Question

1. Explain Physiocratic thought, including its background, the various classes and their interaction, and the policy implications of this school of thought.

Answer 1

Physiocratic thought is regarded as the first and foremost economic school of thought that presented economics in most systematical way. They believed in natural system and advocated free market system. Further, they argued that net value can be created only in agricultural sector. Put differently, only agricultural sector produces net profit.

They divided society in two class: viz productive and non-productive. Agricultural class was considered as productive class and other were put into non-productive class.

Policy implications:

Hence, they suggested that policies must be directed towards the agricultural sector and government should pursue free market policies. Tax should be imposed only on agricultural sector as it is only sector that produces net surplus. There is no use of levying taxes on manufacturing sector since it does not produce surplus.