Anne Robert Jacques Turgot (1726-81) was a French bureaucrat following Richard Cantillon but preceding Adam Smith who made some brief but remarkable contributions to economic thought. This post focuses on his writings about Laissez-faire/free trade. Jacques Claude Marie Vincent de Gournay (1712-59), his mentor in economics, played an influential role in shaping his thoughts.

Unfortunately, Turgot’s works were not sufficiently considered by his contemporaries and immediate successors. His political associations also might have dissuaded people from citing him. In the words of Joseph Schumpeter, “It is not too much to say that analytic economics took a century to get where it could have got in twenty years after the publication of Turgot’s treatise had its content been properly understood and absorbed by an alert profession.”

Free Trade

See Turgot on Free Trade.

Taxation

See Turgot on Taxes and Tariffs.

Utility Theory

  1. Turgot recognized subjective utility and diminishing marginal utility of products. Turgot realized that economic valuations of goods is subjective and ordinal in the minds of the economic agents. Furthermore, these valuations change across time: Turgot derived an early version of the idea of diminishing marginal utility of a good. This provided a good resolution of the water-diamond paradox (See also: Adam Smith’s treatment of the matter in Theory of Value): water, due to its abundance, is not considered precious in a well-watered country where it is easy to obtain in large quantities when necessary.
  2. Turgot described economics as allocation of scarce resources to a limited number of alternative ends. He recognized that to achieve the satisfaction of his wants, man has to put to use his strength, time, and resources, each of which is limited in quantity.
  3. Turgot formed a rudimentary version of the later Austrian idea of opportunity costs. All costs are opportunity costs, sacrifices of certain amount of resources that could have been deployed elsewhere.

Markets

  1. The act of exchange increases the wealth of both parties.
  2. Market processes are the results of expectations. The economy is not at equilibrium. The participants do not possess perfect knowledge.
  3. Bargaining : “The bargaining process, where each party wants to get as much as he can and give up as little as possible in exchange, results in a tendency towards one uniform price of each product in terms of the other.”
  4. Pricing : “The price of any good will vary in accordance with the urgency of need among the participants. There is no ’true price’ to which the market tends, or should tend, to conform.”

Production and Distribution

  1. Division of Labor : “If the same man who, on his own land, cultivates these different articles, and uses them to supply his own wants, was also forced to perform all the intermediate operations himself, it is certain that he would succeed very badly. The greater part of these operations require care, attention and a long experience, such as are only to be acquired by working continuously and on a great quantity of materials.”
  2. Turgot recognized land, labor, and time as the main factors of production. (Notice that capital is not separately mentioned. Turgot operated in a largely agricultural economy.)
  3. Law of Diminishing / Variable Returns : “It can never be assumed that double the advances will yield double the product.” The increase in output is sublinear with respect to the employment of input (beyond a certain point). After a certain maximum is reached, the marginal returns are negative.

Capital, Entrepreneurship, Savings, Investment

  1. Wealth accumulation requires saving (thus, not consuming) a part of what is produced. Savings are stored as money, and then invested in various capital goods. Foregoing consumption precedes savings, savings precedes investments.
  2. A capitalist-entrepreneur must accumulate savings to pay his employees while a product is being developed. This capitalist-entrepreneur also bears market risks.
  3. Production, and stages of production, require time. The owner of capital is willing to wait for the time required to produce, sell, and to make profit.
  4. The interest return on investment is the payment by laborers to the capitalist for the service of advancing money in the present so they need not wait years for their income. (There is an incompleteness in this argument. It is not just a matter of the laborer waiting for the income. It is a matter of risk aversion. Even if all of the profits owing to the particular contributions of a laborer is promised to him when such profits are accrued, laborers, due to their aversion to risk, would likely decline the offer.)
  5. Anticipation of Say’s Law : Savings do not leak out of the economy. They are how advances of capital are generated. Also, it is incorrect to assume that savings lead to a removal of money from circulation, and thus a reduction of price levels. Savings flow back into the economy through investment in capital goods, payments to employees, or loans.

Interest

See Turgot on Interest.

Money

  1. Money is not merely a conventional token. It has value in itself. (In any exchange, objects of equal value are transferred. Money, being one of the transfers, must be in itself valuable.)
  2. Turgot described money as a form of language, one that brought forms of various conventions into a common standard.
  3. He described two kinds of money: real money (metal coins), and fictitious money (numeraire, units of account).
  4. He acknowledged that the relative values of gold and silver would fluctuate according to their relative supplies at any given time.

Reference

  1. Murray Rothbard, Economic Thought Before Adam Smith (1995), Chapter 14.
  2. See Joseph Schumpeter, History of Economic Analysis (1954), for the above quote.