The Malta Independent 5 March 2024, Tuesday
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Revisiting the physiocratic school of economics

Sunday, 11 February 2024, 09:05 Last update: about 24 days ago

Written by George M. Mangion

Who were the physiocrats and what is the relevance of their school of thought at our time?

All agree the world is suffering from core inflation and sluggish growth. Physiocrats were a school of economists founded in 18th-century France and characterised chiefly by a belief that government policy should not interfere with the operation of natural economic laws and that land is the primary pillar of wealth (in our case, fight the exploitation of ODZ land for mega graft).

It is generally regarded as the first scientific school of economics founded by Francois Quesnay. The name "physiocrat" derives from the Greek words phýsis, meaning "nature" and kràtos, meaning "power". They tried to convince the government of Louis XV, who ruled France, to deregulate and reduce taxes on French agriculture so that the country could emulate wealthier Britain - the latter wielded a relatively laissez-faire policy.

Indeed, it was Quesnay, who coined the term laissez-faire. Is this relevant to the fiscal challenges associated with yearly deficits and debt observed in certain EU countries experiencing sluggish GDP growth? Yes, there are a number of similarities particularly when we envisage a modern society which due to pressing climate change rules, it belatedly started at a cost, to practise better governance and higher sustainability norms.

The physiocrats creed contended that the labour force and commerce should be freed from all restraints. Given their assumptions and the social system that they desired, the physiocrats were logical and systematic. They preached to the authorities to rationalise medieval economic ideals, employ more modern philosophical and scientific methods. This was perhaps the first rule book to describe the workings of the economy in an analytical way, and as such, can be viewed as one of the first important contributions to economic thought.

In a nutshell, the main impediment to growth was the archaic dirigisme attitude to protect French manufacturers from foreign competition and a fear to open the fortress economy to free trade. Quesnay advocated reforming these laws by consolidating and reducing taxes, getting rid of tolls, excise duties and other inbred impediments.

These impeded international trade with France, and if applied, freed the economy from the government's stifling controls. His ideas influenced Adam Smith, the Scottish philosopher and writer of the illustrious treatise... the Wealth of Nations. Smith was an advocate for the new industrial order and opposed to regulations that represented interventions by the state due to tightening of economic process, on the contrary liberating the way for exchange of labour flow from neighbouring countries, unbridled movement of capital and of goods.

Smith argued that if individuals, unimpeded by privilege and state regulation, could act in accordance with their self-interest, markets could be trusted to allocate resources equitably in the form of wages, rents and profits.

Let us compare and contrast how Malta, under the current administration is verging away from the physiocratic school of thought in its quest to beat inflation and quell unpopular unrest. When asked by Chamber of Commerce and SME's chamber to trim taxes as a solution to throttle inflation, the finance minister disagreed. Chamber chief executive Abigail Mamo quoted a survey among almost 300 businesses, which revealed that inflation was their topmost concern. Another survey found that more than a quarter of businesses reported a drop in sales last year while 40% said their profitability had slumped.

Most businesses mentioned a drop in customer spending power, increased competition, inflation, higher bank charges, poor governance, state bureaucracy, traffic congestion, parallel trading and an uncertain future expansion of exports. The minister humbly spoke about our small market, being affected by diminishing margin returns as competition in some sectors, such as catering establishments, continued to flourish.

He argues that if tax concessions are acceded, the resulting benefits will in turn invite more operators to the market and in turn these will, again come to ask for more tax concessions. In his opinion, the optimum way to ride this inflation crest, is by authorising a non-discriminatory annual subsidy of €350m to energy producers and fuel monopolies apart from an undisclosed subsidy to importers of farm cereals. Such subsidies result in cheaper energy.

They are directly benefiting all users alongside a state energy regulator, a foreign-owned utility and possibly the foreign shareholder of Enemalta. Another grey omen is how the EU Commission is on the verge of guiding members to reduce their deficits to a mere 1.5% of GDP. Such a lower rate for Malta calls for a faster and more efficient growth and higher fiscal probity. In his opinion, this is a vicious circle because people were looking inward not outward.

The mercantilist philosophy can be traced here as the finance minister wants leading entrepreneurs to rise to the occasion and pull their socks up. Please look outwards. If the economy expands, one obviously expects additional skilled workers fuelling a more labour-intensive economy, which as it progresses, will need even more workers, who would, in turn, need housing and improved road infrastructure - all this constitute additional burdens for the government. And as demand for such workers grows, so would costs, therefore the minister pleads with the chambers for wooing more blue chip FDI.

He is advocating the attraction of capital intensive, digital savvy businesses where intensive use of robotics and AI can mitigate our ingrained scarcity of skilled workers. It is curious how, as a means to collecting more revenue to tone down the annual deficit to 1.5%, the minister overlooked millions of uncollected taxes, not to mention a surreal situation where some local oligarchs openly render to Caesar a minimum coin, while living in bungalows sporting Grand Harbour sea views, sail pleasure yachts and own skiing Swiss chalets - visibly beyond reported declarations.

In conclusion, there is no magic wand to wave that may solve all our economic ailments. One recalls the physiocrats theory about enhanced labour mobility, moderate laissez-faire policy leading to higher international commerce - a poignant reminder that these factors ideally must be freed from all restraints. 

 

gmm@pkfmalta.com

 

George M. Mangion is a senior partner at PKF Malta


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