The Brilliance of Turgot

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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.

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.

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

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.

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

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

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

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

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

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

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.

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."

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).

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

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."

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?"

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

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

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 nave land-productivity (or "fructification")

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

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

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.

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

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

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

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.

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

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 economa 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.

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]

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.

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.

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

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.


The "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.

In 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.

Although 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.

The "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!

In 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.

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.

Turgot’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.

As 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."

While 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.

The 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, Ill.: 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.

Schumpeter, op. cit., note 10, pp. 249, 325.

"Einaudi on Galiani," in H.W. Spiegel (ed.), The
Development of Economic Thought (New York: John Wiley &
Sons, 1952), pp. 77–8.

Indeed publicly self-professed Machiavellianism or amoralism is
almost always self-contradictory, since it will hardly serve Machiavellian

See Joseph Rossi, The Abbé Galiani in France (New
York: Publications of the Institute of French Studies, 1930),
pp. 47–8.

Oswald St Clair, A Key to Ricardo (New York: A.M. Kelley,
1965), p. 293.

My translation. See Emil Kauder, "Genesis of the Marginal
Utility theory," Economic Journal (Sept. 1953), p.

T. Hutchison, Before Adam Smith: The Emergence of Political
Economy, 1662–1776 (Oxford: Basil Blackwell, 1988), p.

Hutchison, op. cit., note 17, p. 327.

Henry Dunning Macleod, A Dictionary of Political Economy
(London, 1863), 1, pp. 534–5.


N. Rothbard
(1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic vice
president of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report
, and appointed Lew as his
literary executor. See
his books.

Best of Murray Rothbard

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