A Journal for Western Man
Turgot on Progress and Political Economy
Dr. Edward W. Younkins
Issue LXVIII- July 24, 2006
Anne-Robert-Jacques Turgot (1727-1781) was a major political and intellectual figure in pre- revolutionary France. He was a man of wide-ranging intellectual interests and is considered to be a symbol or exemplar of the Enlightenment. A.R.J. Turgot was a well-respected social philosopher and political economist despite having written no books. He was a man of letters who was actively involved in pubic life. Turgot’s breadth of interest, enormous erudition, and powers of analysis and synthesis were of the highest order.
Although Turgot’s father was a government official, his family expected the young Turgot to enter the Church and become a priest. He enrolled in a seminary and became an Abbé but ultimately joined the papal bureaucracy first as a regional administrator as Intendant of Limoges and later as Comptroller-General (i.e., Minister of Finance) of France. Originally he was apparently destined for a clerical and academic career, but in 1751 he decided to turn from theological to legal studies and to enter a career in royal administration that entailed administrative and judicial services.
Turgot had a philosophical historian’s interest in social dynamics, social change, development, evolution and progress. In his works on philosophical history, Turgot exhibits a systematic and scientific view of society. Two of the main sources of Turgot’s ideas on history and progress are the two public discourses he delivered in Latin at the opening and closing of the Sorbonne in 1750 when we has 23 years of age. To these he added his 1751 discourses on universal history and a project on political geography. It was after these discourses in 1751 that he decided against ordination in the Church.
Turgot begins by praising the role of divine beneficence and knowledge in human progress but moves on to extol the qualities of human nature that lead to advancement. He saw the Supreme Being, not as an interventionist God, but rather as Prime Mover. Turgot viewed God, not as an immanent Deity, but instead as a First Cause. Early on, he speaks about the benefits of Christianity to the progress of mankind. He noted that Christianity was the moving spirit of mankind’s progress since the fall of the Roman Empire. However, Turgot mainly discussed the secular causes and stages of mankind’s progress. His writings are a mixture of Christianity and humanism with greater emphasis on the latter.
Turgot saw human progress as rooted in human faculties, motivations, will, and fixed natural law. He viewed progress as a basic law of the universe that did not require divine intervention—man progresses under his own power. Turgot’s ideas of world history and progress lay far outside and beyond Biblical teachings. In essence, Turgot discerned that man must learn to adjust and to adapt to the natural laws of the universe. The starting point for the human mind is nature as it is. Man’s problem then is to discover the fundamental principles that underpin the workings of the world. To do this involves the study of the processes of causation through which the past causes the present and the past and present together cause the future. All ages are linked by a series of causes and effects which connects the present state of the world with all those states that have come before it. For Turgot, progress was the inevitable consequence of historical development and, at the same time, the creation of the human will acting with an understanding of the past.
Turgot believed in progress and in the perfectibility of man. The human mind, including the exercise of reason and volition, has the potential for progression. He predicted the future of reason and the inevitable advancement of the human mind. He discussed man’s ability to accumulate experience by receiving impressions from the outside world, reflect upon them, combine them, and improve upon them. For Turgot, man is created by God, is subject to Lockean epistemology, and has the capacity to become a civilized moral person. He saw humanity progressing slowly but somewhat steadily toward greater perfection. Progress is found in man’s singular ability to conceptualize and store knowledge, improving upon it, and making it available to each new generation. Although subject to natural law, man is able to use reason to change and reconstruct, in part, his environment. Turgot was confident and optimistic that knowledge of the past enables man to build a better future.
Subscribing to Rousseau’s idea of the natural goodness of man, Turgot believes that there is a harmony in nature. Accordingly, if men act in accordance with nature’s laws, they would observe themselves to be in harmony with other people. He accepted the notion of enlightened self-interest and repudiated the idea that the origins of man’s actions were solely egotistical. He saw that moral behavior was subject to improvement and that moral progress depended upon obedience to reason and natural law, the practice of tolerance, rational acceptance of law, recognition of the importance of the virtues, and utility. Turgot wanted reason to become more and more important and to diminish emotions and passions.
Turgot observed a fundamental distinction between the physical world and the moral human world. He sees recurrence in the physical order and progress in the human order. He says that the idea of progress distinguished the human order from the physical order and that men do not possess the constancy of the physical world. According to Turgot, there is a basic drive in human nature to create novelty and to innovate. The notion of innovation is the basic new idea in Turgot’s view of the historical world. Mankind is distinguished by innovation, change, and progress. For Turgot, progress is the realm of human beings and constitutes a system of worldly morality.
Turgot developed the four-stage theory of economic and social development from hunter-gatherer, to pastoral, to agricultural, and finally to the peace and prosperity of commercial or market society. Turgot employs a stadial or evolutionary theory of development in which society naturally progresses, evolving in a sequence of regular stages, the last of which is the contemporary commercial world of capitalism. His idea is of the linear progressive advancement of mankind.
Turgot explains that there is a process through which each age inherits the social, political, economic, educational, institutional, artistic, and other legacies and environments of its predecessors. There is a process of acquisition, preservation, and addition to an increasing body of knowledge about man and his world. Turgot discusses an ever-growing accumulation, increasing inheritance, and eternal transmission of the world’s store of knowledge as civilized man has recorded more and more information about the complex and diverse conditions of mankind. This progressive accumulation, augmentation with novel discoveries, and transmission of knowledge has been made possible by language and writing. The past is a valuable store of experience and ideas for mankind. Knowledge and progress go together.
Men are able to synthesize new combinations in order to develop novel ideas. An orderly language is required as a means for the communication of such knowledge and as a repository for the history of mankind’s progress. Such a language provides adequate symbols for displaying one’s ideas and transmitting them to future generations. Turgot viewed language as an index that reflects the stadial development of a given nation or region. It follows that the development of human civilization is a history of language, writing, and symbolic communication. Symbols can hold acquired and new ideas and transmit them socially to successive generations.
According to Turgot, the change process in language is vital - - language should not be too rigid and static. When languages change, they are frequently made more expressive and flexible. New words are invented only when there are new ideas that need to be expressed. Turgot observes that there must be appropriate conditions of language in order for genius to ascend. A precondition of progress is that a society be open to the spirit of change in language as well as in many other areas.
Turgot envisioned inexorable progress with respect to the mathematical nature of all types of specific knowledge. His goal was to have all knowledge expressed as mathematical symbols rather than in imprecise language that can be colored by passion, personal prejudices, politics, irrationality, and imagination. Turgot was looking for a body of rational linguistic symbols and wanted to see the steady conceptualization by man at the sacrifice of his emotional and fanciful propensities. He valued strongly the superiority of the abstract over the concrete.
According to Turgot, history has demonstrated the actuality, direction, and possibility of progress, but it has also shown instances in which progress is hindered by man’s irrationality and by other factors. He notes that inherited ideas can sometimes be obstacles to new knowledge. In addition, he explains that human societies pass through cycles of progression and regression. On the one hand, there is a basic drive in human nature to create novelty and to innovate. On the other hand, there exists a negating principle through which institutions can keep man in a routine of repetition and sameness. Movement as a primordial force, a preference for liberty, and a creative and critical spirit raise societies into civilizations. However, these impulses are sometimes hindered by conservative institutions that become impediments to further progress. Mere repetition adds nothing to progress. World history is thus a struggle between the desire for movement and the proclivity toward quiescence. Turgot adds that men are sometimes lead astray but learn from their mistakes and move forward. He did not see progress heading toward the elimination of all errors, evil, or misery, but he did say that progress involves the overcoming of impeding forces in physical nature, in society, and in man himself. According to Turgot, the human spirit will always propel a society out of stagnation. It follows that nature leads man to truth but at an uncertain and uneven pace.
Turgot did not believe that the Middle Ages were a totally dark period of detrimental impact on the human mind. He said that Christianity through medieval scholastic philosophy fostered reason and acuminated European minds. To this he added the fact that favorable linguistic conditions were developed during the Middle Ages which became essential for the Renaissance to occur. He also observed that barbarism evolved into a system of government and policies and that feudalism was at least better than anarchy. Turgot also noted that the reawakening of speculative science during the Renaissance had been fostered by the introduction of mechanical inventions during the Middle Ages which helped to diffuse scientific knowledge and to make individuals aware of the achievements of those who came before them. He sees technology and artisanship as a foundation for science which then brings even newer technology and products into being and so on. Within a society, Turgot saw technical progress, as embodied in the production techniques of artisans, to be the most enduring and the hardest to destroy. He also sees technical progress occurring throughout history at a relatively stable tempo compared to other forms of progress.
Turgot explains the importance of a “social surplus” as the means by which advances of one stage of progress to the next were made possible. He said that the coming of the agricultural stage of development creates a social surplus which induces trade, tourism, the division of labor, the useful arts, educational advances, other accomplishments, and increased inequalities of life’s conditions in different parts of the world. All nations do not progress regularly or at the same speed. Even at a time when most societies are declining or decaying, Turgot proclaims that there will be some society moving forward. Although he sees evil forces at work throughout history, Turgot is confident that the good will win out and that mankind will continue to grow toward perfection.
Turgot explains that differences in the world during a given time period are due to more than simply adaptations to climate and terrain. He criticizes theories of purely climatic and topographical causes of the variability among various cultures. Turgot says that these differences are better viewed as degrees of social development. However, he does acknowledge that geography is important as an environment for cultural and social processes which bring about progress. There is an infinite variety of historical conditions and circumstances (such as war, colonization, and even chance) which affect the unequal progression of nations. It is only natural that there are inequalities in the progress made by different nations. Turgot also noted that the variations in history were additive.
Turgot inquired into the causes of cultural advancement and cultural decline and asked why creative achievements are seldom found in history. He believed that the causes of creative achievements were found in environments that emphasize reason, liberty, change, mobility, and a diversity of ideas. Welcoming energy, action, and novelty, Turgot contended that the genius played a critical role as dynamic change agent. He was convinced that progress was due to the achievements of the few who were gifted with real genius. Whereas Turgot saw only small differences in the physical abilities of men, he recognized a substantial inequality in their mental capabilities and in the character of their spirits.
Turgot was interested in the contexts and factors of society that enabled genius to develop and in the distribution in time and place of such creative individuals. He assumes that geniuses in a given field are constantly present but that there needs to be a cultural context in existence that makes possible their development and appearance as creative individuals. He sees the biological presence of superior innate powers as only the beginning in the emergence of creative individuals.
Opportunities for progress are always present but they need to be perceived, reflected upon, and acted upon in order to be actualized. Turgot says that a genius grasps novel opportunities and goes forward to articulate his vision. He sees genius as the human moral force that moves world history. Genius thus explains the diversity in the rate and attributes of progress throughout time and space.
Turgot assumed that nature was similarly productive of great minds in various historical periods and that the more earthly inhabitants there were, the more potential geniuses there would be. It follows that favorable conditions in society and in politics are needed in order to promote geniuses to their full capacity. Turgot says that the maintenance of geniuses and the optimization of their potential is the principal operation of the good society. He emphasizes that the accumulation of knowledge requires freedom of inquiry and is in favor of a political structure that promotes opportunities for liberty and spontaneous action. He saw that free exercise of one’s talents was good as long as there was no harm to others.
Turgot witnessed an increasing momentum of both vertical and horizontal progress. With the broadening of communication networks, the Enlightenment was about to bring the entire world into civilization, thus safeguarding against degeneration. Volitional men were exerting ever greater control over nature through technology. He saw mankind as embodying a law of steady perfectibility.
According to Turgot, through their actions men gained ideas of distinction and of unity. Although Turgot embraces boundless diversity, he explains that everything in nature is linked together despite the differences. All aspects of the universe are interconnected. Metaphysically, there is one universe in which every entity is related in some way to all the others. No aspect of the total can exist apart from the total. All entities are related through the inexorable laws of cause and effect. No concrete existent is totally isolated without cause and effect. Each entity potentially affects and may be affected by the others. As inhabitants of the universe, each person is linked via cause and effect, to everything that exists. It follows that all true knowledge is interrelated and interconnected, properly reflecting a unified whole that is the universe.
I believe that the following paragraph from an essay I wrote, called “Toward the Unity and Integration of Knowledge,” does a good job of summarizing, updating, and reflecting the spirit and content of some of Turgot’s thoughts on progress:
“Man develops his potential by accumulating and adding to the knowledge of past generations. Such knowledge expands and accumulates when it is stored in books and other media for the use of future generations. Inventions— from writing to the computer—have been important devices for sorting and recalling accumulated knowledge.
Advances build on progressive developments of knowledge in the past. Whenever we discover something new, that new knowledge is necessarily related to principles that men already knew. Any given item of knowledge requires a prior context of knowledge in order to be grasped by a human being. In turn, that prior context of knowledge is related to another previous context of knowledge, and so on back in time. Any given item of current knowledge is related to mankind’s knowledge as accumulated throughout the ages. Of course, because of division of labor, specialization, and man’s limitations and bounded rationality, all that was required for an item of new knowledge to exist did not and could not exist in any one person’s mind. It is likely that the discoverer of some specific new knowledge has no personal knowledge of much of the great totality of knowledge, nor of all the connections required that his grasp of the new knowledge depends upon. However, it requires that the total knowledge that makes possible the next tier of advancement existed somewhere at some time in men’s minds.
A particular datum of knowledge rests on a previous total that has been discovered, and on all the connections of knowledge that were required for that one item to be apprehended by a person. The web of knowledge interrelationships is not just at a particular time but exists in a hierarchical manner across the centuries. For a man to understand a new piece of knowledge implies all the knowledge that mankind had to attain in orderto get the new bit of knowledge.
Various disciplines analyze and explore different regions of reality. However, after a phenomenon is analyzed and dissected into its component elements, there remains the need for it to be reconstituted back into the totality that is the universe. It is important to have sense of how each specific discipline fits into the whole."
Statesman and Theorist
Turgot’s first writing on economics came in 1749 in his Letter to the Abbé de Cicé in which he attacked the inflationary doctrines of Scottish financier, John Law, who had moved to France. In it, Turgot took a metallist stance, defending gold against the view that it was possible to replace metallic money with paper credit. In 1753, he wrote letters advocating the toleration of Protestants in France. Then, during 1755-1756, he traveled with free trade and free competition advocate and physiocrat Vincent de Gournay. In 1759, he wrote an Elegy for Gournay, explaining why it is impossible for government bureaucrats to direct an economy. Then, in 1761, Turgot was appointed intendant for Limoges, a poor region of France. At this point, Turgot’s intellectual and practical interests turned almost exclusively in the direction of economic thought and practice. However, his later economic work, as a civil servant and statesman, occurs in the context of, and continues to develop, his theories of history and social development.
Turgot blamed much of the economic decline of Limoges on high taxation of the peasants there. Therefore, he wanted to make taxation more equitably based. The taille was based upon the tax collector’s personal estimate of a person’s ability to pay—many aristocrats and clergy were exempt from this tax, leaving the tax burden on the peasants. Unfortunately, Turgot was unable to abolish the taille. However, he was able to eradicate the corvée, which consisted of unpaid forced labor on the royal roads. He was able to replace this forced labor obligation with the paid labor of proper workers, engineers, and contractors who built and improved roads and drainage.
Serving as intendant of the district of Limoges from 1761-1774, Turgot was able to turn Limoges into one of the more prosperous districts in France. During this time period, he was able to do much more than to eliminate compulsory labor for public work. He took many additional measures to save Limoges from widespread famine. Among the many problems he faced there were: the unequal incidence of the tax burden, unproductive agriculture, scarcity, sporadic famine, restricted markets, inadequate poor relief, poor roads, problems in transporting troops, inadequate schools, inefficient gathering of statistics, and so on.
Turgot introduced new crops and new agricultural methods for cultivation and storage. In addition, he established agricultural and veterinary schools as a way to improve the quality of labor in the district. He also reduced tariffs, promoted local free trade, especially in corn, and used government funds in the form of loans to grain markets in order to promote imports into Limoges. Furthermore, Turgot instituted a better relief system for the poor. Not only did he provide work for the poor, he also reduced their taxes, established emergency burdens on the rich, and placed special restrictions on landowners.
In 1766 Turgot drew up a list of questions on economics for two Chinese students whom the Jesuits had sent to study in Paris. To help instruct them in understanding his interrogations, he put his ideas on paper. These 53 pages became his Reflections on the Foundations and Distribution of Riches and included the following themes: the division of labor, the origin and use of money, the improvement of agriculture, the nature of capital and the different modes of its employment, the legitimacy of interest and loans, and revenue from land. Then, in 1769, he wrote Value and Money, which developed an Austrian-type theory beginning with Crusoe economics and moving to two person exchange, to four person exchange, and finally to a competitive market economy.
Turgot had a second opportunity to put free-market reforms into practice when he served as France’s Minister of Finance from 1774 to 1776. He courageously attempted to save the French monarchy from economic disaster by keeping government spending in check and by encouraging private economic enterprise. Turgot sought a lessening of state activity in many areas. The French government had been running a deficit for years and was close to bankruptcy as a type of welfare state for various privileged and entrenched interests that obstructed change. He wanted to return the country to solvency by reducing expenditures and increasing tax revenue. Turgot expected free markets to bring about increased production, leading to lower prices for consumers and to a greater source of tax revenue for the state. He told Louis XVI to cut government spending and to make taxes more equitable, or there would be a danger of revolution. As Comptroller-General, Turgot adopted the slogan, “No Bankruptcy, No Increase in Taxes, No Loans.”
Turgot was concerned with failure in various markets, including those in corn, labor, and land rents. He also observed administrative chaos and the proliferation of self-serving local authorities in the form of bureaus, agencies, boards, courts, and councils. There was also rampant corruption among government officials. In addition, he saw the need for practical political education of France’s citizens. Turgot also looked disapprovingly upon the guild system, a carryover from medieval times, which prevented workers from entering certain occupations without permission—much like contemporary occupational licensing.
To a great extent, as Finance Minister, Turgot tried to institute on a larger scale the reforms he introduced at Limoges. His highest priority was to establish freedom of the grain industry in all of France as he had done in Limoges. He said that maintaining free trade in corn is the best way to prevent scarcity in European nations. Turgot opposed strongly government intervention in the corn trade. During 1775 he attempted to reform the taille—a tax abuse that weighed more heavily on the poor. In 1775, he was able to gain enough support to have the controls lifted on the internal trade of grain, thus restoring the free circulation of grains sold within France. He also wanted to abolish laws restricting the wine industry. The next year Turgot, in one of his Six Edicts of 1776, officially removed the controls on the prices and transportation of grain, flour, and bread. It was with these Six Edicts that he attempted to transform and refashion the traditional monarchy of France.
A second of these edicts called for the eventual abolition of guilds which monopolized various trades. There remained only a few exceptions. Turgot viewed work as a creative act and as a key instrument of freedom. To shackle work with restrictions was to violate the right to liberty and to stifle the possibility of change. The guild system involved the use of close corporations which represented the various trades—no one could exercise such trades without going through a long list of formalities. Turgot insisted that these corporations be suppressed except in a few industries.
In another important edict, Turgot abolished the corvée, thus furthering the freedom of work. He ended the government’s policy of conscripting labor yearly to construct and maintain roads and replaced it with a more efficient tax in money. It had been the practice of the royal department of roads and buildings to conscript the labor of peasants and farm workers, without the payment of wages, in building and repairing the royal highways. Turgot intended, in place of the corvée, to employ a trained road-building force and to pay their wages through a moderate tax increase. Road construction and repair, along with the transportation of military stores, were to be transferred to the supervision of proper engineers. In addition, France was to have transportation of military provisions well-guarded.
The last three of the six Edicts were of little consequence and dealt with the discharge of government officials who imposed restrictions on ports and docks, abolishing tax on the cattle and meat industries, and cutting the tax on suet (i.e., hard animal fat). Unfortunately, the nobility and the upper classes undermined Turgot and his Six Edicts. He ran into insurmountable opposition on the part of nobles, the clergy, and the Parliament of Paris and was dismissed from his position.
Turgot was a clearly articulated defender of individual and economic freedom who realized that interference with freedom can have systemic effects. He observed that conditions in various markets are interrelated through a reciprocal interdependence. He understood the complex interrelations of the ingredients of land, labor, capital, wages, production, consumption, and so on in the economy. He had a grand conception of an open and dynamic society. He said that government should be limited to protecting individuals against injustices and the nation against invasion. Turgot realized that free commerce was the best protection against scarcity. He wanted to abolish crushing taxes, trade restrictions, monopoly privileges, and forced labor and to reduce government expenditures and public debt. Turgot was opposed to military conscription and protectionism. Although he desired freedom in foreign commerce, he was most interested in eliminating restrictions on France’s internal trade. For example, he wanted to introduce banking and taxation reforms. Turgot also wanted to create a scientific system of weights and measures.
During his two years as Minister of Finance, Turgot proposed a gradual progress of deregulation that put trust in the operation of the open market. His goal was to have general liberty in buying and selling. Moderation and gradualism were his form of tactics. His main efforts were to prepare the public for, and to institute, reasonable and incremental reforms.
Turgot wanted to see local self-government in France and ultimately a constitutional government of the nation. He desired political liberty and favored constitutional limits on royal power as well as strong regional governments. Turgot therefore proposed a hierarchy of elected assemblies going from the village up to the national level. Although he was sympathetic to American rebels, he himself would not recommend that they go to war. He also warned Americans that slavery is not in accord with a proper political constitution. Turgot further cautioned America about the danger of possible civil war.
Although Turgot was familiar with, and close to, the Physiocrats with respect to their views on economics, he went further than they do and in a different direction. Like the physiocrats, he promoted free trade and advocated a single tax on the net product of land. He wanted taxes to be shifted back to agriculture. Turgot agrees with the physiocrats that, because ultimately only agriculture is productive, there should be a single tax on land. Taxation of land was thus the only proper source of revenue for the state. He saw land as a unique form of wealth and presented an early view of the law of diminishing returns in agriculture. Turgot’s ultimate goal was actually to eliminate taxes. Not a full-fledged physiocrat, he was more interested in abolishing taxes than in exacting them on agricultural land. However, as long as taxation was a reality, his “ ideal” in taxation would be a single imposition levied only on land. Turgot recommended taxing only the landowners and not the tenants.
In his writings on progress, Turgot had analyzed the relationship between agrarian and industrial organizations. He explained that the development of commercial capital activates growth both in the involved industries and in agriculture. According to Turgot, industry yields a surplus that creates a demand, not only for crafts and products created through new technology, but also for products of the soil.
According to Turgot, each person compares various economic goods, values them, forms ordinal preference scales, and then chooses among them. He does this while considering his present and future wants and needs and the potential uses of the different economic objects. Turgot saw that these values were subjective (i.e., personal) and not able to be measured in any way except ordinally. Explaining the mutual benefits of free exchange, Turgot states that exchange increases the wealth of both parties. He also notes that each transactor wants to gain as much possible and to surrender as little as possible in a given exchange. Like the much later F.A. Hayek, Turgot spoke of the essential particular knowledge of subjective individual actors who tend to act in their perceived self-interest.
Turgot observed that the subjective utility of an economic good decreases as its supply to an individual increases—diminishing utility is a function of abundance. A forerunner of the Marginalist Revolution, Turgot conceived of the idea of diminishing marginal productivity of factor inputs. Increasing the quantity of some factors increases the marginal productivity until a maximum point is attained. Past this point, the marginal productivity will decrease, fall to zero, and ultimately will turn negative. Each increase in input would be less and less productive. Essentially, all that Turgot lacked was the idea of the marginal unit.
Concerned with the classical political economy of scarcity, Turgot saw economics as the allocation of scarce resources to a number of alternative ends. He understood that all costs are opportunity costs because in choosing to employ resources in one way, a person has to give up using specific resources in some other productive manner. Turgot views the capitalist-entrepreneur as desiring to earn his imputed salary plus the opportunity cost (today we would say, lost contribution margin) that he gave up by not investing his money somewhere else.
Turgot observed that natural resources must be converted to economic products through the application of human labor and that production takes time to take place. He thus recognized the critical role of time in the production process. In addition, he noted that capital in advance is essential to the production process. The act of waiting, which is necessary in modern production processes, must be rewarded by a return to the suppliers of capital. This return is, at the minimum, equal to the market rate of interest on the capital invested in the company.
While products are being worked on, there must be advance payments to laborers, who, Turgot explains, are agreeable to paying the capitalists a discount out of production in order to be paid money in advance of the uncertain future revenues. He says that capital advances are essential in all productive enterprises. The interest return on investments can be viewed as the price labor pays to capitalist-entrepreneurs for advancing savings in the form of current money. Turgot emphasized that the time element in production is a function of the use of capital-intensive production methods, the division of labor, and the demand for capital. He apportioned the return to the capitalists into pure interest, depreciation, and entrepreneurial payment that includes a risk premium.
Turgot recognized that capital was required for economic growth and that the only way to amass capital was for individuals not to consume everything that they had produced. He illuminated the meaning of the term “surplus” and explained the link between surplus and economic growth and progress. Turgot observed that a prosperous economy depends upon the free flow of capital—capital promotes economic activity. The greater the amount of saving, the excess of income over consumption, the higher the accumulation of capital will be. Savings are accumulated in the form of money and then are invested in capital goods. He explains that the advance of savings to the factors of production is the essence of investment.
Turgot’s savings and capital formation analysis is one of his greatest contributions in economics, and it became the basis for the 19th century classical theory of savings and investment. He demonstrated clearly the benefit of a policy of capital accumulation and explained that money was essential to the process of accumulating capital and generating economic growth. Money was the required ingredient for transferring savings into investment. Although the surplus accumulated via savings could be held in commodities or in money, Turgot explained that economic society languished before the arrival of metallic money because of the extreme difficulty of aggregating and transforming surplus production into capital. Money allowed people to more easily accumulate and employ their savings.
Money is also a commodity and is not merely a conventional symbol. Turgot explains that it is a form of wealth and has value in itself. Metallic money is more than a sign of value. He said that gold and silver are money by the nature of things and that precious metals are one of the forms of capital. For him, money was intrinsically valuable in the form of gold and silver. He explained that money had to be a commodity having intrinsic value for it to be useful as a medium of exchange. Turgot was against the perspective that the government could effectively issue paper money as a substitute for metallic money. His favored order is one in which metallic money, representing savings, is loaned to borrowers. Savings, in the form of money, are loaned to entrepreneurs who desire to invest. This money is channeled through moneylenders as intermediaries. Some people earn interest income from loans made to farmers, landowners, merchants, and industrialists. Such financiers promote the circulation of capital. Money is vital for transferring savings into investments.
Interest, the price of borrowed money, is determined by the supply and demand for capital and is not immoral. To lend and borrow is the result of a voluntary contract by two parties, each of whom hoped to gain from the transaction. Turgot recognized that a loan is a reciprocal contract between two parties because each believed that it is advantageous to him. Because there exists no exploitation in charging interest, Turgot says that usury laws have been refuted.
Turgot understood that the explanation for interest is time preference—the phenomenon of discounting the future and of setting a premium upon the present. He explains that the present market value of a capital asset tends to equal the aggregate of the expected annual future returns from it discounted by the market rate of interest (or time preference). Turgot also emphasized that an entrepreneur’s expected profits must exceed the loan rate of interest in order for a loan to have taken place—he saw the relationship between the profit rate and the interest rate.
Turgot asserted that the rate of interest was determined in the market via exchange. He perceived the relationship between the interest rate and the quantity of money. More specifically, he observed the interrelationship among the supply and demand for money and people’s time preferences which come together to affect the relative amounts of spending and saving and the interest rate. Turgot saw that a decrease in thrift would raise interest rates and vice versa. He explained that a low interest rate is a function of a high savings rate and that a low interest rate propels the economy to high rates of economic growth. Turgot noted that a change in the rate of accumulated savings affects the interest rate which changes the allocation of resources in the economy. He also talked about the difference between the natural rate of interest that would occur in a free economy and the actual interest on loans (i.e., the difference between the real and nominal rates of interest). Similarly, he distinguished between a product’s natural price and its market price.
Turgot said that money can be employed to: (1) purchase land for cultivation or to lease to farmers; (2) invest in industry by acquiring buildings, materials, and tools for manufacturing; (3) invest in agriculture by renting land and purchasing stock and implements for agricultural entrepreneurship; (4) invest in trade by buying finished goods and other requirements for commercial activities; and (5) lend money to others for the above purposes. According to Turgot, all these activities either directly or indirectly return money to the circular flow—there are no leakages. His analysis of savings and investment thus foretells classical analysis, which denies the possibility of leakage from the exchange process and, therefore, the possibility of a general glut of products. It is clear that Turgot anticipated J.B. Say’s Law of Markets.
Turgot was for the freedom of domestic and foreign trade and against mercantilist regulation, forced cartelization, and special privileges conferred by the government. He said that regulation involves expenses that become a tax on products—the result is overcharging domestic customers and discouraging foreign purchasers. He wanted sound money and warned against the dangers of fiat paper money. Turgot also explained that individual self-interest moves society forward and is in accord with the general interest. He also anticipated the diminishing marginal utility theory of Carl Menger and others. Turgot explained that a person can only pay taxes by reducing consumption and that there was no logical basis for levying different rates on different products. He, like the physiocrats, believed that the strain of taxation should fall only on the owners of land because of the very nature of the world. Turgot was a low-interest advocate who contended that money was the foundation of capital. He saw savings as a real phenomenon that facilities greater investment in the economy. For a busy man of affairs who found little time to devote to economics, he certainly has made some monumental contributions in that field.
Dr. Edward W. Younkins is Professor of Accountancy at Wheeling Jesuit University. He is the author of Capitalism and Commerce: Conceptual Foundations of Free Enterprise [Lexington Books, 2002]. Many of Dr. Younkins's essays can be found online at his personal web page at www.quebecoislibre.org. You can contact Dr. Younkins at email@example.com.
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