Austerity is like 'bleeding' the patient – and may be as deadly
IN the late 18th Century in the court of Louis XIV, the Sun King of France, a doctor named Francois Quesnay met Adam Smith. Adam Smith wrote the founding text of economics in 1776 and influenced Quesnay as much as Quesnay influenced Smith. Quesnay was a scientist, one of the first of the medical profession who learned from scientific experiment as much as from direct, clinical experience.
Quesnay wanted to bring Smith's ideas and the new scientific mode of inquiry together. The circulation of blood around the organs of the body had just been discovered, and Quesnay wanted to apply this thinking to the economy. He produced the first national accounts for France, then the largest economy in the world, based on the idea that all wealth comes from surpluses generated by agriculture. Money was the blood that flowed around this system and the "pulse"' of the nation, in a sense, was how much output it was producing, or how much people were spending, or how much income people had. Because the economy was a closed system– much like an unpunctured human body – these three things, output, income, and expenditure, would amount to the same thing.
The "economic table" Quesnay produced still underpins the national accounts we use today. Statisticians and economists use these national accounts to measure the value of the economy's output over some time. These accounts are quite complicated, but imagine that the economy produces only apples, for one euro each. If last year the economy produced 100 apples, the value of its output is obviously €100. If this year the economy produces 120 apples, then we can say the economy "grew" by 20pc.