Destabilising shocks and crises
To know the conditions for an optimal equilibrium is not enough: Boisguilbert had to explain the depressed economic situation in France and thus deal with the various possible destabilising shocks which can trigger a crisis - this also forms an a contrario proof of the necessity of free trade.
Basically, destabilising shocks originate in the class structure of society and more precisely in the behaviour of the members of the leisure class - be they simple rentiers or members of the administration of the realm: the rentiers are not involved in trade, their behaviour is not checked by competition but by some other rules dictated by the “societe de cour”. They do not know anything about the conditions of economic life, their action must be enlightened - and to enlighten them is precisely Boisguilbert’s task. He presents himself as “a new interpreter and extraordinary ambassador of this unknown country of the people” (Boisguilbert 1691-1714, 769). The very existence of a leisure class thus potentially transforms the economic structure from a stable to an unstable one. Boisguilbert’s aim is thus to show how the destabilising shocks are caused by the behaviour of those who “only receive” - and particularly the government through the institution of bad forms of taxation and any regulation of economic activities. His analysis is multifaceted (Faccarello 1986). Let us deal here with the main destabilising shocks caused by trade regulations.The emergence of crises and the role of expectations
During the Ancien Regime, the market for agricultural products was basic for two reasons. (1) It had to satisfy the important needs and consumption habits of the population, and agriculture was by far the main source of income of the leisure class - this is why agricultural crises lead directly to general depressions through significant spill-over effects in different markets.
(2) However, and this is the main point, agricultural crises are due neither to climatic conditions nor to the mere behaviour of the members of the productive class: prosperity and depression, Boisguilbert asserts, depend on the environment of activities. The role of expectations is crucial: the same climatic conditions and the same basic behaviour of agents in markets can generate either stabilising or destabilising consequences, depending on whether trade is free or regulated.Suppose first a strong corn trade regulation such as that which prevailed during the Ancien Regime - it was forbidden to export corn, not only from the country but also from province to province, all corn brought to a marketplace had to be sold there, tolls had to be paid on roads, etc. What happens in times of bad harvest or even when future harvests are simply predicted to be meagre? (1) On the one hand, referring to past experience, buyers expect rising prices and demand larger amounts of corn. A crop failure, real or only predicted, Boisguilbert stresses, is sufficient to induce strong precautionary behaviour: buyers form precautionary stocks. (2) On the other hand, the sellers amplify the movement - to greatly benefit from the situation, they can even say that harvests are going to be very bad, even if it is not true, thus generating an asymmetry of information. And, as they expect a rising corn price, they do not bring the usual quantities of corn to the market - they keep back speculative stocks and the price movement gains momentum. Thus, with a higher demand and a reduced supply, Boisguilbert notes, the price of corn increases to seven or even ten times its previous value. Consumers are the losers; they are greatly impoverished in real terms. The point to note is the stock/flow mechanism on both sides of the market, which is linked to the expectations of the agents.
Of course, the opposite occurs in the case of a good harvest, when the agents’ expectations induce reverse attitudes in the market.
Buyers expect a lower price and thus demand smaller quantities of corn than usual, while the sellers, who cannot keep the corn in stock and also anticipate lower prices, increase their supply. With a reduced demand and an increased supply, the price falls and farmers are led to ruin. In a regulated system, plentiful years are therefore just as catastrophic as years of shortage, the only difference being the more or less immediately apparent or dramatic effects: “if one [a high price] stabs, the other [a low price] poisons” (Boisguilbert 1691-1714, 847); a low price “produces less noise and commotion than that caused by extreme sterility; but while it is apparently less violent, its effects are more pernicious; it is like the dagger and poison used to kill men” (846).Not only are the two situations damaging for the economy, but they are interlinked, and the one necessarily generates the other in an everlasting cycle. In a regulated context, there is a direct relationship between plenty and shortage of corn, between periods of very low and very high prices. Plenty generates shortage. When prices are low, farmers no longer cultivate poor-quality land. Agricultural production decreases, causing a shortage after the slightest climatic variation. On the other hand, shortage generates plenty because, owing to the high price of corn, more land is cultivated during the following period. Agricultural crises are thus inevitably cyclical and violent, causing ruin on each side of the market in turn.
But whenever free trade prevails, Boisguilbert stresses, the price of corn never fluctuates greatly and there are no crises. The proof is again based on the information available to agents. When bad crops occur, for example, the mere possibility of buying from other places restrains the purchasers from increasing their demand for corn and building up precautionary stocks; the same possibility also restrains the sellers from bringing less corn to the market and speculating. As a result, the price does not fluctuate so much, and proportion prices are roughly maintained.
In this case also, Boisguilbert emphasises the role of expectations; prices are stabilised, he says, even if no corn, or only a small quantity of it, is imported from other provinces or from abroad. An analogous development is made in the case of an overproduction of corn. In case of plenty, buyers do not delay their purchases because they know that the farmers have the possibility to export their corn - and farmers do not overload the market but prefer to sell part of their production elsewhere. Prices are thus stabilised.The propagation and deepening of crises
A final question is also material: why do agricultural crises turn into general depressions? In the context of regulated trade, the stock/flow mechanism linked to expectations in agricultural markets amplifies price and quantity movements considerably. A similar stock/flow mechanism, now linked to financial expectations, causes the propagation of the crisis from agriculture to other markets. As a matter of fact, the agricultural crisis directly affects the income of the leisure class. The rentier is faced with a diminished income flow.[50] His reaction is twofold: he spends less money because of his lower income; but he also spends less because, due to the depressed state of affairs, he expects a lower income in the future and he accordingly adopts a precautionary attitude - hoarding. As a result, the crisis is propagated more rapidly and economic movements are amplified. What Boisguilbert depicts here is a kind of negative multiplier, by which the most superfluous professions, which were the last to appear, are the first to decline. But all the professions are attacked, he asserts, and the regression is general, because people working in the more superfluous trades, facing a lower income, are also progressively obliged to stop buying from other more fundamental trades.
A man who used to go to the theatre every day during his prosperous period, in other words while his farmers, through the sale of their produce to the actors, paid him regularly, experiencing a decrease in his prosperity through some violent cause...
restricts himself to frequenting it just three times a week, compensating the diminution in his receipts through a decrease in his spending. As for the actor, who is affected by the same ill-fortune, he does likewise; while he used to eat meat or even poultry every day, he too restricts his ordinary fare, reducing it to only half the time. Hence, apart from the reducing of the grain price, the farmer of the man who used to go to the theatre, and who is a livestock merchant suffers an increased difficulty in paying his master, who in his turn has difficulty in supporting the actor............................This process continues until reciprocally they have both taken leave of one another, which is the absolute destruction of the state.
(Boisguilbert 1691-1714, 990)
Finally, the propagation and deepening of the crisis also takes place in a different and noticeable way: through price rigidities, for example, in the market for non-agricultural products where downwardly rigid prices prevail; or in the labour market where Boisguilbert puts a particular emphasis on the role of worker coalitions and downwardly rigid money wages.
Back to money and foreign trade
These developments allow us to understand Boisguilbert’s ideas on the usual economic policies of the time concerning money and foreign trade.
As regards money, Boisguilbert’s twofold regime has already been noted. In addition, his ideas on the attainment of the “state of plenty” through a system of equilibrium relative prices, the “proportion prices”, imply that absolute prices do not matter, and neither, therefore, does the quantity of circulating medium: thanks to “paper”, at least when expectations are positive, circulation naturally generates the circulating medium it needs. Criticising the many and persistent complaints about a “lack of money” as the origin of the economic difficulties of the realm, Boisguilbert insisted that this alleged want of circulating medium is only the consequence of the crisis - through the constitution of precautionary stocks of money by the agents and the destruction of a great part of the commercial paper which circulated before - and by no means the cause.
The usual policies of trying to introduce more money into the economy in order to increase the level of activity and get out of stagnation are thus bound to fail: the additional money will simply be hoarded.As regards foreign trade, its role is essential, but in a way totally opposed to the common wisdom of the doctrine of the balance of trade. Its importance is not quantitative, that is, it does not lie in a positive balance because, as just stated, it is useless to attract more precious metals to the country. Its importance is qualitative, as it greatly influences the expectations of agents in the grain market. Free domestic trade without free foreign trade would not be totally efficient. It is thanks to perfect freedom of trade, both domestic and foreign, that expectations end up being fully stabilising and crises are avoided. The size of the flows of imports or exports is of very little significance in this context.