Destabilizing Shocks and Crises

After having stated the conditions for economic equilibrium Boisguilbert had to deal with the destabilizing shocks on the economy: this also constitutes an a contrario proof of the necessity of free trade.

In Boisguilbert’s scheme, a very simple type of society - the “etat d’innocence” - existed for some time after the Fall, in which men, though corrupted, cooperated with each other: the number of needs was limited, the division of labour simple and barter was possible. All this came to an end when violence emerged: some men became lords (the rentiers) and the rest, that is, all those who produce goods and services, were subjected to them. This society is called a “state of civilization and magnificence” (“etat poli et magnifique”).

This transition induced major consequences: (1) with the existence of the rentiers, the number of needs increased and with it professions multiplied; (2) barter was no longer possible and money was introduced in order to facilitate exchanges; (3) the progressive multiplication of the professions, from the most necessary to the most superfluous - the comedian - generates also a kind of ratchet effect, that is, once a profession appears, and even if it is the least necessary, it had to be maintained because any attack on any trade inevitably induces, through the diminution of incomes and expenses, a depressing effect on all the other trades; (4) a one-way flow emerged in the distribution of income, reflecting the class structure of society and the fact that rentiers receive an income from the productive class without giving anything in exchange; and (5) 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 know nothing about trade and its necessities and their action has thus to be enlightened.

For Boisguilbert and in general for most authors during the Ancien Regime, the market for agricultural products is basic for two reasons: to satisfy the important needs and consumption habits of the population and because agriculture is the source of income of the leisure class. This is why agricultural crises lead directly to general depressions through significant spillover effects in different markets. But it is Boisguilbert’s opinion that agricultural crises are due neither to climatic conditions nor to the mere behaviour of the members of the productive class. Prosperity as well as depression depends on the environment of activities. The role of expectations is crucial here: the same climatic conditions and the same basic behaviour in markets can generate either stabilizing or destabilizing consequences, depending on whether trade is free or regulated.

Let us suppose a strong corn trade regulation such as that which prevailed during the Ancien Regime. What happens in times of bad harvest or even when future crops are simply supposed not to be abundant? On the one hand, buyers expect rising prices and demand larger amounts of corn; a supposed crop failure is sufficient to induce strong precautionary behaviour - the formation of precautionary stocks. On the other hand, the sellers amplify the movement. They stress that crops are going to be very bad ones, even if it is not true; they expect a rising corn price, and, therefore, do not bring the usual quantities of corn to the market: they keep back speculative stocks in order to amplify the price movement. Thus, with a higher demand and a reduced supply, the price of corn increases to seven or even ten times its previous value and consumers are greatly impov­erished in real terms.

Why do crises occur so regularly in such a context? 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 thus causing a decrease in agricultural production, which pro­duces a shortage at the slightest climatic variation. On the other hand, shortage generates plenty because, owing to the high price of corn, more land is cultivated. Agricultural crises are thus inevitably cyclical and violent, causing in turn ruin on both sides of the market.

However, whenever free trade prevails, Boisguilbert stresses, the price of corn never fluctuates greatly and there are no crises. The proof is always based upon 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 speculating. As a result, the price does not fluctuate so much and proportion prices are roughly maintained. In this case also Boisguilbert emphasizes the role of expectations; prices are stabilized, he says, even if no corn, or only a small quantity of it, is imported from “foreign” provinces or foreign countries.

Finally, how do agricultural crises turn into general depressions? In the context of a regulated trade, the stock/flow mechanism linked to expectations in agricultural markets amplifies price and quantity movements considerably.

However, the propagation and deepening of the crisis also takes place in a different way: through price rigidities, for example, in the market for non-agricultural products where downward rigid prices prevail; or in the labour market where a particular empha­sis is put on the role of worker coalitions and of downward rigid money wages (on all these points see Faccarello 1986 [1999]).

Two last points must be stressed. First, the essential role played by foreign trade in Boisguilbert’s approach is peculiar and still at the root of the free-trade attitude of Quesnay and Turgot during the following century - a kind of specificity of the French followers of the “liberte du commerce”. The importance of free foreign trade is, first, qualitative. It is this freedom which acts on the expectations of agents in the grain trade and allows prices to stabilize and avoid crises; the size of the flows of imports or exports are of almost no significance in this context. Secondly, the question of foreign trade is disconnected from that of money. The quantity of circulating medium is of no impor­tance: only the system of relative prices matters. Criticizing 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 - constitution of precautionary stocks of money, destruction of a great part of the commercial paper which acted as a medium of exchange - and by no means the cause.

Gilbert Faccarello

See also:

Marie-Jean-Antoine-Nicolas Caritat de Condorcet (I); French Enlightenment (II); Francois Quesnay and Physiocracy (I); Adam Smith (I); Anne-Robert-Jacques Turgot (I).