The Great, Mighty, Brilliant A.R.J. Turgot
[Introduction to The Turgot Collection: Writings, Speeches, and Letters of Anne Robert Jacques Turgot, Baron de Laune (2011)]
Anne Robert Jacques Turgot's career in economics was brief but brilliant, and in every way remarkable. In the first place, he died rather young, and second, the time and energy he devoted to economics was comparatively little. He was a busy man of affairs, born in Paris to a distinguished Norman family which had long served as important royal officials. Turgot's father, Michel-Étienne, was a councillor of the Parliament of Paris, a master of requests, and top administrator of the city of Paris. His mother was the intellectual and aristocratic Dame Madeleine-Françoise Martineau.
Turgot had a sparkling career as a student, earning honors at the Seminary of Saint-Sulpice and then at the great theological faculty of the University of Paris, the Sorbonne. As a younger son of a distinguished but not wealthy family, Turgot was expected to enter the Church, the preferred path of advancement for someone in that position in 18th-century France. But although he became an abbé, Turgot decided instead to become magistrate, master of requests, intendant, and, finally, a short-lived and controversial minister of finance (or "controller-general") in a heroic but ill-fated attempt to sweep away statist restrictions on the market economy in a virtual revolution from above.
Not only was Turgot a busy administrator, but his intellectual interests were wide-ranging, and most of his spare time was spent reading and writing, not in economics, but in history, literature, philology, and the natural sciences. His contributions to economics were brief, scattered, and hasty. His most famous work, "Reflections on the Formation and Distribution of Wealth" (1766), comprised only 53 pages. This brevity only highlights the great contributions to economics made by this remarkable man.
In the history of thought, the style is often the man, and Turgot's clarity and lucidity of style mirrors the virtues of his thought, and contrasts refreshingly to the prolix and turgid prose of the physiocrat school.
Laissez-faire and Free Trade
Turgot's mentor in economics and in administration was his great friend Jacques Claude Marie Vincent, Marquis de Gournay (1712–1759). It is fitting, then, that Turgot developed his laissez-faire views most fully in one of his early works, "In Praise of Gournay" ("Éloge de Gournay," or "Elegy to Gournay," 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 of 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 transaction 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 aloof from the fray.
In proceeding to a more detailed analysis of the market process, Turgot points out that self-interest is the prime mover of the process, and that in the free market, individual interest 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 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 of the seller to sell."
It is possible, Turgot conceded, that on the free market there will sometimes be "a cheating merchant and a duped consumer." But then the market will supply its own remedies: "the cheated consumer will learn by experience and will cease to frequent the cheating merchant, who will fall into discredit and thus will be punished for his fraudulence." Turgot, in fact, ridiculed attempts by government to insure against fraud or harm to consumers.
To expect the government to prevent such 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 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 goes on once more in the Hayekian theme of greater knowledge by the particular actors in the market. Gournay's entire laissez-faire doctrine, he points out, "was founded on the complete impossibility of directing, by invariant rules and by continuous inspection a multitude of transactions which by their immensity alone could not be fully known, and which, moreover, are continually dependent on a multitude of ever changing circumstances which cannot be managed or even foreseen." Turgot concludes his elegy to his friend and teacher by noting Gournay's belief that most people were "well disposed toward the sweet principles of commercial freedom," but prejudice and a search for special privilege often bar the way. Every person, Turgot pointed out, wants to make an exception to the general principle of freedom, and "this exception is generally based on their personal interest."
Turgot's final writings on economics were written while he was intendant at Limoges, in the years just before becoming controller-general in 1774. They reflect his embroilment in a struggle for free trade within the royal bureaucracy. In his last work, the "Letter to l'Abbé Terray [the controller-general] on the 'Marque des Fers'" (1773), Turgot trenchantly lashes out at the system of protective tariffs as a war of all against all using State monopoly privilege as a weapon, at the expense of the consumers.
Turgot indeed, in anticipation of Bastiat 75 years later, calls this system a "war of reciprocal oppression, in which the government lends its authority to all against all." He concludes that "whatever sophisms are collected by the self-interest of a few merchants, the truth is that all branches of commerce ought to be free, equally free, and entirely free."
Turgot was close to the physiocrats, not only in advocating freedom of trade, but also in calling for a single tax on the "net product" of land. Even more than in the case of the physiocrats, one gets the impression with Turgot that his real passion was in getting rid of the stifling taxes on all other walks of life, rather than in imposing them on agricultural land. Turgot's views on taxes were most fully, if still briefly, worked out in his "Plan for a Paper on Taxation in General" (1763), an outline of an unfinished essay he had begun to write as intendant at Limoges for the benefit of the controller-general.
Turgot claimed that taxes on towns were shifted backward to agriculture, and showed how taxation crippled commerce, distorted the location of towns, and led to the illegal evasion of duties. Privileged monopolies, furthermore, raised prices severely and encouraged smuggling. Taxes on capital destroyed accumulated thrift and hobbled industry. Turgot's eloquence was confined to pillorying bad taxes rather than elaborating on the alleged virtues of the land tax. Turgot's summation of the tax system was trenchant and hard-hitting: "It seems that Public Finance, like a greedy monster, has been lying in wait for the entire wealth of the people."
Value, Exchange, and Price
One of the most remarkable contributions by Turgot was an unpublished and unfinished paper, "Value and Money," written around 1769. Turgot developed an Austrian-type theory first of Crusoe economics, then of an isolated two-person exchange, which he later expanded to four persons, and then to a complete market. By concentrating first on the economics of an isolated Crusoe figure, Turgot was able to work out economic laws that transcend exchange and apply to all individual actions.
First, Turgot examines an isolated man, and works out a sophisticated analysis of his value or utility scale. By valuing and forming preference scales of different objects, Crusoe confers value upon various economic goods and compares and chooses between them on the basis of their relative worth to him, not only between various present uses of goods but also between consuming them now and accumulating them for "future needs."
Like his French precursors, Turgot sees that the subjective utility of a good diminishes as its supply to a person increases; and like them, 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 "these appraisals are not permanent, they change continually with the need of the person." Turgot proceeds 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."
After bringing the anticipation of future needs into his discussion, Turgot deals with diminishing utility as a function of abundance. Armed with this tool of analysis, he helps solve the value paradox:
Water, in spite of its necessity and the multitude of pleasures which it provides for man, is not regarded as a precious thing in a well-watered country; that man does not seek to gain its possession, since the abundance of this element allows him to find it all around him.
Turgot then proceeds to a truly noteworthy discussion, anticipating the modern concentration on economics as the allocation of scarce resources to a large and far-less-limited number of alternative ends:
To obtain the satisfaction of these wants, man has only an even more limited quantity of strength and resources. Each particular object of enjoyment costs him trouble, hardship, labor, and, at the very least, time. It is this use of his resources applied to the quest for each object which provides the offset to his enjoyment, and forms as it were the cost of the thing.
Although Turgot called the cost of a product its "fundamental value," he comes down generally to a rudimentary version of the later Austrian view that all costs are really "opportunity costs," sacrifices foregoing a certain amount of resources that would have been produced elsewhere. Thus, Turgot's actor (in this case an isolated one) appraises and evaluates objects on the basis of their significance to himself.
First, Turgot says that this significance, or utility, is the importance of his "time and toil" expended, but then he treats this concept as equivalent to productive opportunity foregone, as "the portion of his resources which he can use to acquire an evaluated object without thereby sacrificing the quest for other objects of equal or greater importance."
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 their 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.
Turgot then unfortunately goes off the subjective-value track by adding, unnecessarily, that the terms of exchange arrived at through this bargaining process will have "equal exchange value," since otherwise the person cooler to the exchange "would force the other to come closer to his price by a better offer." It is unclear here what Turgot means by saying that "each gives equal value to receive equal value"; there is perhaps an inchoate notion here that the price arrived at through bargaining will be halfway between the value-scales of each. He is, however, perfectly correct in pointing out that the exchange increases the wealth of both parties. He then brings in the competition of two sellers for each of the products and shows how the competition affects the value-scales of the participants.
A few years earlier in his most important work, "Reflections on the Formation and Distribution of Wealth," 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.
Finally, in his repeated analysis of human action as the result of expectations, rather than in equilibrium or as possessing perfect knowledge, Turgot anticipates the Austrian emphasis on expectations as the key to actions on the market. Turgot's very emphasis on expectations, of course, implies that they can be and often are disappointed in the market.
The Theory of Production and Distribution
In one sense, Turgot's theory of production followed the physiocrats — only agriculture is productive, so there should be a single tax on land. But the major thrust of his theory of production was quite different from that of physiocracy. Even though only land was supposed to be productive, 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.
One of Turgot's most remarkable contributions to economics, the significance of which was lost until the 20th century, was his brilliant and almost off-hand development of the laws of diminishing returns. This gem arose out of a contest for essays on indirect taxation which he had inspired to be held by the Royal Agricultural Society of Limoges. Unhappiness with the winning physiocratic essay by Guérineau de Saint-Péravy led him to develop his own views in "Observations on a Paper by Saint-Péravy" (1767).
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 products variable, but also after a point, "all further expenditure 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." Furthermore, it is "more than likely that as the advances are increased gradually past this point up to the point where they return nothing, each increase would be less and less productive." On the other hand, if the farmer reduces the factors from the point of maximum production, the same changes in proportion would be found.
In short, Turgot had worked out, in fully developed form, an analysis of the law of diminishing returns which would not be surpassed, or possibly equaled, until the 20th century. 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.
The Theory of Capital, Entrepreneurship, Savings, and Interest
In the roster of Turgot's outstanding contributions to economic theory, the most remarkable was his theory of capital and interest, which, in contrast to such fields as utility, sprang up virtually full-blown, unrelated to preceding contributions. Not only that, but 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.
Turgot's theory of capital proper was echoed in the British classical economists as well as the Austrians. In his great "Reflections," Turgot pointed out 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" his 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, etc., until the harvest is reaped and sold and he can recoup his advances. And so it is in every field of production.
Some of this was picked up by Adam Smith and the later British classicists, 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, but he also, as 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, thereby equilibrating market conditions, 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 Professor Hoselitz pointed out, "been completely ignored" until the 20th century.
If the British classicists totally 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. In short, the capitalist's accounting profits will tend to a long-run equilibrium plus the imputed wages of his own labor and skill. In agriculture, manufacturing, or any other field of production, there are two basic classes of producers in society: (a) the entrepreneurs/owners of capital, and (b) the workers.
At this point, Turgot incorporated a germ of 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. For, to develop 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.
Seeing that advances of savings to factors of production are a key to investment, and that this process is only developed in a money economy, 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.
The following year, in his scintillating comments on the paper by Saint-Péravy, Turgot expanded his analysis of savings and capital to set forth an excellent anticipation of Say's Law. Turgot rebutted pre-Keynesian fears of the physiocrats that money not spent on consumption would "leak" out of the circular flow and thereby wreck the economy. As a result, the physiocrats tended to oppose savings per se.
Turgot, however, pointed out 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.
Turgot goes on to point out that the physiocrats assume without proof that savings simply leak out of circulation. Instead, he says, money will return to circulation immediately; savings will be used either (a) to buy land, (b) to be invested as advances to workers and other factors, or (c) to be loaned out at interest. All of these uses of savings return money to the circular flow. Advances of capital, for example, return to circulation in paying for equipment, buildings, raw materials, or wages. The purchase of land transfers money to the seller of land, who in turn will either buy something with the money, pay his debts, or relend the amount. In any case, the money returns promptly to circulation.
Turgot then engaged in a similar analysis of spending flows if savings are loaned at interest. If consumers borrow the money, they borrow in order to spend, and so the money expended returns to circulation. If they borrow to pay debts or buy land, the same thing occurs. And if entrepreneurs borrow the money, it will be poured into advances and investments, and the money will once again return to circulation. Money saved, therefore, is not lost; it returns to circulation.
Furthermore, the value of savings invested in capital is far greater than that piled up in hoards, so that money will tend to return to circulation quickly. Furthermore, Turgot pointed out, even if increased savings actually withdrew a small amount of money from circulation for a considerable time, the lower price of the produce will be more than offset for the entrepreneur by the increased advances and the consequent greater output and lowering of the cost of production. Here Turgot had the germ of the much-later Mises-Hayek analysis of how savings narrows but lengthens the structure of production.
The acme of Turgot's contribution to economic theory was his sophisticated analysis of interest. We have already seen Turgot's remarkable insight in seeing interest return on investment as a price paid by laborers to capitalist-entrepreneurs for advances of savings in the form of present money. Turgot also demonstrated — far ahead of his time — the relationship between this natural rate of interest and the interest on money loans.
He showed, for example, that the two must tend to be equal on the market, since the owners of capital will continually balance their expected returns in different channels of use, whether they be money loans or direct investment in production. The lender sells the use of his money now, and the borrower buys the use, and the "price" of those loans, i.e., the loan rate of interest, will be determined, as in the case of any commodity, by the higgling and haggling of supply and demand on the market.
Increased demand for loans will raise interest rates; increased supply of loans will lower them. People borrow for many reasons — to try to make an entrepreneurial profit, to purchase land, to pay debts, or to consume — while lenders are concerned with just two matters — interest return and the safety of their capital.
While there will be a market tendency to equate loan rates of interest and interest returns on investment, loans tend to be a less risky form of channeling savings. So that investment in risky enterprises will only be made if entrepreneurs expect that their profit will be greater than the loan rate of interest. He also pointed out that government bonds will tend to be the least risky investment, so that they will earn the lowest interest return. Turgot went on to declare that the "true evil" of government debt is that it presents advantages to the public creditors but channels their savings into "sterile" and unproductive uses, and maintains a high interest rate in competition with productive uses.
Pressing on to an analysis of the nature and use of lending at interest, Turgot engaged in an incisive and hard-hitting critique of usury laws, which the physiocrats were still trying to defend. A loan, Turgot pointed out, "is a reciprocal contract, free between the two parties, which they make only because it is advantageous to them." Turgot moved in for the clincher: "Now on what principle can a crime be discovered in a contract advantageous to two parties, with which both parties are satisfied, and which certainly does no injury to anyone else?" There is no exploitation in charging interest just as there is none in the sale of any commodity. To attack a lender for "taking advantage" of the borrower's need for money by demanding interest "is as absurd an argument as saying that a baker who demands money for the bread he sells, takes advantage of the buyer's need for bread."
It is true, Turgot says to the antiusury wing of the Scholastics, that money employed successfully in enterprises yields a profit, or invested in land yields revenue. The lender gives up, during the term of the loan, not only possession of the metal but also "the profit or the revenue he would have been able to procure by it, and the interest which indemnifies him for this loss cannot be looked upon as unjust." Thus, Turgot integrates his analysis and justification for interest with a generalized view of opportunity cost, that is, of income foregone from lending money. And then, above all, Turgot declares, there is the property right of the lender, a crucial point that must not be overlooked.
In the highly influential "Paper on Lending at Interest" (1770), Turgot focused on the crucial problem of interest: why are borrowers willing to pay the interest premium for the use of money? The opponents of usury, he noted, hold that the lender, in requiring more than the principal to be returned, is receiving a value in excess of the value of the loan, and that this excess is somehow deeply immoral. But then Turgot came to the critical point: "It is true that in repaying the principal, the borrower returns exactly the same weight of 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 the usefulness it has for the lender and the borrower?"
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 equal sum which is to be received at a distant date." The key is time preference — the discounting of the future and the concomitant placing of a premium upon the present. Turgot points to 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."
But cannot 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." He added that what has to be compared in a loan transaction is not the value of the money when it is loaned with the value of the money when it has been repaid, but the "value of the promise of a sum of money" compared to "the value of a sum of money available now." For a loan is precisely the transfer of a sum of money in the future. Hence, a maximum rate of interest imposed by law would deprive virtually all risky enterprises of credit.
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, that 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.
As if this were not enough to contribute to economics, Turgot also pioneered a sophisticated analysis of the relation between the interest rate and the quantity of money. There is little connection, he pointed out, between the value of currency in terms of prices and the interest rate. The supply of money may be plentiful, and hence the value of money low in terms of commodities, but interest may at the same time be very high. Perhaps following David Hume's similar model, Turgot asks what would happen if the quantity of silver money in a country suddenly doubled, and that increase were magically distributed in equal proportions to every person. Turgot then points out that prices will rise, perhaps doubling, and that therefore the value of silver in terms of commodities will fall. But, he adds, it by no means follows that the interest rate will fall if people's expenditure proportions remain the same.
Indeed, Turgot points out that, depending on how the spending-saving proportions are affected, a rise in the quantity of money could raise interest rates. Suppose, he says, that all wealthy people decide to spend their incomes and annual profits on consumption and spend their capital on foolish expenditures. The increased consumption spending will raise the prices of consumer goods, and, there being far less money to lend or to spend on investments, interest rates will rise along with prices. In short, spending will accelerate and prices rise, while, at the same time, time-preference rates rise, people spend more and save less, and interest rates will increase.
Thus, Turgot is over a century ahead of his time in working out the sophisticated Austrian relationship between what 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.
As for the movements in the rate of time preference or interest, an increase in the spirit of thrift will lower interest rates and increase the amount of savings and the accumulation of capital; a rise in the spirit of luxury will do the opposite. The spirit of thrift, Turgot notes, has been steadily rising in Europe over several centuries, and hence interest rates have tended to fall. The various interest rates and rates of return on loans, investments, and land will tend to equilibrate throughout the market and tend toward a single rate of return. Capital, Turgot notes, will move out of lower-profit industries and regions and into higher-profit industries and regions.
Theory of Money
While Turgot did not devote a great deal of attention to the theory of money, he had some important contributions to make. In addition to continuing the Hume model and integrating it with his analysis of interest, Turgot was emphatic in his opposition to the now-dominant idea that money is purely a conventional token. By contrast, Turgot declared, "it is not at all by virtue of a convention that money is exchanged for all the other values: it is because it is itself an object of commerce, a form of wealth, because it has a value, and because any value exchanges in trade for an equal value."
In his unfinished dictionary article on "Value and Money," Turgot develops his monetary theory further. Drawing on his knowledge of linguistics, he declares that money is a kind of language, bringing forms of various conventional things into a "common term or standard." The common term of all currencies is the actual value, or prices, or the objects they try to measure. These "measures," however, are hardly perfect, Turgot acknowledges, since the values of gold and silver always vary in relation to commodities as well as each other. All moneys are made of the same materials, largely gold and silver, and differ only on the units of currency. And all these units are reducible to each other, as are other measures of length or volume, by expressions of weight in each standard currency.
There are two kinds of money, Turgot notes, real money — coins, pieces of metal marked by inscriptions — and fictitious money, serving as units of account or numéraires. When real money units are defined in terms of the units of account, the various units are then linked to each other and to specific weights of gold or silver.
Problems arise, Turgot shows, because the real moneys in the world are not just one metal but two — gold and silver. The relative values of gold and silver on the market will then vary in accordance with the relative scarcity of gold and silver in the various nations.
One of the striking examples of injustice in the historiography of economic thought is the treatment accorded to Turgot's brilliant analysis of capital and interest by the great founder of Austrian capital-and-interest theory, Eugen von Böhm-Bawerk. In the 1880s, Böhm-Bawerk set out, in the first volume of his Capital and Interest, to clear the path for his own theory of interest by studying and demolishing previous, competing theories.
Unfortunately, instead of acknowledging Turgot as his forerunner in the pioneering Austrian theory, Böhm-Bawerk brusquely dismissed the Frenchman as a mere physiocratic land-productivity theorist. This unfairness to Turgot is all the more heightened by recent information that 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. Perhaps we must conclude that, in this case as in others, Böhm-Bawerk's need to claim originality and to demolish all of his predecessors took precedence over the requirements of truth and justice.
In the light of Böhm-Bawerk's mistreatment, it is heart-warming to see Schumpeter's appreciative summation of Turgot's great contributions to economics. Concentrating almost exclusively on Turgot's "Reflections," Schumpeter declares 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."
The theory of saving, 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 propositions." 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."
Böhm-Bawerk, Eugen von. 1959. Capital and Interest. Vol. 1. South Holland, Ill.: Libertarian Press. Pp. 39–45.
Fetter, Frank. 1977. Capital, Interest, and Rent: Essays in the Theory of Distribution. Edited by Murray N. Rothbard. Kansas City: Sheed Andrews and McMeel. Pp. 39–45.
Groenewegen, Peter D. 1983. "Turgot's Place in the History of Economic Thought: A Bicentenary Estimate." History of Political Economy 115 (Winter): 611–15.
— — . 1977. The Economics of A.R.J. Turgot. The Hague: Martinus Nijhoff. Pp. xxix-xxx.
— — . 1971. "A Reinterpretation of Turgot's Theory of Capital and Interest." Economic Journal 81: 327–28, 333, 339–40.
Rothbard, Murray N. 1995. Economic Thought before Adam Smith. Vol. 1. An Austrian Perspective on the History of Economic Thought. Cheltenham, U.K.: Edward Elgar. Pp. 383–463.
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Turgot, A.R.J. 1898. Reflections on the Formation and the Distribution of Riches. Translated by William J. Ashley. New York: Macmillan. Reprinted, New York: Augustus M. Kelley, 1921, 1963, and 1971.
 Turgot wrote the "Elegy" in a few days, as material for Gournay's official eulogist, writer Jean François Marmontel. Marmontel simply took extracts from Turgot's essay, and published them as the official eulogy.
 In the course of arguing in this letter for free trade in iron, Turgot anticipated the great Ricardian doctrine of comparative advantage, in which each region concentrates on producing that commodity which it can make efficiently relative to other regions.
 The "Reflections" (1766), remarkably, were scribbled hastily in order to explain to two Chinese students in Paris questions that Turgot was preparing to ask them about the Chinese economy. Rarely has a work so important arisen from so trivial a cause.
 According to Schumpeter, not until a journal article by Edgeworth in 1911.
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