countries like India have one set of problems, the more developed countries

have to face up to their issues. The Gandhian philosophy of non-violence and the

Gandhian ideology of decentralization have influenced the economic policies of the

Government and are of great significance and value to the students of Economic in

India. Ideas and environment are equally important and hence a close relationship

between History of Economic Thought and Economic History.

Scope of History of Economic Thought:

The scope of History of Economic Thought is very wide. It includes the study of human

ideas from the time man started formulating and expressing them down to the presenttimes. It is the business of the research scholar to collect scattered ideas from ancient

literature and put them in their proper sequence and then to evaluate them. This

provides a fascinating field for him though the task is, by no means, easy. The ideas

have to be traced from customs, institutions and laws means, easy. The ideas have to


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be traced from customs, institutions and laws having a particular bearing on economic

theory.

Alexander Gray has rightly pointed out that old doctrines never die; they only fade

away, with a strange power of recuperation in an appropriate environment. The

dominant opinion of any age, even if it has a flavour peculiarly its own, is on analysis,

fricassee of the thoughts of all the ages, and the latest exponent of orthodox and

accepted doctrine may, to a later generation, appear to have added at most one further

ingredient or one condiment before passing it on.

History of Economic thought must also include a study of the various approaches

adopted by scholars and philosophers from time to time in the study of the science of

economics or in analysing economic phenomena. These approaches can be recounted

here by way of illustration. They are (1) Chronological approach; (2) Conceptual

approach; (3) Classical deduction approach; (4) Historical approach; (5) neo-classical

approach; (6) Welfare approach; (7) institutional approach; and (8) Keynesian

approach.

History of the development of economic thought can be divided into three distinct

periods; (a) ancient, (b) medieval, and (c) modern. Though some writers like Gide and

Rist have not considered it necessary to study the ancient medieval economic ideas and

the contribution made by the materialists, it is largely a matter of treatment. The fact

remains that the keen and impartial eye of largely a matter of treatment. The fact

remains that the keen and impartial eye of the historian, attempting a history of

economic thought, can hardly afford to overlook anything which us relevant to such a

work. Nay, he must include in his history all such ideals born since the time man started

recording his mind, to date.

Significance of the Study of History of Economic Thought:

The significance of studying the History of Economic Thought lies in the benefits thataccrue from it. The study of the subject gives one an insight into the evolution of

economic theory, and the formulation of policies which controlled economic life, from the

earliest times to the present day. Thoughts of every age in the context of their

surroundings have governed individual actions and policies and are, therefore, important


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for us. The chief advantages of the study of History of Economic Thought have been very

well summed up by the Professor Haney as under:

First, he says, such a study reveals that there has been a certain unity in the thinking

of man right from the earliest times to the present day. Thinking is the heritage of man.

In every age, thoughts have emanated from the environmental influences.

Secondly, the study of the History of Economic Thought reveals that there has never

been an age in which ideas have not developed. The presumption that middle Ages were

dark ages leads one to think that no new ideas or philosophy were developed during this

epoch.

Thirdly, such a study assists us in tracing the origin and the development of economics

and in understanding its nature and scope and relationship with other sciences,

Economics, being a science, is dynamic and without studying ancient thought we cannot

correctly assess the developments that have taken place in its nature and scope.

Fourthly, Economics, being a social science, is closely related to other social sciences. As

a member of society, mans physical efforts in various fields are mainly directed towards

earning his livelihood. While making these efforts his political, ethical, economic and

other ideals get mixed up and all his activities appear to be economic. Economics is thus

intimately connected with other disciplines in the group of social sciences.

Fifthly, the study of the History of Economic Thought, leads to a change in the outlook of

the student. He no more remains dogmatic. He starts examining and assessing critically

the practical value of each idea and theory in the context of his own times and

conditions. The attitude of mind becomes impartial and he does not either condemn or

uphold a concept with a prejudiced mind or a coloured vision.

In the sixth place, such a study provides the reader with a broad basis for comparisonwhich proves to be of great value. His sentimentalism is brushed aside. Prof. Haney has

said, Standing at the highest point yet reached, after centuries of economic thought

and looking back over the path of truth, strewn with fallacies and truisms thought it be,

the students feels his judgment broadened, and well-balanced and reasonable

conservatism, or a wise progressivism, may fill his mind.


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A study of the History of Economic Thought also enables its reader in developing a sort

of objective point of view. He starts realising that economics is quite different from

economists, that the two are separate entities altogether and that whereas Economics is

a science, economists are only human beings.

Economics is a science, a systematised body of doctrines developed during the course

of centuries, encircled by the view of different economists and gains confidence without

caring for the personalities.

The study of the History of Economic Thought also reveals the differences in the points

of view of various thinkers and shows how a particular point of view has been built.

Differences in opinion and points of view are bound to occur owing to the differences in

the basic philosophy of life and the method adopted by each thinker in studying a

problem.

HEBREW, GREEK, PLATO AND ROMAN ECONOMIC THOUGHT

The Hebrew:

The Hebrew was a nation of ancient civilization whose history dates back to 2500 B.C.

The main source of their history and ideas is the writings of the Hebrew prophets. Their

ideas contained in the rules of conduct and laws enunciated and formulated by the

sacerdotal class. These injunctions or commands were the standard of all thought and

action. The main theme of Hebrew education and the chief concern of the Hebrew

government was the observance of these laws and commands. In fact, all their

activities, including economic relationships, were strictly regulated by these rules of

conduct. The code covered important economic problems, like agriculture, industry,

usury, monopoly, adulteration, weights and measures, inheritance, property rights,

taxation, poverty, labour and wages, etc. The Old Testament is the most important and

original source of information regarding the economic thought of the Hebrews. From a

description of the contemporary society in the Old Testament it appears that it had some

of the characteristic features of a capitalist society.

The Hebrew prophets soon reacted to this by denunciating the greed and avarice of the

new society. They preached against usury and land alienation and reiterated the

necessity for limiting the right to private property, but all in vain. Their mistake lay in

not being able to visualize that the change was imminent, as a consequence of the


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changes in the modes of production. Their preaching, however, made a deep impact on

the minds of men.

Characteristics of the Hebrew Economic Thought:

Broadly speaking, the Hebrew economic thought had the following characteristic

features:

(1)As the social life at that time did not have any of the modern complexities, the socialphilosophy resulting there from was over-simplified.

(2)Religion, ethics, law, economics, philosophy-all were inextricably bound together, butthere was a predominance of religion and ethics

(3)Their everyday life was strictly regulated by the rules of conduct and laws formulatedby the dominating class of priests to such an extent that the laws covered even such

activities as the cleaning of teeth, funeral obligations, eating, trimming of hair and

beard, etc. Many trades and activities which were primarily economic were thus

regulated by the religious hierarchy.

(4)One of the most striking characteristics of their economic thought was the conflictbetween economic stimuli and ethic-religious ideas. There were many factors which

retarded economic stimuli and ethic-religious ideas. There were many factors which

retarded economic progress. Their philosophy was characterized by such a lack of

individualism and of materialism, such a disapprobation of industry other than

agriculture, such relative indifference towards wealth, and such a great degree of

passivity and fatalism, that its dominance made any great industrial civilization

impossible.

(5)Another characteristic feature was the fixity of their ideas. The general aim of social

regulation was to maintain the social equilibrium, and here, as elsewhere among ancient

peoples, static ideals dominated. This finds expression in the caste system and in the

isolated national life.


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(6)The Hebrews had a concept of society and social welfare but it lacked the necessarydynamism. It was the result of their idealistic philosophy, so passive in nature that it

did not lead to active Social planning and Industrial regimentation.

Greek Economic Thought:

During the days of Homer, Greece enjoyed complete economic self-sufficiency. A poem

composed in the 7th century B.C. by Hasid, telling farmers the true principles of

agricultural economy, reveals the nature of economic thinking as theoretic. When tribal

bonds were broken, society was divided into classes, and came to be ruled by a landed

aristocracy. Agricultural exports led to the impoverishment of the peasantry; and the

interest of merchants and landowners clashed. The Greek economy was never treated

as a separate subject. It was inextricably bound-up with political science and ethics.

Religion was part of the machinery and the mystery of the state. There was absence of a

connected system of economic thought because the State was founded on slavery; and

the work of craftsmen was regarded as incompatible with a life of virtue. The ordinary

business of life, excepting agriculture, was despised. The economic ideas of ancient

Greeks are contained in the teachings of Greek philosophers Plato and Aristotle; and in

the writings of the contemporary historian-Xylophone and Epicurus

Plato and Aristotle sought a unified science of society; their economic ideas were

embedded in the institutional arrangements of the time.

Plato (427-347 B.C):

Platothe world-renowned Greek philosopher and pupil of Socrates, who had traveled in

North Africa, Southern Italy and Sicily, was a teacher in the Athenian Academy. He

accepted patrimony only which was sufficient for his maintenance. His books are in the

form of philosophical dialogues. Two of them-The Republic and The laws-are very

important from the economic point of view as they reveal his ideas about the origin of

state, division of labour, etc.

Origin of State. The organized city of Greece known as polis was equivalent to a

modern state. Plato attributed the origin of a city state to economic considerations. He

stated in The Republic that a state arose, out of the needs of mankind; and as people

had many wants, many persons were needed to supply them; and when helpers and

partners lived together in one habitation, the body of inhabitants was termed a state.


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Regulation of Population. Plato based the conception of a city state on the economic

wants human beings. The ideal size of a state, according to him, should be such as it

can be conveniently administered and in which all citizens may know each other. Thus,

it should neither be too big nor too small. A city state comprising 5,040 citizens was

considered an ideal organization. But if the number showed a decreasing tendency,

prizes might be offered to encourage the growth of population, and if it rose beyond the

proposed number, new colonies could be established.

Division of Society. The ideal city state which was to be ruled only by an intelligent

and planned government (he was against democracy) should have classes. Among the

ruling class were included philosophers whose virtue was wisdom, aristocrats who were

the men of culture and high breed, and warriors whose virtue was courage. All these

men enjoyed common ownership of property. Among the ruled class were included

menials, workers, agricultural labourers and craftsmen, their virtue being temperance,

the right of property was denied to them. The main function of the ideal city state was

to ensure happiness to every one which could be possible only with virtue and justice.

Property and Governance. For each class of people Plato had suggested ideal

property arrangements. Only farmers and artisans were allowed to work to profit; and

accumulate property. The rulers and auxiliaries could not enjoy property rights. He

realized that the city was divided into two parts-city of the poor and city of the rich-

always at war with each other.

Reciprocal Needs: According to Plato, men have many wants; and no man is self-

sufficient. They take helpers, and exchange with one another. The simplest example is

that of the production and exchange of food and other means of physical maintenance.

There is some sort of satisfaction of needs and some exchange of services in a society.

Division of Labour. Platos division of labour or his concept of specialization and

exchange depended upon two things; diversities of natures and aptitudes. He wrotethat all things were produced more plentifully and easily and of a better quality when

one man did one thing which was natural to him; and did it at the right time, and left

other things. It simply carries the idea of division of trades which was in accordance

with human needs.


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Slavery and Communism. Plato regarded slavery as a permanent factor in the

civilization of mankind. In his book The Laws he pointed out the best kind of slaves and

how to treat them. He held the view that the foreigners who were defeated in war, and

were taken prisoner, should b e made slaves. But their life was not that of hardship.

Aristotle (322B.C):

Aristotlethe son of the physician to king Amyntos II and pupil of Plato was the founder

of a school popularly known as peripatetic because he taught his pupils while walking.

He was the first analytical economist and a philosopher of extraordinary brilliance who

contributed extensively to ethics, economics and politics. His career began at the end of

the creative period in Greek thought, and after his death it was 2,000 years before the

world produced any philosopher who could be regarded as approximately his equal.

Although he did not write a separate book on economics, yet his economic ideas

presented in the dialogue form were based on scientific precision; and exercised

profound influence on the development of economic thought.

Origin of State. Aristotle regarded man as a political animal and state as the creation

of nature which owed its origin to the natural instinct of human beings to live with their

fellowmen to lead a good life. According to him, the state was a natural organism. He

viewed economic problems from a political state was a natural organism. He viewed

economic problems from a political standpoint. He did not agree on a community

property as it would lead to disputes; but advocated private property. He held that

state should be the custodian of the highest morals, should develop the highest qualities

of men, and should have a constitution which should aim at the maximization of

economic welfare.

Natural Economy and Chrematistics. Aristotle divided economy into two parts; (a)

natural economy or household management and (b) chrematistics or artificial or wealth-

getting economy.

Money. Ideas about money are contained in both of his books-The Ethics and The

Politics. His treatment of money is the best part of his economic thought. He said that

money came to be introduced to facilitate commercial dealings.


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Value and Exchange. Aristotle clearly distinguished between value-in-use and value-

in-exchange which were known as subjective value and objective value respectively.

Condemning exchange and giving the example of shoes he wrote that a shoe was used

for wear. And for exchange; both were the uses of the shoe. He who gave shoe in

exchange for money or food to him, who wanted one, did indeed use the shoe as a shoe,

but that was not its proper or primary purpose, for a shoe was not made to be an object

of barter. The same might be said of all possessions; retail trade was not natural part of

the art of getting wealth.

Usury. For him usury was the most nated sort of things which made a gain out of

money itself, and not from the natural objects of it. Moreover, money was intended to

be used in exchange but not to increase at interest.

Property. In the opinion of Aristotle, property was part of a household and the art of

acquiring property was part of the art of managing a household. Property did not

include slaves. In contrast with Plato, he criticized communism; and favoured private

property because he felt that when every one had a distinct interest, none would

complain against others. In addition, more progress would be achieved as everyone

would be attending to his own business.

Finance. Aristotle recognized the art of finance which developed as a natural

consequence along with the introduction of money. In the natural sense, finance was

regarded as part of domestic economy but unnatural finance, according to him,

produced money by means of exchange.

Roman Economic Thought:

Romans were the men of action. They built institutions that profoundly influenced the

development of law and politics. They approached the economic problems of the day

from the political standpoint; thus their specific contribution to economic thought is very

little.Among Roman philosophers and writers the names of the following may chiefly be

mentioned.

(1)Marcus Tullius Cicero(106-43 B.C)(2)Lucius Annaeus Seneca (4 B.C-65 A.D.)(3)Pliny the Elder (23-79 A.D.)


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(4)Marcus Porcus Cato (234-149 B.C)(5)Marcus Terentius Varro (116-27 B.C.)(6)Lucius Junius Moderatus Columella.Cicero commended the traditional Roman virtue of public service. Though he did not

posses original ideas, his statement became incomparably the most important single

literary means for spreading them throughout Western Europe. He said that though all

mean were not equal in learning, yet in the possession of reason, in their psychological

make-up and in their attitude towards good or bad they were alike. To him, equality

was a moral requirement and state, a moral community or corporate body which existed

to supply its meanless the advantage of mutual aid and just government. Three

consequences follow from these observations;

(a)Since State is the common property of people, its authority arises from theircollective power.

(b)Political power when exercised rightfully and lawfully becomes the corporate powerof people.

(c)State is always subject to the law of God or to moral or natural law.Let us now briefly discuss the ideas of Roman writers on economic questions.

Agriculture. Cato, Verro, Pliny, Columella and Paladius praised agriculture and were

chiefly interested in the improvement of agricultural technique.

Value. According to Pedius, the prices of things w2ere determined neither with

reference to affection nor to their utility to single individuals, but had a common validity.

They did not develop their ideas on value. According to them, price was determined by

the forces of demand and supply. In due course of time the concept of just price

developed which showed some regard for ethical considerations.

Money and Interest. Formerly, the barter system of economy was prevalent; but

about the middle of the fourth century B.C. Bimetallism (coins of bronze and silver) was

adopted in Rome. The active circulation of coins created financial crisis also. Pliny theElder favoured barter because to him, gold was the cause of the ruin of mankind.

Commercial Regulations. The Roman State interfered with economic matters and

commercial regulations in difficult times.


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Division of Labour. In his writings Cicero laid emphasis of division of labour in

economic activities as it conferred several advantages. Hutcheson has acknowledged his

debt to Cicero on this topic. In the same way, David Hume referred to Roman writers in

his discussion of division of labour.

ECONOMIC THOUGHT IN ANCIENT INDIA

Introduction:

India has a glorious past and ideas on economic subjects, even in the fourth century

B.C. were as comprehensive as they are today in Anglo-Saxon countries or in any part

to the world. Not only that, they are quite akin to modern thinking on the subject. It is

wrong to say that the ancient Indian economic ideas have but a slight interest from the

point of view of modern science. The can all be reduced to a few moral precepts. Our

ancient literature, the Vedas, the Upanishads, the Epics, all contain as ocean of

economic ideas, the depth of which is fathomless. True, that economics as an

intellectual discipline did not enjoy independent existence till recently. It is also a fact

that ancient economic ideas were overshadowed by religion, philosophy and literature,

but how about the ideas of ancient Greek and Roman philosophers? The same is true

about India. If we look at things impartially and without any coloured vision, we should

arrive at the conclusion that ideas develop with the progress of civilization, which is

largely the product of physical and geographical conditions of a country. River valleys,

mountains, climate, flora and fauna and mineral wealth have always been a source of

inspiration to the development of art and literature, mythology and religion and the

economic life of the people. The Himalayas and the rivers Ganges and Yamuna have not

only moulded our political and economic life, but have also been a source of inspiration

for creative art, literature, philosophy and religion of the people of India. Innumerable

instances can be cited from the Vedic and the ancient literature in support of this

statement.

Development of Indian Economic Thought:

The history of the development of economic thought in Indian can be traced back to the

times since man started recording his ideas. According to Indian philosophy, history is

defined as a narrative of the past which exemplifies the fulfillment of four ideals of life:

Dharma (the doctrine of duty); Artha (material prosperity); Kama (Worldly Pleasures);


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and Moksha (Salvation). These ideals have been the regulator of human life and

activities in this country since times immemorial.

To the ancient seers and sages in India, economics, like the modern thinkers, was a

social science concerning everyday life and pursuits, which would be impossible without

association, organization and concerted action to achieve predetermined objectives. The

ancient writers believed that all social sciences were interdependent in their theoretical

as well as practical aspects. Shukracharaya, a legendary sociologist held that any action

which can be described by words (or can be read) is Vidya or science and action, which

even a dumb person can achieve, is called a Kala or an art. The ancient concepts

underwent certain changes since then. The various invasions of the Mughals, the

Mongols, and the Turks, the British rule, the influence and domination of foreign

languages, have been responsible for the change in the meanings of the technical terms.

Moreover, the foreign invasions and the ravages of time, the natural calamities like

floods and earthquakes, destroyed to a very great extent the ancient literature.

Economic Thought in Ancient India:

A proper appreciation of the ancient economic thought in India is full of serious

difficulties. And the reasons are not far to seek. Our ancient past is shrouded in the haze

of legend, as the story of our people was seldom recorded in black and white and the

principal personages of our history were trained in the virtues of modesty and steeped in

the ideals of truthfulness and godliness. But there as scientific treatises of hoary

antiquity which cover most of the aspects of the modern science of economics, which

were seen at work in the daily life on a grand scale by contemporary foreign observes. It

is on the basis of the remnants of ancient literature and on the basis of the writings of

the foreign travelers who visited India during those days that the ideas of the ancient

thinkers on various subjects can be known. To the ancient seers and sages of India, like

the modern thinkers, economics was a social science, concerning man and his pursuits in

every day life, which would be impossible without association, organization and co-

operative action. The interdependence of all the social sciences in their theoretical as

well as applied form was an outstanding characteristic of our ancient thinkers.

Kautilyas View:

Kautilyas Arthashastra is the chief source of information. Kautilyas name was Vishnu

Gupta. He was a learned Brahmin. He is known by the name of Kautilya because he was

an expert in diplomacy and political strategy. He was the chief minister of Chandra


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Gupta Maurya. He was responsible for getting Chandra Gupta the kingdom of Nand,

after destroying its king. Kautilya has given vivid description of the administrative

procedures, of the duties of kings, ministers and government officers, in his book. His

Arthashastra is based on earlier treaties and is divided into fifteen chapters covering

about 430 pages. He has acknowledged his debt to Shukracharya and Brahaspti. He has

regarded economic as a continuous process. It covers almost every aspect of the theory

and practice of economics. It also deals with the government of town and villages, law

courts, rights of women, maintenance of the old and helpless, marriage and divorce,

public finance, maintenance of army and navy, diplomacy, agriculture, spinning and

weaving and a number of other subjects. His book contains ample ideas on a welfare

state.

The Ideas of Kautilya:

(a) Nature and Purpose of Material Wealth. The term Artha (wealth) occupied an

important place as one of the Purusharthas, in the system of economic thought during

the Vedic Period. The concept of Varta (national economy) as understood by the Vedic

seers and sages was the Artha or the material wealth or prosperity was essential for the

stability and maintenance of the social structure and organization which provide means

and opportunities to every individual for leading a decent life, ensuring adequate self-

expression, self-realisation and salvation. The concept of wealth was, thus necessarily

correlated with that of want and welfare. Wealth include, during those days, cattle,

especially cows and horses. In ancient India, individuals were free to earn and

accumulate wealth but only to the extent it was necessary for the satisfaction of ones

wants and those of the members of ones family.

(b) Varta. The term Varta which means the science of national economy, has been

most commonly used by the ancient thinkers. Kautilya include agriculture, animal

husbandry and trade in Varta.

(c) Agriculture and Animal Husbandry. Agriculture and animal husbandry formed

important components of Varta. These were regarded as the basic sources of new

wealth.(d) Dignity of Labour. According to the Vedas, a man should lead an active life of hard

labour for 100 years. The ancient sages thus appreciated the dignity of labour. Kautilya

also recognized the ashram vyavastha of the more ancient thinkers. He did not

recommend slave labour. Kautilya laid down a code of discipline for labour in which he

prescribed penalty for those who refused to work after receiving wages. In certain cases,


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labourers also were entitled to leave. The worker and the employer may also enter into

a written contract.

(e) Trade. The ancient thinkers approved of trade, whether internal or foreign, only

when a surplus, after meeting reasonable domestic or local needs was left over. Broadly

speaking, the exchange of commodities of internal trade was considered superfluous.

(f) Public Finance. Taxation was one of the most important sources of revenue of the

state. It was known as Raj kar. The rate of tax was determined in accordance with the

dictates of Hindu Religion. According to kautilya, the tax receipts can be dividied into

three parts: (a) income earned through taxes on goods produced within a country; (b)

income earned through taxes on good produced in the capital and (c) through taxes on

imports and exports.

The main principles of taxation were, thus as follows: (i) a tax should be levied once a

year and should not prove a burden to the taxpayer; (ii) rich persons should be taxed

according to their ability to pay or richness. The burden should be so distributed that the

taxpayer is not weakened and no harm is done to the state. Since wealthy people are to

contribute more to the state, they should be given a prominent place in the society.

Kautilyas ideas are more or less confined to the organization of central finance. He did

not touch the problems of local finance.

Kautilya included the following items in public expenditure; (i) national defence; (ii)

public administration; (iii) salaries of the ministers and expenditures on government

departments; (iv) expenditure on government storehouses, etc; (v) expenditure

incurred on the maintenance of national storehouse and granaries; (vi) expenditure

incurred on the maintenance of armies; (vii) expenditure incurred on the acquisition of

valuable gems, stones and ornaments. Whatever was left was deposited to the war

chest and the treasury.

(g) Population. A large population was not a cause of worry to the ancient Indian

thinkers. It was considered as source of strength. According to the Vedas, ten sons to a

newly married couple were considered to be just. It was believed that population couldnot grow beyond a reasonable limit owing to the high death rate due to constant wars

between small states and loss of life due to the inadequate medical facilities. Kautilya

even recommended that the kind should establish colonies for facilitating immigration.

(h) Slavery. In ancient India a slave was a member of the family and was not required

to do menial jobs. He used to be a hereditary domestic servant without any rights of


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accumulation of wealth and private property. He was, in any case, better than a hired

worker.

(i) Welfare State. The ancient Indian thinkers had a very clear concept of welfare

state. Wages were determined on the basis of equality and justice. There was no

exploitation of labour by the employers or of the cultivators by the landlords and the

capitalists. Manu and Kautilya were against high rates of interest. Manu has given

instructions in Dharma Shastra for the regulation of the rates of interest. He even

forbade the charging of compound interest. According to Kautilya profits are the rewards

of purely entrepreneurial function.

Kautilyas concept of state is founded on industrial edifice. According to him, there are

three guiding principles for the state: first, the state should undertake those industries

which help directly in making the nation self-sufficient and self-reliant, e.g., gold, silver,

diamonds and iron and other to farming, spinning, and weaving, livestock farming, arts

and crafts, etc., should be the state should see that the activities relating to production,

distribution, and consumption are carried out efficiently and in accordance with the rules

framed by it. It, thus, implies a perfect domination of the state on the individuals but

with the sole object of augmenting their welfare.

(j) Social Security. During the time of Kautilya, the system of social security was not

so elaborate as it is found today.

(k) Interest. Although the ancient thinkers approved of the charging of interest, they

were not in favour of high rates of interest. Kautilya proposed regulation of the rate

interest.

(l) Price Control. The main object of price control was to protect the consumers

against the malpractices of the shrewd and dishonest traders.

(m) Socio-Economic Institutions. As stated earlier, the socio economic structure in

ancient India was based on the dictates of religion. The laws of religion governed every

walk of life, family and social relations, economic activities and spiritual life. A study of

social and economic relationships is a study of Hindu religion which consists in the

analysis of state and varna ashram. Accordingly, the earth was common property of all.

(n) Town Planning. The science of town planning was quite advanced in ancient India,especially during the times of Mauryan emperors. The villages were grouped together

from the point of view of economic necessities and for national defence. Town planning

included the reorientation of main streets, the subdivision of the city area, and the

widening of the main streets. The capital was established after careful planning.


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Elaborate rules were laid down for prevention of the fire and maintenance of sanitary

arrangements.

Economic Ideas of Valluvar:

No account of the economic thought in ancient India would be complete without a

reference to the economic ideas of Valluvar. Valluvar was a sage and seer, a poet and a

scholar whose book Thirukkural is one of the most important works of the Sangam era.

It is an undying classic and a work of ethics par excellence. It deals with the

fundamentals of life. The exact period during which Valluvar lived is not certain but it is

believed that it was in the first or the second century A.D. that he produced the Kural.

Valluvars teachings were an appeal to the people at large. He was not merely a scholar

but a prophet exhorting his countrymen to a course of action which he considered the

most important for a prosperous life. In the tradition of the Sangam Age he chose the

couplet verse as the medium of communication.

Thus, the four cardinal principles on which an orderly and a prosperous societys

superstructure should be built, according to Valluvar are: (i) faith in God; (ii) economic

resources; (iii) spiritual leadership; and (iv) observance of the moral law. He has not

given any order of priority and, therefore, he considers them as the four wheels of an

automobile. These principles are the key to the understanding of the rest of the Kural,

comprising 129 chapters and in all 1330 Kural stanzas.

The Concept of an Economic Society:

His economic ideas are mostly found in the second part of the Kural which he names as

the Porutpal, i.e., the part dealing with wealth for Valluvar Porutpal was the same as

Arthashastra was for Kautilya. Porutpal literally means things, substances, objectives,

values, wealth, etc., i.e., all material things, all tangible objects, that can be acquired,

enjoyed and lost and which a man requires in daily life for maintaining his family and forthe fulfilling of his lifes obligations.

Poverty and Begging as Social Curses:


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Valluvar condemns the evils of poverty. In ten graphic stanzas he spells out the horrors

of poverty; nothing is more dreadfully painful than poverty; gripping poverty robs a

man of the lofty nobility of his descent and the golden eloquence of his tongue, cursed

poverty is a nest of evils and so on. Valluvar was totally against begging for, he says:

It is the height of folly to redress the ills of poverty by begging; again it is most

heinous to beg for a bucketful of water even to quench the feverish thirst of a sinking

cow. But, aware as he was of the realities of life and knowing that lifes circumstances

force this indignity on some unfortunate few.

Accumulation of Wealth:

After condemning poverty and begging as the greatest social curses, Valluvar deals with

the importance of accumulation of wealth.

The Spirit of Industry:

He prescribes certain moral and spiritual qualities for the citizens of an economic society

which is free from poverty, begging and hoarding and which encourages accumulation,

consumption and better distribution of wealth.

Importance of Agriculture:

Such is the economic philosophy of Valluvar. He did not work out any economic system

as such. He was general in his approach and treatment of the constituents of an ideal

economic society.

Balanced Spending:

As already stated, he was neither in favour of hoarding nor an admirer of extravagance.

To quote him, give; always give; but let your giving be governed by your resources. Be

thrifty, but not to verge of miserliness; again, let your charity be proportionate to you

wealth. This is the way to preserve it; and further, behold the man who lavishes his

wealth beyond his resources; he appears to be prosperous, but he only treads the

downward path to destruction. He thus believed in balanced spending.

Constituents of an Economic Society:

Like modern economists he does not classify factors of production into land, labour and

capital.


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Public Finance:

In the fiscal sphere, Valluvar assigned four essential functions to the State, namely, the

creation of revenues, collection of revenues, management of revenues and public

expenditure. Valluvar was not in favour of any undue compulsion in taxation. To quote

his famous dictum, the king who extorts money at the point of the bayonet is like a

highwayman, who waylays the benighted traveler with his threatening cry stand and

deliver. These are his views on taxation. Customs were the next and the tribute paid by

vanquish enemies was the third source of revenue.

Welfare State:

By what he said, it can be inferred that he was an advocate of a welfare state, and he

wanted the king to be a sound administrator. Next to sound administration, he looked

upon education as basic to progressive economy. In other words, he considered

knowledge as an essential factor of production; for knowledge brings in man the wisdom

to earn and spend wealth; a force for social leveling up, and a driving force for progress.

The economic society of Valluvars choice is to be based on a vigilant social

consciousness, a code of basic moral values and sound welfare principles. His was not

the concept of a modern welfare state, because Valluvar seems to have relied more on

individual action than on a state action; for it is the ideas and aspirations, sanction and

participation of the individual that ultimately count for the emergence and success of

corporate state action.

Comparison between the two (Kautilya and Valluvars) views:

Some have tried to draw a parallel between the economic ideas of Kautilya and those of

Valluvar. While some hold that Kural borrowed some of its economic ideas from

Arthashastra, some others say that Kautilya carried with him some of Valluvars

economic ideas and embodied them in the Arthashastra. There are still others who hold

that there was no influence of one upon the other. Firstly, it has been seriously

questioned if Kautilya lived in the 4

th

century B.C. and arguments have been advancedto show that Kautilya belonged to a much later date or to the 4th century A.D. and not to

the 4th century B.C. Secondly, there is no resemblance whatsoever between the

economic ideas of the two; (i) Valluvar attached primary importance to agriculture and

agriculturists while Kautilya doe not. (ii) Kautilya lays down a long list of taxes for

raising revenue which Valluvar has not. Kautilya even suggests measures by which the


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maximum revenue can be collected from land through fear or persuasion; (iii) The

economic society of Kautilya was based on castes and this caste system is virtually

absent in the Kural; (iv) The economic society of the Kural is based on ethical principles

which are totally missing in the Arthashastra; (v) While Valluvar believed in taxation by

consent, Kautilya believed in taxation by fear and intimidation; (vi) Kautilya did not even

hesitate to exploit superstition, credulity, religious beliefs, innocence of the subjects and

even drinking and prostitution for enriching the coffers of the State, which were totally

unacceptable to Valluvar.

We may thus conclude that Valluvar was a great sage and a poet. He was neither an

economic theorist nor a political thinker. He was essentially a philosopher who tried to

synthesise the principles of ethics, economic and politics and in this respect he stands

far away from the ancient sages and the modern economists.

MEDIEVAL ECONOMICS THOUGHT

The middle ages cover a vast span of about one thousand years which is divided into

two parts (1) from 476 to the 11th century known as the dark ages in which static or

stagnant economy prevailed and (2) from the 12th to the 15th century the period which

commercial and economic progress.

Feudalism. The social structure of the medieval period was raised on the foundation of

feudalism which appeared in the Western Europe in the course of the 9 th century which

divided the entire society into two classes those of feudal lords and tenants called

serfs. Nobles or feudal lords owned large estates and the dependence of people on them

made them small sovereigns. The king was not in a position to control them, hence for

practical purposes they had become independent rulers; and had made their own laws.

The landless and the poor came under their patronage; and they granted their requests

for tilling the soil.

The relationship between feudal lords and serfs (often known as fiefs) was of a

permanent nature. The latter had to pay taxes mostly in kind to the former for tilling

their land, or else to pay them in the form of manual labour on their fields. Feudal lords

in turn granted them hereditary right of tillage; ensured protection against probable

attack barbarians and guaranteed justice to them.


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Another feature of feudal economy was the development of towns and cities (most of

them were walled for protection) which played an important role in stimulating

commercial activities. Great became strong trading centres during the 11th and 12th

centuries. It must be remembered in this connection that crusades or holy wars greatly

contributed to the development of communications which considerably helped in

promoting trade and commerce, and industries opening new markets some of which

came to attain international importance, but the most important feature of feudal

economy was the predominance of agriculture.

Emergence of Capitalism. During this period, barter economy was disrupted; and

money economy was firmly established which gave rise to the problem of modern

capitalism. Production began to be carried on in an organized way; and the wage system

came to be adopted.

Influence of Religion. The Roman Catholic Church was a cosmopolitan organization. It

had accumulated a vast landed properly, was the super feudal lord; and in this capacity

it promoted the interests of the society of the day. Its influence on the medieval

economic life was very great because it taught to people the virtues of industry, thrift,

fidelity and obedience. Christianity taught brotherhood and natural equality; condemned

slavery and promoted the idea of natural community of property. It, moreover, taught

dignity of labour and the duty of helping the poor. It also emphasized the personality of

man.

ST. THOMAS AQUINAS (1225 1274)

St. Thomas Aquinas (1225 1274 A.D.) was the most renowned scholastic philosopher.

Having been born in Italy, he got his early education in the Benediction monastery of

Monte Cassino. St. Thomas Aquinas continued his studies at Paris, and Cologne, where

he became a pupil of Albert the Great. After the completion of his academicapprenticeship, he taught theology and philosophy at Cologne, Paris, Bologna, Rome,

and Naples, changing his residence frequently. He was an extensive writer and wrote 60

books. His best known work is the Summa Theologiae which is a systematic summary of

the ideas of the time.


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His Economic Views or Scholasticism. His views were, therefore, an admixture of the

teachings of the Bible and the philosophy of Aristotle. The views of St. Aquinas in

particular and the scholastic writers in general, can be briefly stated as follows:

1. Individualism. Schoolmen in general despised individualism and scorned the idea of

laying emphasis on human personality as the basis for economic decisions. Thus, on the

one hand, it tended to limit that reference to individual choices which was to become the

basis of economic science; while, on the other hand, it kept alive and emphasized the

concept of social uniformities and the dominance of abstract laws, which later

contributed to the idea of that science.

2. Property. St. Aquinas did not uphold the exclusive and unrestricted rights in private

properly. He totally followed Aristotle in this regard. According to Aristotle there were

two aspects of private property, viz., firstly the power of acquiring and administering it

and secondly, the manner of using it. The power of acquiring the property confers the

rights on the individuals. Private property leads to an increase in the production of

wealth. It is natural and necessary for the peace of the society.

3. Trade. St. Aquinas regarded trade neither good nor natural. It was unnatural and

graceless. But, he recognized that it was an evil which could not be dispensed with. It

could be justified only, if the merchant sought to maintain his household and when the

object of trade was to benefit the country. According to him, trade could be permitted if

goods were exchanged at a price which was just both to the seller and the buyer, i.e.,

the commodity given and the commodity received were of equal value. St. Aquinas in

this respect appeared to those of the earlier thinkers.

4. Just Price. The most important part of the economic thought of the Schoolmen,

especially of St. Aquinas is the doctrine of justum pretium. The doctrine was based

upon their concept of value. Value was considered as an objective quality inherent in

every commodity. Its measure was dependent upon a process of estimation of the costof production which covered labour. The concept of Just Price, something like value was

absolute and was associated with the common usefulness of the commodity.

5. Usury and Money-lending. Money-lending, as a means of gaining wealth was

considered by the Church Fathers as the most degraded act. Similarly, the Hebrews has


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also prohibited taking of interest. With the growth of money economy and with

expanding opportunities for profitable investment of money, the concept of usury like

that of value also underwent changes. The general prohibition of interest-taking was

now not considered necessary.

6. Division of Labour. Division to labour was accepted as useful. The Schoolmen did

not agree with the ignobility of certain forms of labour and the disreputability of other

occupations than agriculture, as held by the Greeks.

7. Economic Functions of the State. The state was likened to a private economy and

the office of the ruler was regarded as private property. The state was perform the

following functions: The maintenance of population and provision for the poor, the

establishment of safe and free roads a system of weights and measures and a special

coinage. The establishment of an exact and unchanging system of coinage was the

most important duty of the ruler. Aquinas believed that by money the king could

purchase food for his subjects, in times of war. The king, thus, possessed the right to

control and regulate the monetary system and to make laws for the prevention of

counterfeiting and clipping of coins. The regulation of currency was thought necessary,

because a slight change in its quantity might affect its price.

Mercantilism:

The term mercantilism used sporadically by the French Physiocrats was introduced in

Economics by Adam Smith who devoted one-fourth of his famous treatise The Wealth

of Nations to a scathing criticism of what he termed the commercial or mercantile

system. It is a misleading term if it is taken to mean that at any time of the history of

economic thought there exist a group of writers who scientifically developed a body of

mercantilist doctrines. Different names have been given to these economic ideas,

namely, mercantile system, Colobertism, Commercial system, restrictive system and

mercantilism. As they do not properly form a system: and do not belong to any one man

or fall under one central economic idea, the term mercantilism is preferable.

According to Cole, mercantilism is a term which may be applied to those theories,

policies and practices, arising from the conditions of the time, by which the national

State, acting in the economic sphere, sought to increase its own power, wealth and

prosperity. As understood by Heimann, it was the ideological justification of


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commercial capitalism. In the opinion of Professor Lekachman, in its glory

mercantilism was a battle against hampering medieval thought and practice.

Mercantilism prevailed not only in France, England and Italy; but was also prevalent in

countries like Russia, Spain and Scotland. It adapted itself to the changing

circumstances of the time; and showed wide variations in accordance with local

conditions. So far as the period of mercantilism is concerned, different writers have

different views. Some writer like Alexander Gray hold that the mercantilist ideas in crude

from began to appear about the end of the 14th or the beginning of the 15th century; and

continued in spite of variations and modifications until the second half of the 18th

century. But others like Cannan claim that mercantilism proper did not appear until the

17th century, influenced as it was by the development of early industrial capitalism which

was interested in the promotion of export trade.

Factors Shaping Mercantilism:

(a) Cultural and Religious Factors. There were two sets of factors cultural and

religious, and political and economic that shaped mercantilism, the first being intangible.

About the beginning of the 16th century religious and intellectual awakening among the

European masses was very great. Reformation (associated with the name of Erasmus)

and Protestantism (associated with the name of Martin Luther) spread the ideas of

individualism and personal freedom, and thus went a long way in developing property

and contract rights so essential to the growth of commerce and free exchange.

Renaissance and Humanism (the movement of new light and learning) played a more

significant part than protestanism. The medieval theology laid emphasis on the

happiness in Heaven which would compensate the miserable existence of human beings

on this Earth. A strong reaction was provided by the new light against this medievalism.

People began to disbelieve the promised pleasures of the other world; and laid emphasis

on the achievement of real happiness through economic activity on this Earth.

(b) Economic and Political Factors. Economic and political factors that stimulated

mercantilist thought were immediate factor i.e., developments that took place towards

the end of the 15th century. These included the downfall of feudalism, lack of State


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organization, rise of free labour class, competition and development of exchange

economy.

The development of international trade found expression in the discovery of new islands

and countries and colonisation. The discover of America, that of round-the-Cape Route

to India and the search for Eldorado the island full of gold and silver, and other

countries gave enormous potentialities for capturing foreign markets. The importance of

money can be realized in another way, apart from its significance in exchange economy.

General Outline of Mercantilist Theories:

Foreign Trade. It occupied the first place in the mercantilist system. Mercantilists

always wanted a favourable balance of trade for their countries. There were two things

in which a country could become strong and rich: either it possessed gold and silver

mines or engaged in trade. But all countries did not possess gold and silver mines.

Therefore, such countries as England, France, etc., could amass bullion by exporting the

maximum of manufactured articles and importing the minimum of the most essential

commodities. This thought encouraged the adoption of certain policies relating to the

development of allied industries, organization of agriculture, etc. Industries like shipping

and fishing enjoyed priority over others as they helped considerably the foreign trade of

the country. Agriculture was to be organized so that the production of food crops and

tobacco might be increased; and their imports curtailed. In a mercantilist State the leastimportance was given to the development of internal trade.

Importance of Money. Wealth consists in money or in gold and silver was the core of

the mercantilist theory. In a mercantilist State every possible effort was to be made for

increasing the amount of treasure. Two important slogans were raised at the time: -

More gold, more wealth, more power and the life of commerce and trade is money.

Mercantilism had a tight hold on money and precious metals. These days our wealth

depends upon the availability of material goods and diverse services which maximize

human welfare. Transition to a definite economy had changed the economic life of

mercantilist States.

Size of Population. One of the cardinal features of mercantilism was not to have a

large population but to have a numerous population for two purposes war, and

increase in production. Cheap and abundant labour was necessary to enable home


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productions to compete successfully with those of foreign countries hence the laws and

regulations encouraging matrimony and parent-hood. According to Davenant, people

were the real strength of a community; a dense population made inventions. It also

developed industries which brought riches to the nation.

Factors of Production Mercantilists recognized two factors of production namely land

and labour. Pettys famous dictum is repeated here Labour is the father, and active

principle of wealth, as lands is the mother. According to Josiah Child, land and trade

went together. It clearly shows that for the development of trade the factor of labour

was urgently required. They laid emphasis on the cultivation of agricultural waste land

so that food production might increase, the country might become self-sufficient in

foodstuffs and their imports might be curtailed.

Interest. So far as the ideas about interest or usury are concerned, unanimity did not

exist among mercantilist writers. Thomas Mun justified the charging of interest on the

ground that the money of widows, orphans and others was advantageously employed in

trade; and that borrowers earned large profits. In 1668, Thomas Culpeper suggested the

establishment of lower rates of interest: and his son bitterly criticized the institution of

usury. Josiah Child also suggested low rates of interest. In his opinion high rates of

interest made money scarce. Devenant was against those who accepted interest. He

wrote in this connection The usurers who are the true drones of a common wealth

living upon the honey without the labour, should be taxed.

Commercial Regulations. Mercantilists believed that commercial regulations were

essential for maximizing the social welfare and regulating the economic life of the

community. These were passed to restrict the imports of food materials, but no-

regulations applied to the imports of raw materials because these were in the interests

of the industrial development of the country. One of the regulations required colonies

not to export any commodity direct to foreign countries. The parent country must

receive all surpluses which could be re-exported from there. This actively increased the

importance of a mercantilist state as centre of entrepot trade. The use of credit

instrument was encouraged by the government and banking was to be developed for the

promotion of trade and commerce. A legal measure provided for lowering the rate of

interest so that business activities might be accelerated. The Mercantilist State

undertook to subsidies export industries, fishing and shipping which would secure a

favourable balance of trade; and bullion would not be exported.


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Value. Formerly, writers used to think that value was inherent in commodities, and

depended upon human needs. Gradually the medieval idea of just price was several

from actual market value. Value came to be regarded as an extrinsic market

phenomenon which depended upon exchange. The Dutch scholar Hugo Grotius and theGermna Historian Samuel Pufendorf made needs and desires an important element in

the determination of value.

NEO-MERCANTILISM

There is a big gulf of difference between mercantilism and neo-mercantilism of the

present century. During period of the worldwide trade depression (1929 34) and the

post-war era countries like Great Britain, U.S.A. and France followed typical mercantilist

devices for tiding over their financial difficulties. These related to tariff restrictions, grant

of bounties to producers, maintenance of god stocks, currency debasements, etc.

Economics was an important instrumentality of mercantilists for serving the ends of

national economies; hence their preponderating emphasis on economic controls. These

days also, economic guides the national interests of various countries. Some have

adopted economic planning to maximize human welfare which old mercantilists had

never conceived of. Although William Petty and German mercantilists laid emphasis on

statistics, yet statistical control over economic policies was very difficult as the

organizations for the collection and interpretations of statistics did not exist. In modern

times, statistics occupies an important place in trade and commerce. Every government

maintains a fully developed statistical organization. Thus, mercantilists practices in the

present century depend upon planning scientific organization and protection; and are

guided by the theory of social benefits.

PHYSIOCRACY

The system of economic thought which developed in France about the middle of the 18th

century is known as physicoratie or physiocracy the term which was first used by the

French writer Dupont de Nemours in 1768. Derived from a Greek word, it signifies the

rule of Nature. Recently, it has been suggested by Norman J.Ware that physiocracy was

a rationalization of certain specific political aims. In fact, it was a rationalization of

medieval economic life: it aimed at recreating a better society and maintaining its

equilibrium.


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Physiocrats preferred to call themselves Economists. They believed that there was a

natural order which must be followed in order to increase the material happiness of

mankind. They sought to minimize regulator control and maximize economic freedom.

They were the first to gasp the conception of a unified science of society.

The leading physiocrats whose life and works will be dealt with later, were associated

with a school of philosophers who held the view that all things were part of an

interconnected system, proceeding from comprehension. These philosophers believed in

some supernatural power Nature to which they always appealed for bringing the gulf

that existed between their ideals and materialism.

Factors Giving Rise to Physiocracy:

(1) Extravagant Court Life. During the reigns of Louis XV and XVI the court life was

degenerate and extravagant. I am the State was the royal maxim. Owing to the

luxurious life of Kings, the State treasury had become empty. The rural population which

produced revenues stood in the service of a few upper class men. The trading

community was serving them like grooms and lackeys. France had taken heavy loans.

Another reason for the week financial position of the country was the continuity of wars.

The 72-year reign of Louis XIV and 59-year reign of Louis XV were marked with the

monotonous regularity of wars. Luxury and wars contributed to her insolvency.

(2) Heavy Taxation. During the period of mercantilism, trade and commerce were

developed at the cost of agriculture. Whereas agricultural land belonging to the religious

class people and nobles was exempt from taxes, that of cultivators was heavily taxed. In

addition to paying a large portion of produce to land-owners and taxes on the remaining

produce, cultivators had to pay some duties which restricted the home and international

markets for them.

(3) Environment. In those days there were no enclosures in France, and the great

majority of small peasant proprietors, in order to supplement their slender incomes,

used to hire themselves as daily labourers in rural industries. Nobles and clergymen who

often owned more than 40 percent land were absentee landlords. In the majority of

cases, land was cultivated by metayers (share croppers) to whom landlords advanced


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seed and livestock: and got one half of the harvest. In some cases, nobles leased out

heir land to the farmers who possessed sufficient capital, and whose method of

cultivation was superior to that metayers.

(4) Reaction against Mercantilist Policies. Mercantilism which laid great emphasis

on the development of trade, had outlived its usefulness. In England, an agricultural

revolution was taking place with large-scale farming they advantages of which were

brought to the knowledge of the French by transitional writers some of whom had been

to England, important among the m being Gournay, Mirabeau ad Montesquieu. The

works of several England writers were translated into French which provided to French

thinkers and leaders, an opportunity of having the knowledge of the economic prosperity

of Great Britain which depended, to a considerable extent, upon agricultural progress.

Thus the prestige of mercantilism was further shaken, turning the thoughts of people

towards the increasing importance of agriculture.

(5) Transformation of Society. Another potent factor that led to the rise of

physiocracy was the subjective force working for transformation. The French thought,

too, had begun to break away from the Shackles of Servile credulity. Political writers

also began to lay stress upon rational laws. The development of natural sciences and the

application of their methods to social and economic problems brought agriculture in the

forefront.

Net Product:

It is the surplus which is obtained by subtracting input (that is the amount of wealth

destroyed in the production of new wealth_ from the amount of new wealth produced.

According to physiocrats, labour when applied to agriculture was capable of producing

net product. In this connection Quesnay the father of physiocracy observed in his

articles Farmers and Corn Agriculture and commerce are constantly regarded as the

two sources of our wealth. Commerce like industry is merely a branch of agriculture.

These two states exist only by virtue of agriculture. It is agriculture which furnishes thematerial of industry and commerce and which pays both; but these two branches give

back their gain to agriculture which renews the wealth which is spent and consumed

each year.


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Thus, in their opinion, agriculture alone was productive. Other industries, transportation

and manufacturing were considered sterile. As a result of net product, economy was

possible and civilization had become a fact. In the words of De Nemours The

prosperity of mankind is bound up with a maximum net product. As agriculture was

regarded as the source of all wealth, they suggested that it should be promoted.

Physiocrats divided the existing society into two classes productive and sterile.

Agriculture which produced new wealth was productive; and industry which drew upon

agriculture was sterile. Industry as Rivere pointed out, merely superimposes value,

but does not create any which did not previously exist. Although trade commerce and

industry performs of wealth produced by agriculture. Hence agriculture in the

physiocratic system occupied the primary place; and all others the secondary one. It

should be clearly understood that it did not imply any contempt for the latter. Le Trosne

held that which was applied anywhere except to land was sterile because man was not a

creator; and to Turgot artisans were domestic servants or the hirelings of agriculturists.

The physiocratic ideas of Net Product (which resulted from the superior bounty of

Nature) were repeated by Adam Smith and Robert Malthus. It was David Ricardo who

later on held that net product or rent was the inevitable result of the limited extent and

growing sterility of land. It has clearly been mentioned that Mercantilism had laid great

emphasis on the development of trade and commerce. Mercantilists thought that wealth

could be increased only by exploiting colonies and neighbours. According to physiocrats,

agriculture alone could increase national wealth. Thus physiocracy was a clear challenge

to mercantilism. The idea of Net Product was a great contribution made by physiocrats

to the development of economic analysis.

Circulation of wealth:

Credit for attempting a synthesis of the distribution of national wealth also goes to

physiocrats. The circulation of net product in the words of Turgot, constituted the very

life of the body politic, just as the circulation of blood did of the physical. Quesnay whohad diligently studied Dr.Harveys discovery of the circulation of blood systematically

introduced the biological conception into the system of sociology with the help of the

Economic Table (1758) which was reproduced by the British Economic Association in

1894. The entire society was divided into four classes of people: (a) Productive class

(cultivators), (b) Partly productive class (land owners), (c) Non-productive class


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(merchants, artisans and professionals), and (d) Workers and labourers. While the first

three classes were placed in one group; and were independent and active; the last one

was dependent and passive.

The annual net product or wealth circulated among the above four classes of people.

When agriculturists produce, they do not keep the entire produce with them. They have

to part with a major portion, to be given to land lords and some portion to be given to

merchants who supply them agricultural machinery, implements, clothes, kerosene, etc.

Let us suppose that total produce is 4 million tones out of which cultivators keep 1

million tones for maintenance and farm expenses. Out of the remaining 3 million tones

landlord receive 2 million tones in the form of rent and various taxes, and the merchant

class gets 1 million tones for supplying farmers commodities needed by them.

The question is whether landlords and merchants will always keep the part of the wealth

with them. Landlords also require certain important goods, so they will give one million

tones to the merchant class from whom they purchase commodities. But in the end both

landlords and merchants would give their portions to farmers for supply of foodgrains

and raw materials. In this way, 3 million tones have gone back to farmers who invest

them in cultivation and the bounty of nature will again reproduce for distribution among

the various classes of people next years.

Practical and Policies:

Value. Their attention being largely concentrated on production, physiocrats evinced

little interest in the concept of value, although they suggested good price (both prix) for

agricultural produce. According to Turgot, value depended upon utility. It must be noted

that his ideas about value were much more scientific. Physiocrats did not regard value

inherent in commodities. They also differentiated between value-in-use and value-in-

exchange: but treated price and values as one and the same thing. In the words of

Quesnay What is called value is price. He discussed a cost of production theory of

price. Value according physiocrats was not fixed but changed from time to time,depending as it did, upon demand.

Trade. As the commodities of equal values were exchanged, trade and commerce were

regarded as unproductive. According to them, foreign trade did not produce any real

wealth. It was considered indispensable in case of those commodities which could not be


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produced in the country but according to Mercier de la Riviere it was necessary evil.

Physiocrats regarded the reselling of commodities or commercial transactions as a Sheer

waste. It is interesting to quote Riviere again Like mirrors, too, the traders seem to

multiply commodities, but only deceive the superficial.

Wages and Population. Physiocrats did not make any contribution to the theory of

wages. As the employer had the choice of selection among workers, the latter were paid

subsistence wages only; but want constituted subsistence wages, was not clearly

analysed. The amount to be paid might have included a little savings. Wages (Natural

Wages) depended upon economic conditions then obtaining in France. There was no

problem of wage determination. They did not work out any theory of population. Some

thought of the possibility of over-population, although they were not afraid of it. To

quote Riviere As it is in the physical order that men thus united in society multiply

promptly by a natural and necessary parallel to that multiplication they are reduced to

lack the means of subsistence if they do not, at the same time, multiply those means of

cultivation.

Profit. Adam Smith regarded profit as a constituent element in the supply price of

commodities. According to Sir James Stuart, it was regarded as a sort of superior wage

or a surplus over cost the level of which changed in accordance with the prevailing

circumstances. It was an important part of net revenue. Physiocrats maintained that the

rent of land was not only an income in the nature of a surplus but was also the only

income in the form of a surplus.

Functions of State. Although physiocrats were not anarchists, they suggested a State

with the minimum of civil laws which placed hurdles in the way of realizing Natural

Order. Every law, according to them, should be an expression of the Divine wisdom. One

of the anecdotes reveals, that Riviere was invited to St.Petersburg to advice Catherine

the Great, the then Empress of Russia, on the new Constitution of the country. After

taking into consideration the great difficulty and responsibility he opined that the bestway of achieving her object was just to let things take their course. Consequently, he

was dismissed from the Russian Court.

Taxation. Inextricably bound up with the theory of net product was the theory of

taxation one of the main characteristics of physiocratic thought. Taxes were required


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for meeting the expenses of State for the maintenance of security, spread of

education, establishment of public works and for increasing the productivity of land.

Physiocrats

master of philosophy (economics)

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