Anne-Robert-Jacques Turgot, Baron de Laune (May 10, 1727 – March 18, 1781) was perhaps the leading economist of eighteenth century France. Although often put together with Francois Quesnay and the Physiocrats, his contributions were quite distinct and advanced considerably upon Physiocratic theories. More importantly, Turgot exercised a deep influence upon Adam Smith, who was living in France in the 1760s and was on intimate terms with Turgot. Many of the concepts and ideas in Smith's Wealth of Nations are drawn directly from Turgot.
Although Turgot's theoretical work was largely ignored at the time, due mostly to his removal from public office and the abandonment of his reforms, many of his ideas have proved to be worthy of study, revived in the twentieth century. His contributions include theories of price formation, marginal productivity in anticipation of the work of the Austrian School, and understandings of topics such as savings, investment, capital, and entrepreneurship that stand as worthy accounts today. Turgot's ideas were thus far ahead of his time, or rather the time and place in which he lived was not open to the ideas that could have been available. At least, through Adam Smith, many of these ideas were brought to the receptive attention of the academic world, albeit through the Scottish Enlightenment rather than in his own native France.
In the end, Turgot decided against ordination and instead entered a career in the royal administration. From 1751 to 1760, he worked at the parliament in Paris. He hobnobbed with the philosophes and contributed several articles (two of them on linguistics) to the famous Encyclopèdie of Denis Diderot.
In 1755-1756, Turgot accompanied the free-trade advocate Vincent de Gournay on his official tours of France and, on their travels, Gournay got him thinking about economic matters. Upon Gournay's death, Turgot penned a marvelous eulogy to his fallen mentor (Turgot 1759).
In August 1761, Turgot was appointed intendant of the genéralité of Limoges, which included some of the poorest and most over-taxed parts of France. There he remained for thirteen years. He was already deeply influenced by the theories of Quesnay and Gournay, and set to work to apply them as far as possible in his province. He introduced various reforms, including substituting a tax in place of the corvée (required unpaid labor), compiling a land register for tax purposes, and combatting a famine while maintaining free trade in grain. Limoges, hitherto one of the poorest areas of France, became a showpiece for what a determined and enlightened administrator could accomplish. During this time he also published several economic treatises which proved highly influential.
Later, in July 1774, Turgot was appointed minister of the navy, mainly due to Maurepas, the "Mentor" of Louis XVI. His appointment met with general approval, and was hailed with enthusiasm by the philosophes. A month later he was appointed controller-general. His first act was to submit to the king a statement of his guiding principles: "No bankruptcy, no increase of taxation, no borrowing." Turgot's policy, known as the "Six Edicts" (Turgot 1776), in face of the desperate financial position was to enforce the most rigid economy in all departments.
The immediate cause of Turgot's fall from favor is uncertain. Some speak of a plot, of forged letters containing attacks on the queen shown to the king as Turgot's, and of a series of notes on Turgot's budget shown to the king to prove his incapacity. There is yet another possible explanation: Turgot attempted to abolish the guilds in February 1776, trying to replace the unnatural and stultifying hierarchy of corporatism with a natural and free one. He assumed that masters and workers would form natural hierarchical relationship in the marketplace and that the natural would maintain order. Corporatists thought it dangerous illusion; severing one link eventually might lead to destroying the whole system and even the monarchy itself.
Thus, at the end, on May 12, 1776, he was ordered to send in his resignation. He at once retired to La Roche-Guyon, the château of the duchesse d'Enville, but returned shortly to Paris, where he spent the rest of his life in scientific and literary studies, being made vice-president of the Académie des Inscriptions et Belles-Lettres in 1777. He died on March 18, 1881.
Turgot developed his laissez-faire views most fully in one of this early works, the Elegy to Gournay (Turgot 1759), a tribute offered when the Marquis died young after a long illness. Turgot made it clear that the network of detailed mercantilist regulation of industry was not simply intellectual error, but a veritable system or coerced cartelization and special privilege conferred by the State. For Turgot, freedom of domestic and foreign trade followed equally from the enormous mutual benefits of free exchange. All the restrictions "forget that no commercial transactions can be anything other than reciprocal," and that it is absurd to try to sell everything to foreigners while buying nothing from them in return.
Turgot then goes on, in his Elegy, to make a vital pre-Hayekian point about the uses of indispensable particular knowledge by individual actors and entrepreneurs in the free market. These committed, on-the-spot participants in the market process know far more about their situations than do intellectuals far distant from the situation.
Turgot points out that self-interest is the prime mover of the process, and that individual interest in the free market must always coincide with the general interest. The buyer will select the seller who will give him the lowest price for the most suitable product, and the seller will sell his best merchandise at the highest competitive price.
Governmental restrictions and special privileges, on the other hand, compel consumers to buy poorer products at higher prices. Turgot concludes that
the general freedom of buying and selling is therefore … the only means of assuring, on the one hand, the seller of a price sufficient to encourage production, and, on the other hand, the consumer of the best merchandise at the lowest price. (Turgot 1759).
Turgot concluded that government should be strictly limited to protecting individuals against "great injustice" and the nation against invasion. "The government should always protect the natural liberty of the buyer to buy, and the seller to sell." (Turgot 1759).
To expect the government to prevent any fraud from ever occurring would be like wanting it to provide cushions for all the children who might fall. To assume it to be possible to prevent successfully, by regulation, all possible malpractices of this kind is to sacrifice to a chimerical perfection the whole progress of industry.
Turgot (1759) added that all such regulations and inspections "always involve expenses, and that these expenses are always a tax on the merchandise, and as a result overcharge the domestic consumer and discourage the foreign buyer." Turgot concludes with a splendid flourish:
To suppose all consumers to be dupes, and all merchants and manufacturers to be cheats, has the effect of authorizing them to be so, and of degrading all the working members of the community (Turgot (1759).
One of the most remarkable contributions by Turgot was an unpublished and unfinished paper, "Value and Money," written around 1769. By concentrating first on the Austrian-type theoretical approach of an isolated "Crusoe" figure, Turgot was able to work out economic laws that transcend exchange and apply to all individual actions.
Turgot saw that the subjective utility of a commodity diminishes as its supply to a person increases; he lacks only the concept of the marginal unit to complete the theory. But he went far beyond his predecessors in the precision and clarity of his analysis. He also sees that the subjective values of goods will change rapidly on the market, and there is at least a hint in his discussion that he realized that this subjective value is strictly ordinal and not subject to measure.
Turgot saw that a "comparison of value, this evaluation of different objects, changes continually with the need of the person." Turgot proceeded not only to diminishing utility, but to a strong anticipation of diminishing marginal utility, since he concentrates on the unit of the particular goods:
When the savage is hungry, he values a piece of game more than the best bearskin; but let his appetite be satisfied and let him be cold, and it will be the bearskin that becomes valuable to him (Turgot 1769).
Having analyzed the actions of an isolated "Crusoe," Turgot brings in "Friday," that is, he now assumes two men and sees how an exchange will develop. Here, in a perceptive analysis, he works out the Austrian theory of isolated two-person exchange, virtually as it would be arrived at by Carl Menger a century later.
First, he has two savages on a desert island, each with valuable goods in his possession, but the goods being suited to different wants. One man has a surplus of fish, the other of hides, and the result will be that each will exchange part of his surplus for the others, so that both parties to the exchange will benefit. Commerce, or exchange, has developed.
Turgot then changes the conditions of his example, and supposes that the two goods are corn and wood, and that each commodity could therefore be stored for future needs, so that each would not be automatically eager to dispose of his surplus. Each man will then weigh the relative "esteem" to him of the two products, and supplies and demands until the two parties agree on a price at which each man will value what he obtains in exchange more highly than what he gives up. Both sides will then benefit from the exchange.
A few years earlier in his Reflections (Turgot 1766) Turgot had pointed out the bargaining process, where each party wants to get as much as he can and give up as little as possible in exchange. The price of any good will vary in accordance with the urgency of need among the participants; there is no "true price" toward which the market tends.
Even though only land was supposed to be productive (according to the physiocrats with whose theories Turgot was generally in agreement) Turgot readily conceded that natural resources must be transformed by human labor, and that labor must enter into each stage of the production process.
Here Turgot had worked out the rudiments of the crucial Austrian theory that production takes time and that it passes through various stages, each of which takes time, and that therefore the basic classes of factors of production are land, labor, and time:
What his labour causes the land to produce beyond his personal wants is the only fund for the wages which all the other members of the society receive in exchange for their labour. The latter, in making use of the price of this exchange to buy in their turn the products of the husbandman, only return to him (as matter) … exactly what they have received from him. We have here a very essential difference between these two kinds of labour. (Daire 1844, 9-10).
How then does surplus-value arise? It does not arise from circulation, but it is realized in circulation. The product is sold at its value, not above its value. There is no excess of price over value. But because it is sold at its value, the seller realizes a surplus-value. This is only possible because he has not himself paid in full for the value which he sells, that is, because the product contains a portion of value which has not been paid for by the seller, which he has not offset by an equivalent. And this is the case with agricultural labor. The seller sells what he has not bought.
Another of Turgot's remarkable contributions to economics was his brilliant and almost off-hand development of the laws of diminishing returns. Unhappiness with the physiocratic essay by Guerineau de Saint-Peravy led him to develop his own views in "Observations on a Paper by Saint-Peravy" (Groenewegen 1977, 116). Here, Turgot went to the heart of the physiocratic error of assuming a fixed proportion of the various expenditures of different classes of people.
But, Turgot pointed out, not only are the proportions of factors to product variable, but also after a point:
all further expenditures would be useless, and that such increases could even become detrimental. In this case, the advances would be increased without increasing the product. There is therefore a maximum point of production which it is impossible to pass (Groenewegen 1977, 117).
Increasing the quantity of factors raises the marginal productivity (the quantity produced by each increase of factors) until a maximum point is reached, after which the marginal productivity falls, eventually to zero, and then becomes negative. Here, Turgot had worked out, in fully developed form, an analysis of the law of diminishing returns which would not be surpassed, or even equaled, until the twentieth century.
Turgot worked out almost completely the Austrian theory of capital and interest a century before it was set forth in definitive form by Eugen von Böhm-Bawerk. In Reflections (Turgot 1766), Turgot made clear that wealth is accumulated by means of consumed and saved annual produce. Savings are accumulated in the form of money, and then invested in various kinds of capital goods.
Furthermore, as Turgot pointed out, the "capitalist-entrepreneur" must first accumulate saved capital in order to "advance" their payment to laborers while the product is being worked on. In agriculture, the capitalist-entrepreneur must save funds to pay workers, buy cattle, pay for buildings and equipment, and so forth, until the harvest is reaped and sold and he can recoup his advances. And so it is in every field of production.
Adam Smith and the later British classicists agreed to much of it, but they failed to absorb two vital points. One was that Turgot's capitalist was a capitalist-entrepreneur. He not only advanced savings to workers and other factors of production, he also, as Richard Cantillon had first pointed out, bore the risks of uncertainty of the market. Cantillon's theory of the entrepreneur as a pervasive risk-bearer facing uncertainty, had lacked one key element: an analysis of capital and the realization that the major driving force of the market economy is not just any entrepreneur but the capitalist-entrepreneur, the man who combines both functions.
Yet Turgot's memorable achievement in developing the theory of the capitalist-entrepreneur, has, as Joseph Schumpeter pointed out much later "been completely ignored" until the twentieth century. As the British neglected the entrepreneur, they also failed to absorb Turgot's proto-Austrian emphasis on the crucial role of time in production, and the fact that industries may require many stages of production and sale.
Turgot anticipated the Austrian concept of opportunity cost, and pointed out that the capitalist will tend to earn his imputed wages and the opportunity that the capitalist sacrificed by not investing his money elsewhere. At this point, Turgot introduced a valuable insight from the physiocrats: invested capital must continue to return a steady profit through continued circulation of expenditures, or dislocations in production and payments will occur.
Integrating his analyses of money and capital, Turgot then pointed out that before the development of gold or silver as money, the scope for entrepreneurship had been very limited. In order to develop and keep the division of labor and stages of production, it is necessary to accumulate large sums of capital, and to undertake extensive exchanges, none of which is possible without money.
Turgot then proceeded to a crucial Austrian point: since money and capital advances are indispensable to all enterprises, laborers are therefore willing to pay capitalists a discount out of production for the service of having money paid them in advance of future revenue. In short, that the interest return on investment is the payment by laborers to the capitalists for the function of advancing them present money so that they do not have to wait for years for their home.
As opposed to physiocrats, who tended to oppose savings per se, Turgot made clear that advances of capital are vital in all enterprises, and where might the advances come from, if not out of savings?
He also noted that it made no difference if such savings were supplied by landed proprietors or by entrepreneurs. For entrepreneurial savings to be large enough to accumulate capital and expand production, profits have to be higher than the amount required to merely maintain the current capital stock.
Insofar as interest is concerned, Turgot, in his 1770 "Paper on Lending at Interest" (Groenewegen 1977), focused on the crucial problem of interest: why are borrowers willing to pay the interest premium for the use of money? This question, smacking of loan-sharking and usury, was a standard physiocrats’ issues; they called them “somehow deeply immoral.”
Turgot’s critical point, at this stage, was that:
It is true that in repaying the principal, the borrower returns exactly the same weight of the metal which the lender had given him." But why, he adds, should the weight of the money metal be the crucial consideration, and not the "value and usefulness it has for the lender and the borrower? (Groenewegen 1977)
Specifically, arriving at the vital Böhm-Bawerkian-Austrian concept of time preference, Turgot urges us to compare "the difference in usefulness which exists at the date of borrowing between a sum currently owned and an unequal sum which is to be received at a distant date" (Groenewegen 1977). The key is time preference—the discounting of the future and the concomitant placing of a premium upon the present. Here Turgot invokes the well known motto, "a bird in the hand is better than two in the bush."
Since a sum of money actually owned now "is preferable to the assurance of receiving a similar sum in one or several years time," the same sum of money paid and returned is scarcely an equivalent value, for the lender "gives the money and receives only an assurance." To a question whether this loss in value "be compensated by the assurance of an increase in the sum proportioned to the delay, Turgot concluded that "this compensation is precisely the rate of interest" (Groenewegen 1977).
In addition to developing the Austrian theory of time preference, Turgot was the first person, in his Reflections, to point to the corollary concept of capitalization, that is, the present capital value of land or other capital good on the market tends to equal the sum of its expected annual future rents, or returns, discounted by the market rate of time preference, or rate of interest.
Thus, Turgot is over a century ahead of his time in working out the sophisticated Austrian relationship between what Ludwig von Mises would call the "money-relation"—the relation between the supply and demand for money, which determines prices or the price level—and the rates of time preference, which determine the spending-saving proportion and the rate of interest. Here, too, was the beginning of the rudiments of the Austrian theory of the business cycle, of the relationship between expansion of the money supply and the rate of interest.
Turgot had a deep influence upon Adam Smith, who was living in France in the 1760s and was on intimate terms with Turgot. Many of the concepts and ideas in Smith's Wealth of Nations are drawn directly from Turgot.
As opposed to his official dismissive attitude to Turgot, Eugen von Böhm-Bawerk, in his first evaluation of Turgot's theory of interest in a still-unpublished seminar paper in 1876, reveals the enormous influence of Turgot's views on his later developed thought.
Joseph Schumpeter provided an appreciative summation of Turgot's great contributions to economics. Concentrating almost exclusively on Turgot's Reflections, Schumpeter declared that his theory of price formation is "almost faultless, and, barring explicit formulation of the marginal principle, within measurable distance of that of Böhm-Bawerk" (Schumpeter 1954).
In presenting Turgot's work to the twentieth century, Groenewegen noted that his theory of savings, investment, and capital is "the first serious analysis of these matters" and "proved almost unbelievably hardy. It is doubtful whether Alfred Marshall had advanced beyond it, certain that J. S. Mill had not. Böhm-Bawerk no doubt added a new branch to it, but substantially he subscribed to Turgot's proposition" (Groenewegen 1971).
He concluded that Turgot's interest theory is "not only by far the greatest performance … the eighteenth century produced but it clearly foreshadowed much of the best thought of the last decades of the nineteenth" (Groenewegen 1971, 339-340).
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