Chapter I: The Physiocrats (2)

There is also a refutation of the policy known as reciprocity. “A nation levies an import duty upon the goods of another nation, but it forgets that in trying to injure the selling nation it is really checking the possible consumption of its own goods. This indirect effect, of course, is inevitable, but can nothing be done to remedy this by means of reprisals? England levies a heavy duty on French wines, thereby reducing its debit account with France very considerably, but more French wine will not be bought if a tax is also placed upon the goods which England exports to France. Do you think that the prejudice which England has taken against France can be remedied in this way?”

We have multiplied instances, for during the whole of the hundred years which have since elapsed has anyone deduced better arguments?

These theories immediately received legal sanction in the edicts of 1763 and 1766 establishing free trade in corn, first within the country and then without, but some very serious restrictions were still retained. Unfortunately Nature proved very ungrateful to her friends. For four or five years she ran riot with a series of bad harvests, for which, as we may well imagine, the Physiocratic _régime_ and its inspirers were held responsible. Despite the protests of the Physiocrats, this liberal act was repealed in 1770. It was re-established by Turgot in 1774, and again repealed by Necker in 1777—a variety of fortune that betokens a fickleness of public opinion.

This new piece of legislation, and, indeed, the whole Physiocratic theory, was subjected to severe criticism by an abbot of the name of Galiani. Galiani was a Neapolitan monsignor residing at the French court. At the age of twenty-four he had written a remarkable work in Italian dealing with money, and in 1770, written in splendid French, appeared his _Dialogues sur le Commerce des Blés_. It was an immediate success, and it won the unqualified approval of Voltaire, who was possibly attracted more by the style than by the profundity of thought. Galiani was not exactly opposed to _laissez-faire_. “Liberty,” he wrote, “stands in no need of defence so long as it is at all possible. Whenever we can we ought to be on the side of liberty.”[74] But he is opposed to general systems and against complete self-surrender into the hands of Nature. “Nature,” says he, “is too vast to be concerned about our petty trifles.”[75] He shares the realistic or historical views of the writers of to-day, and thinks that before applying the principles of political economy some account should be taken of time, place, and circumstances. “The state of which the Physiocrats speak—what is it? Where is it to be found.”[76]

Along with Galiani we must mention the great financier Necker, who in a bulky volume entitled _La Législation et le Commerce des Grains_ (1775) advocates opportunistic views almost identical in character with those of Galiani, and who, as Minister of State (1776-81 and 1788-90), put an end to free trade in corn.

In monetary matters, especially on the question of interest, the Physiocrats were willing to recognize an exception to their principle of non-intervention. Mirabeau thought that whenever a real increase of wealth resulted from the use of capital, as in agriculture, the payment of interest was only just. It was simply a sign or symbol of the net product. But in trade matters he thought it best to limit if not to prohibit it altogether. It often proved very harmful, and frequently was nothing better than a tax levied by order of “the corrosive landowners.” Quesnay could not justify it except in those cases where it yielded a net product, but he was content simply to suggest a limitation of it. The Physiocrats are at least logical. If capital sunk in industrial and commercial undertakings yields no income it is evident that the interest must be taken from the borrower’s pocket, and they condemned it just as they condemned taxing the industrial and commercial classes.

Turgot[77] is the only one of them who frankly justifies taking interest. The reason that he gives is not the usual Physiocratic argument, but rather that the owner of capital may either invest it in the land or undertake some other productive work—capital being the indispensable basis of all enterprise[78]—and that, consequently, the capital will never be given to anyone who will offer less than what might have been made out of it did the owner himself employ it. This argument implies that every undertaking is essentially a productive one, and indeed one of the traits which distinguishes Turgot from the other Physiocrats is the fact that he did not think that industry and commerce were entirely unproductive.

II: THE FUNCTIONS OF THE STATE

Seeing that the Physiocrats believed that human society was pervaded by the principle of “natural order,” which required no adventitious aid from any written law, and since Nature’s voice, without any artificial restraint, was sufficient guide for mankind, it might have been expected that the trend of Physiocracy would have been toward the negation of all legislation, of all authority—in a word, toward the subversion of the State.

It is certain that the Physiocrats wished to reduce legislative activity to a minimum, and they expressed the belief—which has often been repeated since by every advocate of _laissez-faire_—that the most useful work any legislative body can do is to abolish useless laws.[79] If any new laws are required they ought simply to be copies of the unwritten laws of Nature. Neither men nor Governments can make laws, for they have not the necessary ability. Every law should be an expression of that Divine wisdom which rules the universe. Hence the true title of lawgiver, not law-maker.[80] It is in this connexion that we meet with those anecdotes—some of more than doubtful authenticity it is true—that have gathered round their names. Of these the best known is that which tells of Mercier de la Rivière’s visit to St. Petersburg, and his laconic reply to Catherine the Great. He had been invited there to advise the Empress about a new constitution for the country. After dilating upon the great difficulties of the undertaking and the responsibilities it involved, he gave it as his opinion that the best way of achieving her object was just to let things take their course. Whereupon the Empress promptly wished him good-bye.

But it would be a great mistake to think of the Physiocrats as anarchists. What they wanted to see was the minimum of legislation with a maximum of authority. The two things are by no means incompatible. The liberal policy of limitation and control would have found scant favour with them. Their ideal was neither democratic self-government, as we have it in the Greek republics, nor a parliamentary _régime_ such as we find in England. Both were detested.[81]

On the other hand, great respect was shown for the social hierarchy, and they were strong in their condemnation of every doctrine that aimed at attacking either the throne or the nobility. What they desired was to have sovereign authority in the guise of a hereditary monarchy. In short, what they really wanted—and they were not frightened by the name—was despotism.[82]

“The sovereign authority should be one, and supreme above all individual or private enterprise. The object of sovereignty is to secure obedience, to defend every just right, on the one hand, and to secure personal security on the other. A government that is based upon the idea of a balance of power is useless.”[83]

This should help us to realise the distance separating the Physiocrats from the Montesquieuian idea of the distribution of the sovereign authority, and from the other idea of local or regional control. There is no mention of representation as a corollary of taxation. This form of guarantee, which marks the beginnings of parliamentary government, could have no real significance for the Physiocrats. Taxation was just a right inherent in the conception of proprietary sovereignty, a territorial revenue, which was in no way dependent upon the people’s will.

It seems strange that such should be the opinion of a future President of the Constituent Assembly. How can we explain this apparent contradiction and such love of despotism among the apostles of _laissez-faire_?

Despotism, in the eyes of the Physiocrats, had a peculiar significance of its own. It was the work of freedom, not of bondage. It did not signify the rule of the benevolent despot, prepared to make men happy, even against their own will. It was just the sovereignty of the “natural order”[84]—nothing more. Every reasonable person felt himself bound to obey it, and realised that only through such obedience could the truth be possibly known.

It is quite different from the despotism of the ancient maxim, _Sicut principi placuit legis habet vigorem_.[85] They would never have subscribed to the doctrine that the king’s word is law, but they were equally energetic in rejecting the claim of the popular will.[86] They are as far from modern democracy as they are from monarchical absolutism.

This despotism was incarnate in the person of the sovereign or king. But he is simply an organ for the transmission of those higher laws which are given to him. They would compare him with the leader of an orchestra, his sceptre being the baton that keeps time. The conductor’s despotism is greater than the Tsar’s, for every musician has to obey the movement of the hand, and that immediately. But this is not tyranny, and whoever strikes a false note in a spirit of revenge is not simply a revolter, but also an idiot.

Sovereignty appealed to the Physiocrats in the guise of hereditary monarchy, because of its associations with property under the feudal _régime_, and since hereditary rights were connected with landed property so must royalty be. The sovereign who best represents the Physiocratic ideal is perhaps the Emperor of China.[87] As the Son of Heaven he represents the “natural order,” which is also the “divine order.” As an agricultural monarch he solemnly puts his hand to the plough once a year. His people really govern themselves; that is, he rules them according to custom and the practice of sacred rites.[88]

In practice there will be nothing of great importance for the despot to do. “As kings and governors you will find how easy it is to exercise your sacred functions, which simply consist in not interfering with the good that is already being done, and in punishing those few persons who occasionally attack private property.”[89] In short, the preservation of the “natural order” and the defending of its basis—private property—against the attacks of the ignorant and the sacrilegious is the first and most important duty of the sovereign. “No order of any kind is possible in society unless the right of possession is guaranteed to the members of that society by the force of a sovereign authority.”[90]

Instruction is the second duty upon which the Physiocrats lay special stress. “Universal education,” says Baudeau, “is the first and only social tie.” Quesnay is specially anxious for instruction on the “natural order,” and the means of becoming acquainted with it. Further, the only guarantee against personal despotism lies in well-diffused instruction and an educated public opinion. If public opinion, as Quesnay said, is to lead, it should be enlightened.

Public works are also mentioned. A wise landlord has good roads on his property, for good roads and canals improve it. These represent a species of _avances foncières_, similar to those undertaken by proprietors.

This is by no means all.[91] There are a number of duties recognised as belonging to the State, of which every economist of the Liberal school up to Bastiat and M. de Molinari approves.

We will add one other trait. Like the Liberal school, the Physiocrats were whole-hearted “internationalists.” In this respect they differ from their prototypes, the Chinese. They believed that all class distinctions and all international barriers ought to be removed in the interest of political development, as well as in that of scientific study.[92] The peace advocates of to-day would do well to make the acquaintance of their illustrious predecessors.

III: TAXATION

The bulk of the Physiocratic system is taken up with the exposition of a theory of taxation, which really forms one of the most characteristic portions of their work. Though inextricably bound up with the theory of the net product and with the conception of landed proprietorship, curiously enough, it has survived the rest of their doctrine, and quite recently has been given a new lease of life.

In the table showing the distribution of the national income three participators only are mentioned—the landed proprietor, the farmer, and the artisan. But there is also a fourth—the Physiocratic sovereign, who is none other than the State itself, and who thoroughly deserves a share. This benevolent despot, whose duties we have just mentioned, cannot be very exacting, for, having little to do, his demands must be moderate. In addition to his double mission of maintaining security and giving instruction, he must also contribute towards increasing the productivity of the land by establishing public works, making roads, etc.[93] Money is required for all this, and the Physiocrats argued that taxes ought to be paid liberally,[94] and not grudgingly, as is too often the case under a parliamentary _régime_. Where is this money to come from?

The reply is obvious if we have grasped their system. The only available fund is the net product, which is the only new wealth that is really dispensable—the rest is necessarily absorbed in the repayment of the advances made for the upkeep of the agricultural and industrial classes. Were taxation to absorb a proportion of the revenues that are devoted to production it would gradually drain away the source of all wealth. So long as it only takes the surplus—the true net product, which is a mere tributary of the main stream—no harm will be done to future production.

All this is quite clear. But if taxation is to absorb the net product the question arises as to who is to pay it. It is equally evident that it can only be taken from those who already possess it, namely, from the landed proprietors, who must bear the whole burden of taxation. Just now we were amazed at the privileges which the Physiocrats so light-heartedly granted them: this is the ransom, and it is no light one. The next problem is how to assess this tax.

The Physiocrats were extremely loth to rob the gentry of their incomes, and a number of pages in their writings are devoted to a justification of their claims upon them. Not only were they willing to leave them everything that was necessary to compensate them for the outlay of capital and labour, but also all that might be required to make the property thoroughly valuable and the position of the landowner a most enviable one.[95] The preference shown for the landowner is just the result of the social importance attributed to him by the Physiocrats. “If some other class were preferable,” says Dupont de Nemours, “people would turn their attention to that.” They would no longer spend their capital in clearing or improving the land. But if the possession of land be so desirable, is there not some danger lest everybody should become a landlord and neglect the other walks of life? The Physiocrats thought not, for, since Nature has set a limit to the amount of land in existence, there must also be a limit to the number of landowners.

A third of the net product, or, if we accept Baudeau’s figures, six-twentieths, _i.e._ 30 per cent., was to be paid in taxes. Taking the net product at 2 milliard francs, which is the figure given in the _Explication du Tableau économique_, this gives us exactly 600 million francs as the amount of the tax.[96]

The proprietors, who were then for the most part free from taxation, felt that this was a very considerable contribution, and that the Physiocrats demanded a heavy price for the high honour which they had conferred upon them. Even to-day a tax of 30 per cent. on the gross revenue of landlords would cause some consternation. The Physiocrats anticipated this objection, and in reply brought forward an argument which shows that they possessed exceptionally keen economic insight. They argued that none would feel the burden, seeing that no one was really paying it. Land would now be bought at 70 per cent. of its former value, so that the 30 per cent. nominally paid by the proprietor was in reality not paid by him at all.[97] Land let at £10,000 would be valued at £200,000. But with a tax of £3000 it is really only yielding £7000, and its value will be £140,000. The buyer who pays this price, despite the fact that he has paid a tax of £3000, will enjoy all the revenue to which he has any claim, for he can only lay claim to what he has paid for, and he did not pay for that portion of the revenue which is affected by the tax. It is exactly as if he had only bought seven-tenths of the land, the remaining three-tenths being the State’s. And if at some later time this tax should be abolished, it would merely mean making him a present of £3000 a year—the equivalent of a lump sum of £60,000.[98]

The reasoning was excellent for those buying land after the tax had been levied. It had, however, a much wider import than the Physiocrats thought, for it might be applied not merely to taxes on land, but also to taxes on capital. But this gave little consolation to those who were to have the honour of inaugurating the new _régime_, and the first task evidently was to convert them.[99]

The sovereign’s position in the main is like that of the landed proprietors, which is in agreement with the Physiocratic conception of sovereignty. The landed proprietors and the king in reality form one class of fellow landowners, with the same rights, the same duties, and the same revenues. Hence the sovereign’s interests are completely bound up with those of his country.[100]

The Physiocrats attached the greatest practical importance to their fiscal system, and were thoroughly convinced that the misery of the people was due to the unequal distribution of the burden of taxation. They thought that this was the true source of injustice—in short, that this was the social problem. To-day we ascribe misery to unequal distribution of wealth rather than to any particular fiscal system, and consequently the Physiocratic view seems to us somewhat extreme. Still, it was perhaps not so difficult to justify, in view of the frightful conditions of fiscal organisation under the old _régime_.

The objections which a single tax, levied only on the landed interest, was bound to provoke were not unforeseen by the Physiocrats, nor did they neglect to answer them.

To the objection that it was unjust to place the burden of taxation upon the shoulders of a single class of the nation,[101] instead of distributing it equally among all classes, the Physiocrats replied that the statesman’s ideal was not equal taxation, but the complete abolition of all taxation. This could only be achieved by taxing the “net product.”

Suppose that we agree that the taxes should be paid by some other class. The question then is to determine what class of the community should be chosen.

Shall we say that the farmer must pay them? But after deducting the “net product” what remains for the farmer is just the bare equivalent of his original outlay. Consequently, if we take 600 millions from the farmers by way of taxation there will be so much less capital for the land, resulting in a smaller gross product the following year,[102] unless they agitate for a reduction of 600 millions in their rents. If they succeed this will leave the proprietors in the position of having paid over the 600 millions to the State. But we must also reckon the losses and friction incurred in every deviation from the “natural order.” Suppose we decide that the sterile classes should pay the taxes. This class is _ex hypothesi_ sterile—that is, it produces the exact equivalent of what it consumes. To take 600 millions from this class is tantamount to a reduction of its consumption by 600 millions, or an equivalent limitation of its purchases of raw material. The result would be a diminished product in the future, unless the industrial classes succeeded in increasing prices by an equivalent amount. Even in that case the landed proprietors will have to bear the brunt of it: firstly, they will have to reduce their own consumption, and secondly, their tenants’, whose efficiency will thereby be impaired.[103]

This process of reasoning seems to imply that the revenues of the agricultural and industrial classes are not squeezable because they represent the indispensable minimum necessary for the expenses of production. This seems to be an anticipation of the notorious “iron law.” Turgot’s formula incisively stating this law, but containing no attempt at a justification, is known to most people.[104] Long before his day, however, it had been stated by Quesnay in terms no less pronounced, though perhaps not so well known. “It is useless to urge that wage-earners can pay the tax so levied upon them, by restricting consumption and depriving themselves of luxuries without thereby causing the burden to fall upon the classes who pay the wages. The rate of wages, and consequently the amount of comfort and luxury which wages can purchase, are fixed at the irreducible minimum by the action of the competition which prevails among them.” This is quite a characteristic trait.[105] The author of the “natural order,” without any hesitation, admits that the direct outcome of the establishment of that order would be to reduce the life of the wage-earners to a level of bare subsistence.

It is also remarkable that in their study of the industrial classes wages should have claimed the exclusive attention of the Physiocrats. Profits even then were by no means unsqueezable, but curiously enough they failed to realise this. Voltaire’s rich banker would have proved embarrassing here. They would have had some difficulty in showing how a reduction of his extravagance could possibly have endangered production. But they might have replied that since he had so little difficulty in squeezing the 400,000 _livres_ out of his fellow-citizens he would not experience much more trouble in getting another 400,000 out of them and paying them over to the State.

Another objection consists in the insufficiency of a single tax to meet all the needs of the State. “In some States it is said that a third, a half, or even three-fourths of the clear net revenue from all sources of production is insufficient to meet the demands of the Treasury, and consequently other forms of taxation are necessary.”[106]

In reply to this the Physiocrats would point out that the mere application of their fiscal system would result in such an increase in the net product that the yield from the tax would progressively grow. We must also take account of the economies resulting from the simplicity of the tax, and the almost complete absence of expenses of collection. But the most interesting point of all is that they thought the State should adapt its needs to meet its revenue, and not _vice versa_. The great advantage of the Physiocratic _impôt_, however, was that it was regulated by a natural norm, which gave the amount of the net product. Without this, taxation becomes arbitrary.[107] At bottom the system affords a barrier against the autocracy of the sovereign—a barrier that is much more effective than a parliamentary vote.

One of the disciples of Quesnay put the theory to the test of practice. The Margrave of Baden had the advantage of being a prince, and he proceeded to experiment on his own subjects. The system was tried in three communes of his principality, but, like most social experiments, failed. In two of the communes it was abandoned at the end of four years. In a third, despite its evil effects, it was prolonged until 1802. The increase in the land tax caused a veritable slump in the value of property just when the remission of taxes upon consumption was resulting in the rapid multiplication of wineshops and beerhouses.[108] It is unnecessary to add that the failure of the experiment did nothing to weaken the faith of the Margrave or his fellow Physiocrats. An experiment on so small a scale could not possibly be accepted as decisive. This is the usual retort of innovators when social experiments prove failures, but we must recognise the element of truth contained in their reply.

But if we wish to see the real results of the Physiocratic system we must look beyond the private experiments of a prince. Elsewhere the effects were much more far-reaching.

The fiscal aspect of the French Revolution owed its guiding inspiration to their ideas. Out of a budget of 500 million francs the Constituent Assembly decreed that about half of it—that is, 240 millions—should be got out of a tax levied upon land, equal to a tax of 2400 million francs nowadays; and the greatest part of it was to be raised by direct taxation.

Distrust of indirect taxation, and of all taxes on commodities, is also a consequence of the Physiocratic system—a distrust that is bound to grow as society becomes more democratic. Most of the arguments in favour of direct taxation are to be found in the Physiocratic writings. But the chief one employed nowadays—namely, that indirect taxes often bear no proportion to the amount of the revenue, but weigh heaviest upon those who have least, is not among them. This concern about proportionality, which is merely another word for justice, was quite foreign to their thoughts.[109]

At a later stage of this work it will be our duty to call attention to the enthusiasm aroused by this old theory of an _impôt unique_ as advocated in the works of an eminent American economist,[110] who renders homage to the Physiocrats for inspiring him with ideals altogether opposed to those of the landed proprietors. And a similar movement under the very same name—the single-tax system—is still vigorous in the United States.

IV: _RÉSUMÉ_ OF THE PHYSIOCRATIC DOCTRINE. CRITICS AND DISSENTERS

A brief _résumé_ of the contributions made to economic science by the Physiocrats will help us to realise their great importance.

From the theoretical point of view we have:

1. The idea that every social phenomenon is subject to law, and that the object of scientific study is to discover such laws.

2. The idea that personal interest if left to itself will discover what is most advantageous for it, and that what is best for the individual is also best for everybody. But this liberal doctrine had many advocates before the Physiocrats.

3. The conception of free competition, resulting in the establishment of the _bon prix_, which is the most advantageous price for both parties, and implies the extinction of all usurious profit.

4. An imperfect but yet searching analysis of production, and of the various divisions of capital. An excellent classification of incomes and of the laws of their distribution.

5. A collection of arguments which have long since become classic in favour of landed property.

From a practical point of view we have:

1. The freedom of labour.

2. Free trade within a country, and an impassionate appeal for the freedom of foreign trade.

3. Limitation of the functions of the State.

4. A first-class demonstration of the superiority of direct taxation over indirect.

It is unjust to reproach the Physiocrats, as is sometimes done, with giving us nothing but social metaphysics. A little over-systemisation may prove useful in the early stages of a science. Its very faults have some usefulness. We must admit, however, that although their conception of the “natural order” supplied the foundation, or at least the scaffolding, for political economy, it became so intertwined with a kind of optimism that it nullified the work of the Liberal school, especially in France.[111]

But the greatest gap in the Physiocratic doctrine is the total absence of any reference to value, and their grossly material, almost terrestrial, conception of production. They seldom mention value, and what little they do say is often confused and commonplace. Herein lies the source of their mistakes concerning the unproductive character of exchange and industry, which are all the more remarkable in view of the able discussions of this very question by a number of their contemporaries. Among these may be mentioned Cantillon,[112] who resembles them in some respects and whose essay on commerce was published in 1755; the Abbé Galiani, who dealt with the question in his _Della Moneta_ (1750); and the Abbé Morellet, who discussed the same topic in his _Prospectus d’un Nouveau Dictionnaire du Commerce_ (1769). More important than any of them, perhaps, is Condillac, whose work _Du Commerce et du Gouvernement_ was unfortunately not published until 1776; but by that time the Physiocratic system had been completed, and their pre-eminence well established.

Turgot, though one of their number, is an exception. He was never a thoroughgoing Physiocrat, and his ideas concerning value are much more scientific.[113] He defines it as “an expression of the varying esteem which man attaches to the different objects of his desire.” This definition gives prominence to the subjective character of value, and the phrases “varying esteem” and “desire” give it greater precision.[114] It is true that he also added that besides this relative attribute value always implied “some real intrinsic quality of the object.” He has frequently been reproached for this, but all that he meant to say was that our desire always implies a certain correctness of judgment, which is indisputable unless every judgment is entirely illusory. But Turgot would never have admitted that.

It is possible that Turgot inspired Condillac, and that he himself owed his inspiration to Galiani, whose book, which appeared twenty years earlier, he frequently quotes. This work contains a very acute psychological analysis of value, showing how it depends upon scarcity on the one hand and utility on the other.

Besides a difference in his general standpoint, there are other considerations which distinguish Turgot from the members of the Physiocratic school, and it would have been juster to him as well as more correct to have devoted a whole chapter to him.[115] Generally speaking, his views are much more modern and more closely akin to Smith’s. In view of the exigencies of space we must be content to draw attention to the principal doctrines upon which he differs from the Physiocrats.

1. The fundamental opposition between the productivity of agriculture and the sterility of industry, if not altogether abandoned, is at least reduced in importance.

2. Landed property is no longer an institution of divine origin. Even the appeal to the “ground expenses” is dropped. As an institution it rests merely upon the fact of occupation and public utility.

3. Movable property, on the other hand, holds a prominent place. The function of capital is more carefully analysed and the legitimacy of interest definitely proved.

But we must turn to Condillac’s book if we want to see how the Physiocratic doctrine should be completed and expurgated of its errors. Condillac was already well known as a philosopher when, in his sixtieth year, he published this new work in 1776. This admirable book, entitled _Le Commerce et le Gouvernement considérés relativement l’un à l’autre_, contains an outline of most modern problems. The title gives no adequate indication of the character of the work, and possibly accounts for the oblivion into which the book has fallen.

It is a genuine economic treatise, and not a medley of economic and political suggestions concerning social science, with an admixture of ethics and jurisprudence. Value is regarded as the foundation of the science, and the Physiocrats are thus out-classed from the very first.[116] Value itself is considered to be based upon utility, which is stripped of its popular meaning, and given a scientific connotation which it has never lost. It no longer implies an intrinsic, physical property of matter, but connotes a degree of correspondence between a commodity and a given human want. “Value is not an attribute of matter, but represents our sense of its usefulness, and this utility is relative to our need. It grows or diminishes according as our need expands or contracts.” This is the foundation of the psychological theory of value.[117]

But this is not all—though a great deal. He clearly realises that utility is not the only determinant of value; that quantity, _i.e._ scarcity or abundance, also exercises an important influence. With admirable judgment he seizes upon the connection between them, and shows how the two statements are united in one, for quantity only influences value according as its action upon utility intensifies or weakens demand. “But since the value of things is based upon need it is natural that a more keenly felt need should endow things with greater value, while a less urgent need endows them with less. Value increases with scarcity and diminishes with plenty. In case of plenty it may even disappear; a superabundant good will be valueless if one has no use for it.”[118] This could not be put more clearly to-day. Here we have the germ of the theories of Jevons and the Austrian school, though it took a long time to develop.

We might naturally expect a superior treatment of exchange following upon this new theory of value. If value is simply the satisfaction of want, exchange creates two values when it satisfies two needs at the same time. The characteristic of exchange is that each of the two parties yields what it has in superabundance in return for what it needs. But what is given up is superabundant, is useless, and consequently valueless; what is demanded has greater utility, and consequently greater value. Two men come to market each with a useless thing, and each returns with a useful one.[119] Consequently the Physiocratic saying that exchange means no gain to anyone, or at least that the gain of one only compensates for the loss of the others, is seen to be radically false. The Physiocrats—notably Trosne—attempted a reply, but, for reasons already given, they never succeeded in realising the subjective character of value.

This same theory should have carried Condillac a stage further, and helped in the rectification of the Physiocratic error concerning production. If value is simply utility and utility itself is just the correspondence between things and our demand for them, what is the agency that produces this harmony between things and desires? It is very seldom that nature succeeds in establishing it. “Nature is frequently fertile in things we have no desire for and lavish of what is useless”—a profound remark that ought to have cooled the Physiocrats’ love of the _Alma Parens_. “Matter is transformed and made useful by dint of human labour. Production means giving new form to matter.”[120] If this be true, then there is no difference between agricultural and industrial production, for they both transform what already exists.[121]

Moreover, the theory proves very clearly that if artisans and proprietors are dependent upon the agriculturists—as, indeed, they are—the latter in their turn are nothing but artisans. “If someone asks whether agriculture ought to be preferred to manufacture or manufacture to agriculture, we must reply that we have no preferences, and that the best use should be made of both.”[122]

Lastly, his definition of wages, short as it is, is of immense significance. “Wages represent the share of the product which is due to the workers as co-partners.”[123] Wages only “represent” the share that is due to the workers. In other words, the wage-earner, either through want of will or of power, cannot exercise his rightful claim to his own work, and simply surrenders the claim in return for a money price. This constitutes his salary, which is regulated, like every other price, by competition between buyers and sellers. Condillac makes no reference to an iron law of wages, but regards them as determined by the forces of demand and supply. He does, however, hint at the implicit alliance which exists between capital and labour.[124]

From a practical standpoint also, especially in his defence of free labour and his condemnation of corporations, Condillac is more categorical than the Physiocrats. “All these iniquitous privileges,” he writes, “have no claim to a place in the order beyond the fact that they are already established.” He is as persistent as Turgot in his justification of the taking of interest and in his demand for the determination of the rate by competition. This very elegant argument is employed to show its similarity to exchange: Exchange implies compensation for overcoming the drawbacks of distance, whether of place or of time.[125] Exchange generally refers to place, interest to time, and this is really the foundation of the modern theory.