Mises Daily

The Brilliance of Turgot

[Excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]

The Man

There is a custom in chess tournaments to award “brilliancy” prizes for particularly resplendent victories. “Brilliancy” games are brief, lucid, and devastating, in which the master innovatively finds ways to new truths and new combinations in the discipline. If we were to award a prize for “brilliancy” in the history of economic thought, it would surely go to Anne Robert Jacques Turgot, the baron de l’Aulne (1727–1781). His 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 that had long served as important royal officials. They were royal “masters of requests,” magistrates, intendants (governors). Turgot’s father, Michel-Étienne, was a councillor of state, president of the Grand Council — an appeals tribunal of the parlement of Paris — a master of requests, and top administrator of the city of Paris. His mother was the intellectual and aristocratic Dame Magdelaine-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 follow family tradition and join the royal bureaucracy. There he became magistrate, master of requests, intendant, and, finally, as we have seen, 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 also wide-ranging, and most of his spare time was spent in reading and writing, not in economics, but in history, literature, philology, and the natural sciences. His contributions to economics were brief, scattered, and hastily written, 12 pieces totaling only 188 pages. His longest and most famous work, “Reflections on the Formation and Distribution of Wealth” (1766), comprises only 53 pages. This brevity only highlights the great contributions to economics made by this remarkable man.

Historians are wont to lump Turgot with the Physiocrats, and to treat him as merely a Physiocratic disciple in government, although he is treated also as a mere fellow traveler of Physiocracy out of an aesthetic desire to avoid being trapped in sectarian ways. None of this does justice to Turgot. He was a fellow traveler largely because he shared with the Physiocrats a devotion to free trade and laissez-faire. He was not a sectarian because he was a unique genius, and the Physiocrats were scarcely that. His grasp of economic theory was immeasurably greater than theirs, and his treatment of such matters as capital and interest has scarcely been surpassed to this day.

In the history of thought the style is often the man, and Turgot’s clarity and lucidity mirrors the virtues of his thought, and contrasts refreshingly with 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). Gournay was a successful merchant who then became royal inspector of manufactures and minister of commerce. Although he wrote little, Gournay was a great teacher of economics in the best sense, through numberless conversations not only with Turgot but also with the Physiocrats and others. It was Gournay who spread the word in France about Cantillon‘s achievement. In addition, Gournay translated English economists such as Sir Josiah Child into French, and his extensive notes on these translations were widely circulated in manuscript in French intellectual circles. It was from Gournay that Turgot absorbed his devotion to laissez-faire, and indeed the origin of the phrase “laissez-faire, laissez-passer” has often been incorrectly attributed to him.

It is fitting, then, that Turgot developed his laissez-faire views most fully in one of his early works, the “Elegy to Gournay” (1759) a tribute offered when the marquis died young after a long illness.1

Turgot made it clear that, for Gournay, 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. Turgot spoke of

innumerable statutes, dictated by the spirit of monopoly, the whole purpose of which were [sic] to discourage industry, to concentrate trade within the hands of few people by multiplying formalities and charges, by subjecting industry to apprenticeships and journeymanships of ten years in some trades which can be learned in ten days, by excluding those who were not sons of masters, or those born outside a certain class, and by prohibiting the employment of women in the manufacture of cloth.

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 intellectuals aloof from the fray.

There is no need to prove that each individual is the only competent judge of the most advantageous use of his lands and of his labor. He alone has the particular knowledge without which the most enlightened man could only argue blindly. He learns by repeated trials, by his successes, by his losses, and he acquires a feeling for it that is much more ingenious than the theoretical knowledge of the indifferent observer because it is stimulated by want.

“All branches of commerce ought to be free, equally free, and entirely free.”A.R.J. Turgot

In proceeding to more detailed analysis of the market process, Turgot points out that self-interest is the prime mover of that process, and that, as Gournay had noted, individual interest in the free market must always coincide with the general interest. The buyer will select the seller who will give him the best price for the most suitable product, and the seller will sell his best merchandise at the lowest competitive price. Governmental restrictions and special privileges, on the other hand, compel consumers to buy poorer products at high 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 the seller to sell.”

It is possible, Turgot conceded, that there will sometimes, on the free market, 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. In a prophetic rebuttal to the Ralph Naders of all ages, Turgot highlighted in a notable passage the numerous fallacies of alleged state protection:

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; it is to restrict the imagination of artificers to all narrow limits of the familiar; it is to forbid them all new experiments. …

It means forgetting that the execution of these regulations is always entrusted to men who may have all the more interest in fraud or in conniving at fraud since the fraud which they might commit would be covered in some way by the seal of public authority and by the confidence which this seal inspires in the consumers.

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:

Thus, with obvious injustice, commerce, and consequently the nation, are charged with a heavy burden to save a few idle people the trouble of instructing themselves or of making inquiries to avoid being cheated. 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 to the “Hayekian” theme of greater knowledge by the particular actors in the market. The entire laissez-faire doctrine of Gournay, he points out, is grounded on the

complete impossibility of directing, by invariant rules and 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.”

One interesting aspect of the elegy is Turgot’s noting of the Dutch influence on the laissez-faire views of Gournay. Gournay had had extensive commercial experience in Holland, and the Dutch model of relative free trade and free markets in the 17th and 18th centuries, especially under the republic, served as an inspiration throughout Europe. In addition, Turgot notes that one of the books that most influenced Gournay was the Political Maxims of Johan de Witt (1623–1672), the great martyred leader of the classical-liberal republican party in Holland. Indeed, in an article on “Fairs and Markets,” written two years earlier for the great Encyclopédie, Turgot had quoted Gournay as praising the free internal markets of Holland. Whereas other nations had confined trade to fairs in limited times and places, “In Holland there are no fairs at all, but the whole extent of the State and the whole year are, as it were, a continuous fair, because commerce in that country is always and everywhere equally flourishing.”

Turgot’s final writings on economics were as intendant at Limoges, in the years just before becoming contrôleur général in 1774. They reflect his embroilment in a struggle for free trade within the royal bureaucracy. In his last work, the “Letter to the Abbé Terray [the controller-general] on the Duty on Iron” (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:

I believe, indeed, that iron masters, who know only about their own iron, imagine that they would earn more if they had fewer competitors. There is no merchant who would not like to be the sole seller of his commodity. There is no branch of trade in which those who are engaged in it do not seek to ward off competition, and do not find some sophisms to make people believe that it is in the State’s interest to prevent at least the competition from abroad, which they most easily represent as the enemy of the national commerce. If we listen to them, and we have listened to them too often, all branches of commerce will be infected by this kind of monopoly. These fools do not see that this same monopoly which they practice, not, as they would have the government believe, against foreigners but against their own fellow-citizens, consumers of the commodity, is returned to them by these fellow citizens, who are sellers in their turn, in all the other branches of commerce where the first in their turn become buyers.

Turgot indeed, in anticipation of Bastiat three-quarters of a century later, calls this system a “war of reciprocal oppression, in which the government lends its authority to all against all,” in short a “balance of annoyance and injustice between all kinds of industry” where everyone loses. 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.”2

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 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 contrôleur général. Turgot claimed that taxes on towns were shifted backward to agriculture, and showed how taxation crippled commerce and how urban taxes 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.”

On one aspect of politics Turgot parted apparently from the Physiocrats. Evidently, Turgot’s strategy was the same as theirs — attempting to convince the king of the virtues of laissez-faire. And yet one of Turgot’s most incisive epigrams, delivered to a friend, was, “I am not an Enclopédiste because I believe in God; I am not an économiste because I would have no king.” However, the latter was clearly not Turgot’s publicly stated view, nor did it guide his public actions.

Value, Exchange, and Price

One of the most remarkable contributions by Turgot was an unpublished and unfinished paper, “Value and Money,” written around 1769.3 In this paper, Turgot, working in a method of successive approximations and abstractions, 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. In short, praxeological theory transcends and is deeper than market exchange; it applies to all action.

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 on various economic goods, and compares and chooses between them on the basis of their relative worth to him. Thus these goods acquire different values. Crusoe chooses not only between various present uses of goods but also between consuming them now and accumulating them for “future needs.” He also sees clearly that more abundance of a good leads to a lower value, and vice versa. Like his French and other Continental precursors, then, 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 (their “esteem-value” to consumers) 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 measurement (and therefore to most mathematical procedures).

Turgot begins his analysis at the very beginning — one isolated man, one object of valuation.

Let us consider this man as exerting his abilities on a single object only; he will seek after it, avoid it, or treat it with indifference. In the first case, he would undoubtedly have a motive for seeking after this object; he would judge it to be suitable for his enjoyment, he will find it good, and this relative goodness could generally speaking be called value, it would not be susceptible to measurement.

Then, Turgot brings in other goods.

If the same man can choose between several objects suitable to his use, he will be able to prefer one to the other, find an orange more agreeable than chestnuts, a fur better for keeping out the cold than a cotton garment; he will regard one as worth more than another; he will consequently decide to undertake those things which he prefers, and leave the others.

This “comparison of value,” this evaluation of different objects, changes continually: “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; 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 scare 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, labour 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.

While there is an unfortunate “real cost” flavor about Turgot’s treatment of cost, and he 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 other’s, 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 weight the possible exchange accordingly. Each will adjust his 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. As Turgot lucidly puts it,

This superiority of the esteem value attributed by the acquirer to the thing he acquires over the thing he gives up is essential to the exchange for it is the sole motive for it. Each would remain as he was, if he did not find an interest, a personal profit, in exchange; if, in his own mind, he did not consider what he receives worth more than what he gives.

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.

Turgot, however, is perfectly correct in pointing out that the act of exchange increases the wealth of both parties to the exchange. 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.

As Turgot had pointed out a few years earlier in his most important work, “The Reflections on the Formation and Distribution of Wealth,”4 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 toward one uniform price of each product in terms of the other. 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.

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 — the unfortunate view that only agriculture is productive, and that, in consequence, there should be a single tax on land. But the main thrust of his theory of production was quite different from that of Physiocracy. Thus, before Adam Smith’s famous example of the pin factory and stress on division of labor, Turgot, in his “Reflections,” had worked out a keen analysis of that division.

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.

And further, even if a man

did succeed in tanning a single hide, he only needs one pair of shoes; what will he do with the rest? Shall he kill an ox to make this pair of shoes? … The same thing may be said concerning all the other wants of man, who, if he were reduced to his own field and his own labour, would waste much time and trouble in order to be very badly equipped in every respect, and would also cultivate his land very badly.

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 law of diminishing returns, or, as it might be described, the law of variable proportions. This gem arose out of a contest that he had inspired to be held by the Royal Agricultural Society of Limoges, for prize-winning essays on indirect taxation. 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, in the Tableau, of assuming a fixed proportion of the various expenditures of different classes of people. But, Turgot pointed out, these proportions are variable, as are the proportions of physical factors in production. There are no constant proportions of factors in agriculture, for example, since the proportions vary according to the knowledge of the farmers, the value of the soil, the techniques used in production, and the nature of the soil and the climatic conditions.

Developing this theme further, Turgot declared that “even if applied to the same field it [the product] is not proportional [to advances to the factors], and it can never be assumed that double the advances will yield double the product.” 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.”

Furthermore, after the maximum point is passed, 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 that would not be surpassed, or possibly equaled, until the 20th century. (According to Joseph Schumpeter, not until a journal article by Edgeworth in 1911!) We have Turgot spelling out in words the familiar diagram in modern economics: Increasing the quantity of factors, in short, raises the marginal productivity (the quantity produced by each increase of factors) until a maximum point, AB, 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 A.R.J. Turgot’s outstanding contributions to economic theory, the most remarkable was his theory of capital and interest which, in contrast with such fields as utility, sprang up virtually full-blown without reference 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. Thus in his great “Reflections” Turgot pointed out that wealth is accumulated by means of unconsumed 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 also a capitalist-entrepreneur. He not only advanced savings to workers and other factors of production; he also, as Cantillon had first pointed out, bore the risks of uncertainty on 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.5 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.6

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 with lengthy periods of advance payment before production and sale. Turgot perceptively pointed out that it is the owner of capital

who will wait for the sale of the leather to return him not only all his advances, but also a profit sufficient to compensate him for what his money would have been worth to him, had he turned it to the acquisition of an estate, and moreover, the wages due to his labour and care, to his risk, and even to his skill.

In this passage, 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: the entrepreneurs, owners of capital, “which they invest profitably as advances for setting men at work”; and the workers or “simple Artisans, who have no other property than their arms, who advance only their daily labour, and receive no profit but their wages.”

At this point, Turgot incorporated a germ of valuable insight from the Physiocratic Tableau — that invested capital must continue to return a steady profit through continued circulation of expenditures, else 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, manufacturing, or commerce 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 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, the interest return on investment (what the Swedish “Austrian” Knut Wicksell would over a century later call the “natural rate of interest”) 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 income. As Turgot put it in his “Reflections,”

Since capitals are the indispensable foundation of all lucrative enterprises, … those who, with their industry and love of labour, have no capitals, or who do not have sufficient for the enterprise they wish to embark on, have no difficulty in deciding to give up to the owners of such capital or money who are willing to trust it to them, a portion of the profits they expect to receive over and above the return of their advances.

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 reproduce current entrepreneurial spending (i.e., replace inventory, capital goods, etc., as they are drawn down or wear out).

Turgot goes on to point out that the Physiocrats assume without proof that savings simply leak out of circulation and lower prices. Instead, money will return to circulation, savings will immediately be used either to buy land; to be invested as advances to workers and other factors; or to be loaned out at interest. All these uses of savings return money to the circular flow. Advances of capital, for example, return to circulation in paying for equipment, buildings, raw material, 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 investment, 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 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 that 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 variations in supply and demand on the market.

Increased demand for loans (”many borrowers”) will raise interest rates; increased supply of loans (”many lenders”) will lower them. People borrow for many reasons, as we have seen: to try to make an entrepreneurial profit, purchase land, pay debts, or consume. 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. Thus investment in risky enterprises will only be made if entrepreneurs expect that their profit will be greater than the loan rate of interest. Turgot also pointed out that government bonds will tend to be the least risky investment, so that they will earn the lowest interest return. He 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 (or, as we would say nowadays, public debt “crowds out” productive private uses of savings).

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.” But a contracted loan is then ipso facto advantageous to both the lender and the borrower. 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.”

And, if the money spent on bread might be considered its equivalent, then in the same way “the money which the borrower receives today is equally an equivalent of the capital and interest he promises to return at the end of a certain time.” In short, a loan contract establishes the present value of a future payment of capital and interest. The borrower gets use of the money during the term of the loan; the lender is deprived of such use; the price of this advantage, or disadvantage, is “interest.”

“No commercial transactions can be anything other than reciprocal.”

A.R.J. Turgot

It is true, Turgot says to the anti-usury wing of the Scholastics, that money as a “mass of metal” is barren and produces nothing, but 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 he could have obtained by investment: the “profit or revenue he would have been able to procure by it, and the interest which indemnified him for this loss cannot be looked on as unjust.” Thus Turgot integrates his analysis and justification for interest with a generalized view of opportunity cost, 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. A lender has

the right to require an interest for his loan simply because the money is his property. Since it is property he is free to keep it … ; if then he does lend, he may attach such conditions to the loan as he sees fit. In this, he does no injury to the borrower, since the latter agrees to the conditions, and has no right of any kind over the sum lent.

As for the Biblical passage in Luke that had for centuries been used to denounce interest, the passage that urged lending without gain, Turgot pointed out that this advice was simply a precept of charity, a “laudable action inspired by generosity,” and not a requirement of justice. The opponents of usury, Turgot explained, never press on to a consistent position of trying to force everyone to lend his savings at zero interest.

In one of his last contributions, the highly influential “Paper on Lending at Interest” (1770), Turgot elaborated on his critique of usury laws, at the same time amplifying his noteworthy theory of interest.7 He pointed out that usury laws are not rigorously enforced, leading to widespread black markets in loans. But the stigma of usury remains, along with pervasive dishonesty and disrespect for law. Yet, every once in a while, the usury laws are sporadically and unpredictably enforced, with severe penalties.

Most importantly, Turgot, in the “Paper on Lending at Interest”, 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 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?”

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 worth 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 money loaned with the sum of money repaid, but the “value of the promise of a sum of money compared to the value of money available now.” For a loan is precisely the transfer of a sum of money in exchange for the current promise 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 corresponding concept of capitalization — that is, the present capital value of land or another 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.8

As if this were not enough to contribute to economics, Turgot also pioneered a sophisticated analysis of the interrelation between the interest rate and the “quantity theory” 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. Specifically, Turgot asks us to assume that there are one million ounces of silver money in existence in a country, and “that there is brought into the State, in some manner or other, a second million ounces of silver, and that this increase is distributed to every purse in the same proportion as the first million, so that he who had two ounces before, now has four.”

Turgot then explains 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, “if all this money is carried to the market and employed in the current expenses of those who possess it.”9 The new money will not be loaned out, since only saved money is loaned and invested.

Indeed, Turgot points out that, depending on how the spending-savings 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 greater 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, land, etc., 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.

Theory of Money

While Turgot did not devote a great deal of attention to the theory of money proper, 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. In his critique of a prize-winning paper by J.J. Graslin (1767), Turgot declares Graslin totally mistaken in “regarding money purely as a conventional token of wealth.” By contrast, Turgot declares, “it is not at all by virtue of a convention that money is exchanged for all the other values: 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, of 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 to each other.

All monies 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 monies 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 abundance and 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 pioneering Austrian theory, Böhm-Bawerk brusquely dismissed the Frenchman as a mere Physiocratic naive land-productivity (or “fructification”) 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 other cases, Böhm-Bawerk’s need to claim originality and to demolish all his predecessors took precedence over the requirements of truth and justice.10

In the light of Böhm-Bawerk’s mistreatment, it is heartwarming 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.” All in all,

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.11

Turgot’s influence on later economic thought was severely limited, probably largely because his writings were unfairly discredited among later generations by his association with Physiocracy, and by the pervasive myth that Adam Smith had founded economics. And those 19th-century economists who did read Turgot failed to grasp the significance of his capital, interest, and production theories. Though Adam Smith knew Turgot personally, and read the Reflections, the influence on Smith, whose conclusions, apart from a broadly laissez-faire approach, were so different, was apparently minimal. Ricardo, typically, was heedless and uncomprehending, simply admiring Turgot for his thankless political role as liberal reformer. James Mill had a similar reaction. Malthus admired Turgot’s views on value, but the only substantial Turgotian influence in England was on the great champion of the subjective utility theory of value, Samuel Bailey. Although the influence on Bailey is patent, he unfortunately did not refer to Turgot in his work, so that the utility tradition in Britain could not rediscover its champion.

It is on the French, self-avowed Smithian, J.B. Say, that Turgot had the most influence, especially in the subjective utility theory of value, and to some extent in capital and interest theory. Say was the genuine heir of the French laissez-faire, proto-Austrian, 18th-century tradition. Unfortunately, his citations of Turgot underplayed the influence, and his obeisances to Smith were highly exaggerated, both probably reflecting Say’s characteristic post-Revolutionary reluctance to identify himself closely with the pro-absolute monarchy, proagriculture Physiocrats, with whom Turgot was unfortunately lumped in the eyes of most knowledgeable Frenchman. Hence the ritualistic turn toward Smith.

Other French and Italian Utility Theorists of the 18th Century

Two other distinguished French writers on economics, both contemporaries of Turgot, must be mentioned as contributing greatly to economic thought. The abbé Ferdinando Galiani (1728–1787) was a fascinating character who, though a Neapolitan, may be counted as largely French. Reared by his uncle, the chief almoner to the king, Galiani early came into contact with the leaders of Neapolitan thought and culture. At the age of 16, Galiani translated some of Locke’s writings on money into Italian, and began an eight-year study of money. During the same period, Galiani took religious orders. At the age of 23, in 1751, he published his remarkable major work, Della Moneta (On Money), which set forth a utility-scarcity theory of the value of goods and money. Unfortunately, Della Moneta has never been fully translated from the Italian.

In 1759, Abbé Galiani became secretary and later head of the Neapolitan embassy in Paris, where he stayed for ten years, and where the erratic, witty, erudite, four-and-a-half-foot-tall Galiani became the social lion of the Paris salons. After his return to Italy, though he wrote several minor works in linguistics and politics, and held several leading positions in the civil service, he considered himself an exile from his beloved France.

In the late Scholastic-French-Italian tradition, Galiani expounded the value of goods as subjective valuation by consumers. Value is not intrinsic, he pointed out, but “a sort of relationship between the possession of one good and that of another in the human mind.” Man always compares the valuation of one good with another, and exchanges one good for another in order to increase the level of his satisfactions. The quantity demanded of a good is inverse to its price, and the utility of each good is in inverse relation to its supply. Alert to the law of diminishing utility upon increasing supply, Galiani, like his predecessors, stops just short of the marginal concept, but is at any rate able to solve the “value paradox” — the view that use-value is severed from price- or exchange-value because bread or water, goods highly useful to man, are very cheap on the market whereas fripperies like diamonds are highly expensive.

Thus Galiani writes, with great subtlety and perception and with his usual flair,

It is obvious that air and water, which are very useful for human life, have no value because they are not scarce. On the other hand, a bag of sand from the shores of Japan would be an extremely rare thing — yet, unless it has a certain utility, it is without value.

Galiani then states the alleged value paradox, quoting from the 17th-century Italian writer Bernardo Davanzati. Davanzati laments that “A living calf is nobler than a golden calf, but how much less is its price!” while “others say: ‘A pound of bread is more useful than a pound of gold.’” Galiani then brilliantly demolishes this doctrine:

This is a wrong and foolish conclusion. It is based on neglect of the fact that “useful” and “less useful” are relative concepts, which depend on the specific circumstances. If somebody is in want of bread and of gold, bread is surely more useful for him. This agrees with the facts of life, because nobody would forego bread, take gold, and die from hunger. People who mine gold never forget to eat and to sleep. But somebody who has eaten his fill will consider bread the least useful of goods. He will then want to satisfy other needs. This goes to show that the precious metals are companions of luxury, that is, of a status in which the elemental needs are taken care of. Davanzati maintains that a single egg, priced at 1/2 grain of gold, would have had the value of protecting the starving Count Ugolino from death at his tenth day in gaol — a value in excess of that of all the gold in the world. But this confuses awkwardly the price paid by a person unafraid to die from hunger without the egg, and the needs of Count Ugolino. How can Davanzati be sure that the Count would not have paid 1,000 grains of gold for the egg? Davanzati obviously had made a mistake here, and, although he is not aware of it, his further remarks indicate that he knows better. He says: What an awful thing is a rat. But when Casilino was under siege, prices went up so much that a rat fetched 200 guilders — and this price was not expensive because the seller died from hunger and the buyer could save himself.

Professor Einaudi informed us in 1945 that “this is the classical section which is always read in Italian seminars when a telling illustration of the principle of diminishing utility is to be given.” In addition to illuminating this crucial principle, the above passage also shows how people, satiated with bread, turn to the consumption or use of other goods foregone.12

In addition to taking a subjectivist, “pre-Austrian” approach to utility and value of goods, Galiani also introduced the same approach toward interest on loans, outlining at least the rudiments of the time-preference theory of interest in passages that influenced Turgot. Thus Galiani wrote,

From this arises the rate of exchange and the rate of interest — brother and sister. The former equalizes the present and the spatially distant money. It operates with the help of an apparent agio, which … equate[s] the real value of the one to that of the other, one being reduced because of lesser convenience or greater risk. Interest equalizes present and future money. Here the effect of time is the same as that of spatial distance in the case of the rate of exchange. The basis of either contract is the equality of the real value.

Galiani defines a loan as “the surrender of a good, with the proviso that an equivalent good is to be returned, not more.” But, in contrast to the centuries-long tradition of anti-”usury” writers who proceed from the same premise to denounce all interest on loans as illegitimate, Galiani points out what would later be a fundamental insight of the Austrian School — a good, in this case an “equivalent,” is not to be described by its physical properties or similarities, but rather by its subjective value in the minds of individual actors.

“It is not labour that is the cause of value, but value that attracts labour.”

A.R.J. Turgot

Thus, Galiani writes that those who conventionally define the equivalence of goods as “weight, or similarity of form,” focus on the physical objects in each exchange (such as units of money). But, he adds, those who adopt such definitions “understand little of human activities.” He reiterates, instead, that value is not an objective characteristic inherent in goods, but rather it is “the relationship of goods to our needs.” But then, “Goods are equivalent when they provide equal convenience to the person with reference to whom they are considered as equivalent.”

Another prefigurement of the Austrian approach was Galiani’s intimations toward a theory of distribution, which were not taken up until Böhm-Bawerk, probably independently, arrived at a similar but much fuller analysis a century and a half later. For Galiani hinted in his Della Moneta that it was not labor costs that determine value, but the opposite — it is value that determines labor costs. Or, more concretely, that the utility of products and the scarcity of various types of labor determine the prices of labor on the market. Though he begins his discussion by stating that labor in the sense of human energy “is the sole source of value,” he quickly goes on to point out that human talents vary greatly, so that the price of labor will vary. Thus,

I believe that the value of human talents is determined in the very same way as that of inanimate things, and that it is regulated by the same principles of scarcity and utility combined. Men are born endowed by Providence with aptitudes for different trades, but in different degrees of scarcity. … It is not utility alone, therefore, which governs prices: for God causes the men who carry on the trades of greatest utility to be born in large numbers, and so their value cannot be great, these being, so to speak, the bread and wine of men; but scholars and philosophers, who may be called the gems among talents, deservedly bear a very high price.

Galiani was undoubtedly overoptimistic about the “very high price” to be commanded by scholars and philosophers on the market, having overlooked his own scintillating example of scarce goods, such as “bags of sand from the shores of Japan,” which, though rare, may have little or no utility or value in the minds of consumers.

On the theory of money proper, Abbé Galiani paved the way for the Austrian Menger-Mises analysis of the origin of money by demonstrating that money — the medium of exchange — must originate on the market as a useful metal, and that it cannot be selected de novo, as a convention by some sort of social contract. In a lively assault on money-as-a-convention that could apply to any social-contract explanation of the origin of the state, Galiani derided

those who insist that all men had once come to an agreement, making a contract providing for the use, as money, of the per se useless metals, thus attaching value to them. Where did these conventions of all mankind take place, and where were the agreements concluded? In which century? At which place? Who were the deputies with whose help the Spaniards and Chinese, the Goths and the Africans made an agreement so lasting that during the many centuries which have passed the opinion never was changed?

Galiani pointed out that the sort of metal that would be chosen on the market would have to be universally acceptable, and hence would need to be highly valuable as a nonmonetary commodity, easily portable, durable, uniform in quality, easily recognizable and calculable, and difficult to counterfeit. Wiser than Smith and Ricardo after him, Galiani warned that money should not be regarded as ideally an invariable measure of value, for the value of a unit of account necessarily varies as the purchasing power of money changes, and therefore such an invariable standard cannot exist. As Galiani put it with typical pungency, “Finally, this concept of stable money is a dream, a mania. Every new and richer mine that is discovered immediately changes all measures, without showing an effect on them but changing the price of the goods measured.”

Galiani made clear throughout Della Moneta that his entire analysis was embedded in the conceptual framework of the natural law. Natural laws, he explained, have a universal validity in economic affairs as much as in the laws of gravity or of fluids. Like physical laws, economic laws can only be violated at one’s peril; any action defying the order of nature will be certain to fail.

The abbé proved his point by citing a hypothetical case. Suppose that a Mohammedan country suddenly converts to Christianity. The drinking of wine, previously prohibited, now becomes legal, and its price will rise because of the small quantity available in the country. Merchants will bring wine into the country, and new wine producers will enter the field, until profits in dealing with wine fall back to their normal equilibrium level, “as when waves are made in a vessel of water, after the confused and irregular movement the water returns to its original level.”

This equilibrating action of the market, which Galiani shows also applies to money, is furthermore propelled, marvelously enough, by self-interest, greed, and the quest for profit.

And this equilibrium wonderfully suits the right abundance of commodities of life and earthly welfare, although it derives not from human prudence or virtue but from the very vile stimulus of sordid profit: Providence having contrived the order of everything for her infinite love of men, that our vile passions are often, in spite of us, ordered to the advantage of the whole.

The economic process, Galiani concluded, was guided by a “Supreme Hand” (shades of Adam Smith’s “invisible hand” a generation later!).

The institution of money, indeed, enables all people to “live together,” to be interdependent on each other, while still benefiting greatly in pursuing their individual ends. As Galiani eloquently puts it,

I saw, and everyone can now see, that trade, and money which drives it, from the miserable state of nature in which everyone thinks for himself, have brought us to the very happy one of living together, where everyone thinks and works for everybody else: and in this state not for the principle of virtue and piety alone (which are insufficient in dealing with entire nations), but we earn our living for the purpose of our personal interest and welfare.

Galiani’s analysis is fuelled by an original and profound comparative analysis of seeing, mentally, what happens in different social systems. Thus he noted that, to avoid the inconveniences of barter, people might try “living together” literally, in communities, as monasteries and convents do, but this is hardly feasible for entire nations. In a larger society, there might be a system where everyone produces whatever goods he wishes and then deposits them in a public warehouse where everyone could draw on the common store. (Galiani might have phrased it thus, “from each according to his ability, to each according to his needs”). But the system would collapse because lazy people would try to live at the expense of exploiting the hard-working ones, who in turn would work less. The public warehouse could, on the other hand, give producers “receipts” that would then exchange for other goods at relative prices fixed by the prince; but one problem is that the prince might well inflate by printing an excessive number of such receipts. So that metals are the only viable money.

Galiani’s youthful work On Money was his great contribution to economics. In his early days an ardent Catholic abbé and monsignore, in Paris Galiani became a free thinker, roué, and Voltairean wit. In the course of rising in the bureaucracy, he completely changed his economic views, publishing the well-known Dialogues on the Grain Trade in 1770, which ridiculed laissez-faire and free trade, natural rights, and the very idea of economic laws transcending time and place. Thus Galiani was not only an excellent utility theorist, but in his later years a forerunner of the 19th-century historicists.

In his private letters, Galiani reveals quite frankly the underlying reason for his later conservatism, adherence to the status quo, cynical Machiavellianism, and critique of any liberal or laissez-faire disruption of the existing state of affairs. Attacking the idea of worrying about anyone’s welfare but one’s own, Galiani writes, “The devil take one’s neighbor!” and that “All nonsense and disturbance arise from the fact that everybody is busy pleading somebody else’s cause, and nobody his own.” He wrote that he was well satisfied with the existing French government because it was frankly expedient for him to do so; specifically, he did not wish to lose his luxurious income of 15,000 livres.

Of course Galiani found it expedient to confine his Machiavellianism to private letters while pretending to moralism in his public writings.13 Thus in his Della Moneta, in both the original edition and in the second edition in 1780, Galiani bitterly denounced the institution of slavery: “There is nothing that appears to me more monstrous than to see human beings like ourselves, vilified, enslaved and treated like animals.” But his approach was very different in a letter written in 1772:

I believe that we should continue to buy negroes as long as they are sold, unless we succeed in letting them live in America. … The only profitable trade is to exchange the blows one gives for the rupees one collects. It is the trade of the strongest.14

In short, anything is right if it succeeds.

Another Italian utility theorist, in his case an analyst of exchange, was the highly influential Neapolitan abate Antonio Genovesi (1712–1769). Genovesi was born near Salerno, and became a priest in 1739. At first a professor of ethics and moral philosophy at the University of Naples, Genovesi shifted his interests and became a professor of economics and commerce, in which he was a notable teacher. In his rather disjointed Lezione de economía civile (Lessons on Civil Economy) of 1765, the learned Genovesi took a moderate free-trade stance. More important, he pointed out the essential double inequality of value involved in any exchange. In any exchange, he said each party desires the object he acquires more than he does the object given up. The superfluous is given up for the necessary. Hence the mutual benefit necessarily present in any exchange.

The last gasp of subjective-utility theory in the 18th century was set forth brilliantly by the French philosopher Étienne Bonnot de Condillac, abbé de Mureaux (1715–1780). Condillac, a leading empiricist-sensationalist philosopher, was the younger brother of the communist writer Gabriel Bonnot de Mably, and son of the Vicomte de Mably, who served as secretary to the parliament of Grenoble. After being educated at a theological seminary in Paris, Condillac left to pursue philosophy, publishing several philosophical works in the 1740s and 1750s.

In 1758, Condillac went to Italy as tutor to the son of Duke Ferdinand of Parma. There his interest was stimulated in economics by acquaintance with the pro–free trade economic policymaker, Tillot, state secretary to the duke. At the same time, Condillac learned of the work of Galiani and other Italian subjective-value theorists. After a decade as tutor of the future duke, Condillac published a 16-volume Course of Studies he had prepared for his pupil.

When Condillac returned to Paris in the late 1760s, interest in trade, political economy, and Physiocracy was at its height, and Condillac, always favoring free trade on his own subjectivist grounds very different from the Physiocrats, was stimulated to write his last work, Le commerce et le gouvernement considérés relativement l’un à l’autre (Commerce and Government), published in 1776, only a month before The Wealth of Nations.

In Commerce and Government, unfortunately destined to be swept away by Smith’s all-commanding influence, Condillac set forth and defended a sophisticated subjective-utility theory of value. The last of the utility-scarcity theorists before the advent of the British classicists, Condillac declared that the source of value of a good is its utility as evaluated by individuals in accordance with their needs and desires. Utility of goods increases with scarcity and decreases with abundance. Exchange arises because the utility and value of the two goods exchanged is different — indeed the reverse — for the two people engaging in the exchange.

As in the case of Genovesi, in exchange the superfluous is exchanged for the object in insufficient supply. But Condillac was careful to point out that exchange does not mean we give up things that are totally useless. An exchange only implies, as a later commentator summed it up, “that what we acquire is worth more to us than what we part with.”15

As Condillac put it, “It is true that I might sell a thing that I wanted; but as I would not do so except to procure one that I wanted still more, it is evident that I regard the first as useless to me in comparison with the one that I acquire.” The point is relative, rather than absolute, superabundance. And this set of superfluous-for-scarce exchanges greatly increases the all-around productivity of the market economy. Notes Condillac,

The superabundance of the cultivators forms the basis of commerce … the cultivators procure the thing which has a value for them, while they give up one which has a value for others. If they could make no exchanges, their superabundance would remain in their hands, and would have no value for them. In fact, the superabundant corn which I keep in my granary, and which I cannot exchange, is no more wealth for me than the corn which I have not yet produced from the earth. Hence next year I shall sow less.

Furthermore, Condillac pressed on and generalized Galiani’s utility theory of costs and distribution, declaring that “a thing does not have value because it costs, as people suppose; it costs because it has a value.”16 And the value is determined by the subjective opinions of individuals on the market.17

Condillac, moreover, refuted the typical classical and preclassical doctrine, dominant since Aristotle, that the fact that one good exchanges for another must mean that the two goods are of “equal value.” Condillac rebutted this point neatly, a rebuttal that was promptly lost for 100 years: “It is false that in exchanges one gives equal value for equal value. To the contrary, each of the contractors always surrenders a lesser for a greater value.”

Since consumer utility and demand determine value, people will tend to receive income from production to whatever extent they satisfy consumers in the production process. Hence, as Hutchison summarizes, “people could expect to receive in income whatever they could expect to receive from the sale of such productive agents as they commanded. … Pay was regulated in markets by sellers and buyers, and depended on productivity and the expected utility of what was produced.”18 Since greater intelligence and skill is in scarcer supply, it will tend to command a higher price, or wage, on the market.

Condillac’s theory of entrepreneurship followed Cantillon, profits of the entrepreneur depending on the way in which he meets uncertainty and is able to forecast future markets. Like Cantillon, too, Condillac denied that money’s value is arbitrary or determined by mere convention or government. The value of metallic money depends on the utility of monetary metals and their supply on the market, so that money’s value is determined, as is that of other goods, by supply and demand. And Condillac also followed Cantillon in analyzing the equilibrating, self-adjusting processes in international money flows and the balance of payments.

It was, then, not a great exaggeration when, nearly a century afterward, the British economist Henry Dunning Macleod waxed rhapsodic over his rediscovery of the then-forgotten Condillac. Macleod noted that Condillac drew from his insights an ardent devotion to complete free trade, and to an attack, far more consistent than that of his contemporary Adam Smith, on all forms of government intervention in the economy. Macleod noted Condillac’s discussion of the “mischievous consequences produced by all violations of, and attacks on” the principle of free markets:

These are wars, custom-houses, taxes on industry, privileged and exclusive companies, taxes on consumption, tamperings with the currency, government loans, paper money, laws about the export and import of corn, laws about the internal circulation of grain, tricks of monopolists.

Condillac, Macleod went on,

first proclaimed, as far as we are aware, the doctrine that in commerce both sides gain; the old doctrine sanctioned by Montaigne, Bacon, and many others, was that what one side gains, the other loses. This pernicious folly was the cause of many bloody wars. The Physiocrats then maintained that in exchange the values are equal. But Condillac laid down the true doctrine, that in commerce both sides gain. And he shows truly that the whole of commercial dynamics arise from these inequalities of value.

Himself joining in anticipation of the imputation, or marginal-productivity theory of wages or other factor pricing, Macleod also underlined the significance of Condillac’s insight that costs are determined by a good’s value to the consumer rather than the other way round. In that way, Condillac helped inadvertently to refute the entire Smithian labor-theory-of-value apparatus that was coming into being the same year that Condillac published his work. As Macleod puts it,

Thus, too, he strikes at the root of many of the prevailing theories of value, which are based upon labour; he says that people pay for things because they value them, and they do not value them because they pay for them, as is commonly supposed. This is exactly the doctrine of Dr. [Archbishop Richard] Whately, when he says that people dive for pearls because they fetch a high price, and they do not fetch a high price because people dive for them … that it is not labour that is the cause of value, but value that attracts labour.

Macleod concludes his discussion with a rhetorical flourish. Noting that Condillac and Smith’s classic works were published in the same year, he contrasted Smith’s “universal celebrity” with Condillac’s neglect, but then notes that the world is rediscovering Condillac and learning of the superiority of his conception of economics to that of Smith. And, besides, Macleod wrote not without justification, “the beautiful clearness, and simplicity” of Condillac contrasts notably with “the incredible confusions and contradictions of Adam Smith.” However, “at length he will receive justice.”19 If we contrast, however, the hypertrophy of Smith’s bicentennial celebration with the nonexistence of Condillac’s, we might not be so quick to conclude that history has yet judged correctly.

This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.

  • 1The “Elegy” was prepared by Turgot in a few days as material for Gournay’s official eulogist, the writer Jean François Marmontel. Marmontel simply took extracts from Turgot’s essay and published them as the official eulogy.
  • 2In the course of arguing for free trade in iron in this letter, Turgot anticipated the great “Ricardian” doctrine of comparative advantage, in which each region concentrates on producing that commodity it can make efficiently relative to other regions.
  • 3Although the incomplete article remained unpublished for decades, it was written for an aborted dictionary of commerce to be edited by Turgot’s lifelong friend and fellow Gournay disciple, the Abbé André Morellet (1727–1819). Morellet published a prospectus for the new dictionary in the same year, a prospectus that repeated Turgot’s model of isolated exchange very closely. It is known, furthermore, that this prospectus was owned by Adam Smith.
  • 4The “Reflections” (1766), remarkably, were “scribbled” hastily in order to explain to two Chinese students in Paris questions Turgot was preparing to ask them about the Chinese economy. Rarely has a work so important arisen from so trivial a cause!
  • 5In an illuminating recent work on the history of the theory of the entrepreneur, Professors Hebert and Link examine the problem of whether an entrepreneur is only a capitalist or whether everyone, including workers without capital, is an entrepreneur. Turgot is considered as retreating from Cantillon’s wider concept of entrepreneurship. But the important point here is that the capitalist-entrepreneur is the motor force of the market economy, and that by focusing for the first time on this vitally important figure, Turgot made an enormous stride forward. And we can hail this achievement even if it is also true that Turgot neglected the wider, less important areas of entrepreneurship. See Robert F. Hebert and Albert N. Link, The Entrepreneur. Mainstream Views and Radical Critiques (New York: Praeger, 1982), pp. 14–29 and passim.
  • 6[6] Bert F. Hoselitz, “The Early History of Entrepreneurial Theory,” in J. Spengler and W. Allen (eds), Essays in Economic Thought (Chicago: Rand McNally and Co., 1960), p. 257.
  • 7Turgot’s paper was applauded in Bentham’s notable Defence of Usury, and was reprinted along with Bentham’s essay in its French and Spanish translations in the late 1820s.
  • 8As Turgot puts it, “a capital is the equivalent of a rent equal to a fixed portion of that capital and conversely, an annual rent represents a capital equal to the amount of that rent repeated a certain number of times, according as the interest is at a higher or lower rate.”
  • 9While the Hume-Turgot model is highly useful in isolating and clarifying distinctions between the price level and interest, and in highlighting the impact of a change in the quantity of money, it is still a retrogression from the sophisticated process analysis of Cantillon.
  • 10The paper, written for the seminar of Karl Knies in Heidelberg, was presented to the Austrian F.A. von Hayek by Böhm-Bawerk’s widow in 1922–1923. See P.D. Groenewegen (ed.) The Economics of A.R.J. Turgot (The Hague: Martinus Nijhoff, 1977), pp. xxix–xxx. For Böhm-Bawerk’s dismissal of Turgot, see Eugen von Böhm-Bawerk, Capital and Interest (South Holland, 111.: Libertarian Press, 1959), I, pp. 39–45. For the American Austrian Frank Fetter’s defence of Turgot as against Böhm-Bawerk, see Frank A. Fetter, Capital, Interest, and Rent: Essays in the Theory of Distribution, ed. by M. Rothbard (Kansas City: Sheed Andrews and McMeel, 1977), pp. 24–6. For more on the treatment of Turgot’s theory of interest by economists, see Groenewegen “A Reinterpretation of Turgot’s Theory of Capital and Interest,” Economic Journal, 81 (June 1971), pp. 327–8, 333, 339–40. For Schumpeter on Böhm-Bawerk’s mistreatment of Turgot, see J.A. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), p. 332n. On the Marshall-Wicksell-Cassel controversy over Böhm-Bawerk’s treatment of Turgot’s theory of interest, see Peter D. Groenewegen, “Turgot’s Place in the History of Economic Thought: A Bicentenary Estimate,” History of Political Economy, 15 (Winter 1983), pp. 611–15.
  • 11Schumpeter, op. cit., note 10, pp. 249, 325.
  • 12“Einaudi on Galiani,” in H.W. Spiegel (ed.), The Development of Economic Thought (New York: John Wiley & Sons, 1952), pp. 77–8.
  • 13Indeed publicly self-professed Machiavellianism or amoralism is almost always self-contradictory, since it will hardly serve Machiavellian ends.
  • 14See Joseph Rossi, The Abbé Galiani in France (New York: Publications of the Institute of French Studies, 1930), pp. 47–8.
  • 15Oswald St Clair, A Key to Ricardo (New York: A.M. Kelley, 1965), p. 293.
  • 16My translation. See Emil Kauder, “Genesis of the Marginal Utility theory,” Economic Journal (Sept. 1953), p, 647.
  • 17T. Hutchison, Before Adam Smith: The Emergence of Political Economy, 1662–1776 (Oxford: Basil Blackwell, 1988), p. 326.
  • 18Hutchison, op. cit., note 17, p. 327.
  • 19Henry Dunning Macleod, A Dictionary of Political Economy (London, 1863), 1, pp. 534–5.
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