WEBVTT NOTE 14. The Brilliance of Turgot 1 00:00:00.000 --> 00:00:04.720 CHAPTER XIV THE BRILLIANCE OF TOUREGAUX 2 00:00:04.720 --> 00:00:06.740 1. 3 00:00:06.740 --> 00:00:09.260 THE MAN 4 00:00:09.260 --> 00:00:15.560 There is a custom in chess tournaments to award brilliancy prizes for particularly resplendent 5 00:00:15.560 --> 00:00:17.660 victories. 6 00:00:17.660 --> 00:00:24.320 Brilliancy games are brief, lucid and devastating, in which the master innovatively finds ways 7 00:00:24.320 --> 00:00:28.860 to new truths and new combinations in the discipline. 8 00:00:28.860 --> 00:00:34.160 If we were to award a prize for brilliancy in the history of economic thought, it would 9 00:00:34.160 --> 00:00:44.240 surely go to Anne Robert Jacques Tourgaux, the Baron d'Olonne, 1727 to 1781. 10 00:00:44.240 --> 00:00:50.460 His career in economics was brief, but brilliant, and in every way remarkable. 11 00:00:50.460 --> 00:00:56.080 In the first place, he died rather young, and second, the time and energy he devoted 12 00:00:56.080 --> 00:00:59.520 to Economics was comparatively little. 13 00:00:59.520 --> 00:01:05.360 He was a busy man of affairs, born in Paris to a distinguished Norman family which had 14 00:01:05.360 --> 00:01:09.100 long served as important royal officials. 15 00:01:09.100 --> 00:01:15.600 They were royal masters of requests, magistrates, entendants, governors. 16 00:01:15.600 --> 00:01:22.360 Torgot's father, Michel Etienne, was a counselor of state, president of the Grand Council, 17 00:01:22.360 --> 00:01:28.920 and Appeals Tribunal of the Parliament of Paris, a Master of Requests and Top Administrator 18 00:01:28.920 --> 00:01:39.120 of the City of Paris. His mother was the intellectual and aristocratic Dame Magdalen Françoise Martinot. 19 00:01:39.120 --> 00:01:45.160 Turgot had a sparkling career as a student, earning honors at the Seminary of Saint-Sulpice 20 00:01:45.160 --> 00:01:51.760 and then at the great theological faculty of the University of Paris, the Sorbonne. 21 00:01:51.760 --> 00:01:57.360 As a younger son of a distinguished but not wealthy family, Turgot was expected to enter 22 00:01:57.360 --> 00:02:03.360 the church, the preferred path of advancement for someone in that position in eighteenth-century 23 00:02:03.360 --> 00:02:04.860 France. 24 00:02:04.860 --> 00:02:11.100 But although he became an abbé, Turgot decided instead to follow family tradition and join 25 00:02:11.100 --> 00:02:13.560 the royal bureaucracy. 26 00:02:13.560 --> 00:02:20.320 There he became magistrate, master of requests, entendant, and, finally, as we have seen, 27 00:02:20.320 --> 00:02:27.380 A short-lived and controversial Minister of Finance, or Controller General, in a heroic 28 00:02:27.380 --> 00:02:34.260 but ill-fated attempt to sweep away statist restrictions on the market economy in a virtual 29 00:02:34.260 --> 00:02:37.620 revolution from above. 30 00:02:37.620 --> 00:02:43.980 Not only was Turgot a busy administrator, but his intellectual interests were wide-ranging, 31 00:02:43.980 --> 00:02:50.300 and most of his spare time was spent in reading and writing, not in economics, but in history, 32 00:02:50.300 --> 00:03:04.300 literature, philology and the natural sciences. His contributions to economics were brief, scattered and hastily written, 12 pieces, totaling only 188 pages. 33 00:03:04.300 --> 00:03:16.300 His longest and most famous work, Reflections on the Formations and Distribution of Wealth, 1766, comprised only 53 pages. 34 00:03:16.300 --> 00:03:23.100 This brevity only highlights the great contributions to economics made by this remarkable man. 35 00:03:23.100 --> 00:03:32.300 Historians are wont to lump Turgot with the physiocrats and to treat him as merely a physiocratic disciple in government, 36 00:03:32.300 --> 00:03:43.100 although he is treated also as a mere fellow traveler of physiocracy out of an aesthetic desire to avoid being trapped in sectarian ways. 37 00:03:43.100 --> 00:04:13.100 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. 38 00:04:13.100 --> 00:04:32.100 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. 39 00:04:32.100 --> 00:04:37.100 2. Laissez-faire and free trade 40 00:04:37.100 --> 00:04:44.460 Turgot's mentor in economics and in administration was his great friend Jacques-Claude Marie 41 00:04:44.460 --> 00:04:54.140 Vincent, Marquis de Gournay, 1712-1759. Gournay was a successful merchant, who then became 42 00:04:54.140 --> 00:05:00.940 royal inspector of manufacturers and minister of commerce. Although he wrote little, Gournay 43 00:05:00.940 --> 00:05:07.100 was a great teacher of economics in the best sense, through numberless conversations, not 44 00:05:07.100 --> 00:05:11.740 only with Torgot, but with the physiocrats and others. 45 00:05:11.740 --> 00:05:17.300 It was Gournay who spread the word in France about Cantillon's achievement. 46 00:05:17.300 --> 00:05:24.220 In addition, Gournay translated English economists, such as Sir Josiah Child, into French, and 47 00:05:24.220 --> 00:05:29.980 his extensive notes on these translations were widely circulated in manuscript in French 48 00:05:29.980 --> 00:05:37.700 intellectual circles. It was from Gournay that Turgot absorbed his devotion to laissez-faire, 49 00:05:37.700 --> 00:05:44.520 and indeed the origin of the phrase laissez-faire, laissez-passer, has often been incorrectly 50 00:05:44.520 --> 00:05:51.540 attributed to him. It is fitting, then, that Turgot developed his laissez-faire views most 51 00:05:51.540 --> 00:05:59.540 fully in one of his early works, The Elegy to Gournay, 1759, a tribute offered when the 52 00:05:59.540 --> 00:06:20.540 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. 53 00:06:20.540 --> 00:06:27.980 Torgot spoke of innumerable statutes dictated by the spirit of monopoly, the whole purpose 54 00:06:27.980 --> 00:06:35.660 of which were to discourage industry to concentrate trade within the hands of few people by multiplying 55 00:06:35.660 --> 00:06:42.380 formalities and charges, by subjecting industry to apprenticeships and journeyman-ships of 56 00:06:42.380 --> 00:06:49.220 ten years in some trades, which can be learned in ten days, by excluding those who were not 57 00:06:49.220 --> 00:06:56.080 at Sons of Masters, or those born outside a certain class, and by prohibiting the employment 58 00:06:56.080 --> 00:07:00.020 of women in the manufacture of cloth. 59 00:07:00.020 --> 00:07:06.300 For Torgot, freedom of domestic and foreign trade followed equally from the enormous mutual 60 00:07:06.300 --> 00:07:09.380 benefits of free exchange. 61 00:07:09.380 --> 00:07:16.860 All the restrictions forget that no commercial transactions can be anything other than reciprocal, 62 00:07:16.860 --> 00:07:22.680 and that it is absurd to try to sell everything to foreigners while buying nothing from them 63 00:07:22.680 --> 00:07:23.680 in return. 64 00:07:23.680 --> 00:07:30.500 Turgot then goes on, in his elegy, to make a vital pre-Hayekian point about the uses 65 00:07:30.500 --> 00:07:38.820 of indispensable particular knowledge by individual actors and entrepreneurs in the free market. 66 00:07:38.820 --> 00:07:44.180 These committed, on-the-spot participants in the market process know far more about 67 00:07:44.180 --> 00:07:49.660 Without their situations than intellectuals aloof from the fray. 68 00:07:49.660 --> 00:07:56.620 There is no need to prove that each individual is the only competent judge of the most advantageous 69 00:07:56.620 --> 00:08:00.620 use of his lands and of his labor. 70 00:08:00.620 --> 00:08:06.700 He alone has the particular knowledge without which the most enlightened man could only 71 00:08:06.700 --> 00:08:08.700 argue blindly. 72 00:08:08.700 --> 00:08:15.980 He learns by repeated trials, by his successes, by his losses, and he acquires a feeling for 73 00:08:15.980 --> 00:08:22.440 it which is much more ingenious than the theoretical knowledge of the indifferent observer because 74 00:08:22.440 --> 00:08:26.260 it is stimulated by want. 75 00:08:26.260 --> 00:08:31.920 In proceeding to more detailed analysis of the market process, Turgot points out that 76 00:08:31.920 --> 00:08:39.400 self-interest is the prime mover of that process, and that as Gourney had noted, individual 77 00:08:39.400 --> 00:08:46.680 interest in the free market must always coincide with the general interest. The buyer will 78 00:08:46.680 --> 00:08:52.600 select the seller who will give him the best price for the most suitable product, and the 79 00:08:52.600 --> 00:08:59.840 seller will sell his best merchandise at the lowest competitive price. Governmental restrictions 80 00:08:59.840 --> 00:09:06.260 and Special Privileges, on the other hand, compel consumers to buy poorer products at 81 00:09:06.260 --> 00:09:08.680 high prices. 82 00:09:08.680 --> 00:09:14.520 Torgot concludes that the general freedom of buying and selling is therefore the only 83 00:09:14.520 --> 00:09:21.900 means of assuring, on the one hand, the seller of a price sufficient to encourage production, 84 00:09:21.900 --> 00:09:28.560 and on the other hand, the consumer of the best merchandise at the lowest price. 85 00:09:28.560 --> 00:09:33.640 Torgot concluded that government should be strictly limited to protecting individuals 86 00:09:33.640 --> 00:09:38.940 against great injustice and the nation against invasion. 87 00:09:38.940 --> 00:09:45.580 The government should always protect the natural liberty of the buyer to buy and the seller 88 00:09:45.580 --> 00:09:47.680 to sell. 89 00:09:47.680 --> 00:09:53.760 It is possible, Torgot conceded, that there will sometimes on the free market be a cheating 90 00:09:53.760 --> 00:09:56.720 merchant and a duped consumer. 91 00:09:56.720 --> 00:10:04.040 But then the market will supply its own remedies. The cheated consumer will learn by experience 92 00:10:04.040 --> 00:10:09.880 and will cease to frequent the cheating merchant, who will fall into discredit and thus will 93 00:10:09.880 --> 00:10:13.560 be punished for his fraudulence. 94 00:10:13.560 --> 00:10:21.440 Torgot in fact ridiculed attempts by government to ensure against fraud or harm to consumers. 95 00:10:21.440 --> 00:10:27.560 In a prophetic rebuttal to the Ralph Naders of all ages, Torgot highlighted in a notable 96 00:10:27.560 --> 00:10:33.040 passage the numerous fallacies of alleged state protection. 97 00:10:33.040 --> 00:10:38.600 To expect the government to prevent such fraud from ever occurring would be like wanting 98 00:10:38.600 --> 00:10:43.680 it to provide cushions for all the children who might fall. 99 00:10:43.680 --> 00:10:51.200 To assume it to be possible to prevent successfully, by regulation, all possible malpractices of 100 00:10:51.200 --> 00:10:58.820 of this kind, is to sacrifice to a chimerical perfection the whole progress of industry. 101 00:10:58.820 --> 00:11:05.240 It is to restrict the imagination of artificers to all narrow limits of the familiar. 102 00:11:05.240 --> 00:11:08.720 It is to forbid them all new experiments. 103 00:11:08.720 --> 00:11:15.080 It means forgetting that the execution of these regulations is always entrusted to men 104 00:11:15.080 --> 00:11:21.400 who may have all the more interest in fraud, or in conniving at fraud, since the fraud 105 00:11:21.400 --> 00:11:27.360 which they might commit would be covered in some way by the seal of public authority, 106 00:11:27.360 --> 00:11:32.440 and by the confidence which this seal inspires in the consumers. 107 00:11:32.440 --> 00:11:39.160 Turgot added that all such regulations and inspections always involve expenses, and that 108 00:11:39.160 --> 00:11:45.720 But these expenses are always a tax on the merchandise, and as a result, overcharge the 109 00:11:45.720 --> 00:11:50.520 domestic consumer and discourage the foreign buyer. 110 00:11:50.520 --> 00:11:53.920 Torgot concludes with a splendid flourish. 111 00:11:53.920 --> 00:12:00.880 Thus, with obvious injustice, commerce and consequently the nation are charged with a 112 00:12:00.880 --> 00:12:08.000 heavy burden to save a few idle people the trouble of instructing themselves, or of making 113 00:12:08.000 --> 00:12:14.600 Degrading inquiries to avoid being cheated. To suppose all consumers to be dupes, and 114 00:12:14.600 --> 00:12:21.680 all merchants and manufacturers to be cheats, has the effect of authorizing them to be so, 115 00:12:21.680 --> 00:12:27.160 and of degrading all the working members of the community. 116 00:12:27.160 --> 00:12:33.360 Turgot goes on once more to the Hayekian theme of greater knowledge by the particular actors 117 00:12:33.360 --> 00:12:35.280 in the Market. 118 00:12:35.280 --> 00:12:41.440 The entire laissez-faire doctrine of Gournay, he points out, is grounded on the complete 119 00:12:41.440 --> 00:12:48.680 impossibility of directing, by invariant rules and continuous inspection, a multitude of 120 00:12:48.680 --> 00:12:56.240 transactions which by their immensity alone could not be fully known, and which, moreover, 121 00:12:56.240 --> 00:13:02.300 are continually dependent on a multitude of ever-changing circumstances which cannot be 122 00:13:02.300 --> 00:13:05.900 Any Managed or Even Forseen 123 00:13:05.900 --> 00:13:12.300 Turgot concludes his elegy to his friend and teacher by noting Gournay's belief that most 124 00:13:12.300 --> 00:13:19.020 people were well disposed toward the sweet principles of commercial freedom, but prejudice 125 00:13:19.020 --> 00:13:23.140 and a search for special privilege often bar the way. 126 00:13:23.140 --> 00:13:29.100 Every person, Turgot pointed out, wants to make an exception to the general principle 127 00:13:29.100 --> 00:13:35.940 of Freedom, and this exception is generally based on their personal interest. 128 00:13:35.940 --> 00:13:42.060 One interesting aspect of the elegy is Torgot's noting of the Dutch influence on the laissez-faire 129 00:13:42.060 --> 00:13:49.220 views of Gournay. Gournay had had extensive commercial experience in Holland, and the 130 00:13:49.220 --> 00:13:56.460 Dutch model of relative free trade and free markets in the 17th and 18th century, especially 131 00:13:56.460 --> 00:14:01.540 under the Republic, served as an inspiration throughout Europe. 132 00:14:01.540 --> 00:14:07.140 In addition, Turgot notes that one of the books that most influenced Gournay was The 133 00:14:07.140 --> 00:14:16.340 Political Maxims of Johan de Wiet, 1623-1672, the great martyred leader of the classical 134 00:14:16.340 --> 00:14:19.940 liberal Republican Party in Holland. 135 00:14:19.940 --> 00:14:26.420 Indeed, in an article on Fairs and Markets, written two years earlier for the great encyclopedia 136 00:14:26.420 --> 00:14:34.100 Wikipedia, Turgot had quoted Gournay as praising the free internal markets of Holland. 137 00:14:34.100 --> 00:14:41.020 Whereas other nations had confined trade to fares in limited times and places, in Holland 138 00:14:41.020 --> 00:14:47.780 there are no fares at all, but the whole extent of the state and the whole year are, as it 139 00:14:47.780 --> 00:14:55.060 were, a continuous fare, because commerce in that country is always and everywhere equally 140 00:14:55.060 --> 00:15:04.220 Torgot's final writings on economics were as intendant at Les Mouges in the years just 141 00:15:04.220 --> 00:15:09.320 before becoming Comptroller General in 1774. 142 00:15:09.320 --> 00:15:15.420 They reflect his embroilment in a struggle for free trade within the royal bureaucracy. 143 00:15:15.420 --> 00:15:22.300 In his last work, The Letter to the Abbé-Terre, the Comptroller General, on the Duty on Iron 144 00:15:22.300 --> 00:15:31.140 1773, Turgot trenchantly lashes out at the system of protective tariffs as a war of all 145 00:15:31.140 --> 00:15:38.980 against all using state monopoly privilege as a weapon at the expense of the consumers. 146 00:15:38.980 --> 00:15:45.700 I believe indeed that iron masters who know only about their own iron imagine that they 147 00:15:45.700 --> 00:15:51.840 would earn more if they had fewer competitors. There is no merchant who would not like to 148 00:15:51.840 --> 00:15:55.040 to be the sole seller of his commodity. 149 00:15:55.040 --> 00:16:00.360 There is no branch of trade in which those who are engaged in it do not seek to ward 150 00:16:00.360 --> 00:16:06.920 off competition and do not find some sophisms to make people believe that it is in the state's 151 00:16:06.920 --> 00:16:13.260 interest to prevent at least the competition from abroad, which they most easily represent 152 00:16:13.260 --> 00:16:16.720 as the enemy of the national commerce. 153 00:16:16.720 --> 00:16:22.840 If we listen to them, and we have listened to them too often, all branches of commerce 154 00:16:22.840 --> 00:16:26.600 will be infected by this kind of monopoly. 155 00:16:26.600 --> 00:16:33.040 These fools do not see that this same monopoly which they practice, not, as they would have 156 00:16:33.040 --> 00:16:39.280 the government believe, against foreigners, but against their own fellow citizens, consumers 157 00:16:39.280 --> 00:16:45.320 of the commodity, is returned to them by these fellow citizens, who are sellers in their 158 00:16:45.320 --> 00:17:09.320 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. 159 00:17:09.320 --> 00:17:17.320 In short, a balance of annoyance and injustice between all kinds of industry, where everyone loses. 160 00:17:17.320 --> 00:17:33.320 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. 161 00:17:33.320 --> 00:17:40.760 Turgot was close to the physiocrats, not only in advocating freedom of trade, but also in 162 00:17:40.760 --> 00:17:46.300 calling for a single tax on the net product of land. 163 00:17:46.300 --> 00:17:51.760 Even more than in the case of physiocrats, one gets the impression with Turgot that his 164 00:17:51.760 --> 00:17:59.120 real passion was in getting rid of the stifling taxes on all other walks of life, rather than 165 00:17:59.120 --> 00:18:03.440 and in imposing them on agricultural land. 166 00:18:03.440 --> 00:18:09.440 Torgot's views on taxes were most fully, if still briefly, worked out in his Plan for 167 00:18:09.440 --> 00:18:18.520 a Paper on Taxation in General, 1763, an outline of an unfinished essay he had begun to write 168 00:18:18.520 --> 00:18:24.560 as Intendant at Les Mouges for the benefit of the Comptroller General. 169 00:18:24.560 --> 00:18:31.520 Turgot claimed that taxes on towns were shifted backwards to agriculture and showed how taxation 170 00:18:31.520 --> 00:18:38.760 crippled commerce and how urban taxes distorted the location of towns and led to the illegal 171 00:18:38.760 --> 00:18:41.000 evasion of duties. 172 00:18:41.000 --> 00:18:48.120 Privileged monopolies, furthermore, raised prices severely and encouraged smuggling. 173 00:18:48.120 --> 00:18:54.120 Taxes on capital destroyed accumulated thrift and hobbled industry. 174 00:18:54.120 --> 00:19:00.280 Turgot's eloquence was confined to pillorying bad taxes, rather than elaborating on the 175 00:19:00.280 --> 00:19:03.960 alleged virtues of the land tax. 176 00:19:03.960 --> 00:19:08.920 Turgot's summation of the tax system was trenchant and hard-hitting. 177 00:19:08.920 --> 00:19:15.220 It seems that public finance, like a greedy monster, has been lying in wait for the entire 178 00:19:15.220 --> 00:19:18.520 wealth of the people. 179 00:19:18.520 --> 00:19:25.680 On one aspect of politics, Turgot parted apparently from the physiocrats. Evidently, Turgot's 180 00:19:25.680 --> 00:19:33.000 strategy was the same as theirs, attempting to convince the king of the virtues of laissez-faire. 181 00:19:33.000 --> 00:19:40.640 And yet, one of Turgot's most incisive epigrams, delivered to a friend, was, I am not an encyclopedist 182 00:19:40.640 --> 00:19:47.560 because I believe in God. I am not an economist because I would have no king. However, the 183 00:19:47.560 --> 00:19:56.560 The latter was clearly not Turgot's publicly stated view, nor did it guide his public actions. 184 00:19:56.560 --> 00:20:02.560 3. Value, Exchange and Price 185 00:20:02.560 --> 00:20:08.560 One of the most remarkable contributions by Turgot was an unpublished and unfinished paper, 186 00:20:08.560 --> 00:20:13.560 Value and Money, written around 1769. 187 00:20:13.560 --> 00:20:20.520 In this paper, Turgot, working in a method of successive approximations and abstractions, 188 00:20:20.520 --> 00:20:27.720 developed an Austrian-type theory, first of Crusoe economics, then of an isolated two-person 189 00:20:27.720 --> 00:20:34.900 exchange, which he later expanded to four persons, and then to a complete market. 190 00:20:34.900 --> 00:20:40.860 By concentrating first on the economics of an isolated Crusoe figure, Turgot was able 191 00:20:40.860 --> 00:21:06.300 First, Turgot examines an isolated man and works out a sophisticated analysis of his 192 00:21:06.300 --> 00:21:09.500 value or utility scale. 193 00:21:09.500 --> 00:21:15.840 By valuing and forming preference scales of different objects, Crusoe confers value on 194 00:21:15.840 --> 00:21:22.340 various economic goods, and compares and chooses between them on the basis of their relative 195 00:21:22.340 --> 00:21:24.700 worth to him. 196 00:21:24.700 --> 00:21:29.120 Thus these goods acquire different values. 197 00:21:29.120 --> 00:21:35.440 Crusoe chooses not only between various present uses of goods, but also between consuming 198 00:21:35.440 --> 00:21:48.000 He sees clearly that more abundance of a good leads to a lower value, and vice versa. 199 00:21:48.000 --> 00:21:54.320 Like his French and other continental precursors, then, Torgot sees that the subjective utility 200 00:21:54.320 --> 00:22:02.300 of a good diminishes as its supply to a person increases, and, like them, he lacks only the 201 00:22:02.300 --> 00:22:07.200 The Concept of the Marginal Unit to Complete the Theory 202 00:22:07.200 --> 00:22:13.540 But he went far beyond his predecessors in the precision and clarity of his analysis. 203 00:22:13.540 --> 00:22:20.420 He also sees that the subjective values of goods, their esteem value to consumers, will 204 00:22:20.420 --> 00:22:26.320 change rapidly on the market, and there is at least a hint in his discussion that he 205 00:22:26.320 --> 00:22:33.480 Turgot realized that this subjective value is strictly ordinal and not subject to measurement, 206 00:22:33.480 --> 00:22:38.160 and therefore to most mathematical procedures. 207 00:22:38.160 --> 00:22:41.840 Turgot begins his analysis at the very beginning. 208 00:22:41.840 --> 00:22:47.000 One isolated man, one object of valuation. 209 00:22:47.000 --> 00:22:53.000 Let us consider this man as exerting his abilities on a single object only. 210 00:22:53.000 --> 00:22:59.000 He will seek after it, avoid it, or treat it with indifference. 211 00:22:59.000 --> 00:23:04.720 In the first case, he would undoubtedly have a motive for seeking after this object. 212 00:23:04.720 --> 00:23:07.880 He would judge it to be suitable for his enjoyment. 213 00:23:07.880 --> 00:23:10.080 He will find it good. 214 00:23:10.080 --> 00:23:15.240 And this relative goodness could, generally speaking, be called value. 215 00:23:15.240 --> 00:23:19.320 It would not be susceptible to measurement. 216 00:23:19.320 --> 00:23:22.640 Then Torgot brings in other goods. 217 00:23:22.640 --> 00:23:28.720 If the same man can choose between several objects suitable to his use, he will be able 218 00:23:28.720 --> 00:23:35.840 to prefer one to the other, find an orange more agreeable than chestnuts, a fur better 219 00:23:35.840 --> 00:23:39.480 for keeping out the cold than a cotton garment. 220 00:23:39.480 --> 00:23:44.300 He will regard one as worth more than another. 221 00:23:44.300 --> 00:23:52.020 He will consequently decide to undertake those things which he prefers and leave the others. 222 00:23:52.020 --> 00:23:59.760 This comparison of value, this evaluation of different objects, changes continually. 223 00:23:59.760 --> 00:24:02.040 These appraisals are not permanent. 224 00:24:02.040 --> 00:24:06.280 They change continually with the need of the person. 225 00:24:06.280 --> 00:24:13.240 Turgot proceeds not only to diminishing utility, but to a strong anticipation of diminishing 226 00:24:13.240 --> 00:24:20.360 marginal utility, since he concentrates on the unit of the particular goods. 227 00:24:20.360 --> 00:24:26.760 When the savage is hungry, he values a piece of game more than the best bearskin, but let 228 00:24:26.760 --> 00:24:33.540 his appetite be satisfied and let him be cold and it will be the bearskin that becomes valuable 229 00:24:33.540 --> 00:24:35.920 to him. 230 00:24:35.920 --> 00:24:41.520 After bringing the anticipation of future needs into his discussion, Turgot deals with 231 00:24:41.520 --> 00:24:46.040 diminishing utility as a function of abundance. 232 00:24:46.040 --> 00:24:52.200 and with this tool of analysis he helps solve the value paradox. 233 00:24:52.200 --> 00:24:58.440 Water in spite of its necessity and the multitude of pleasures which it provides for man is 234 00:24:58.440 --> 00:25:03.440 not regarded as a precious thing in a well-watered country. 235 00:25:03.440 --> 00:25:08.720 Man does not seek to gain its possession since the abundance of this element allows him to 236 00:25:08.720 --> 00:25:12.040 find it all around him. 237 00:25:12.040 --> 00:25:19.640 So then proceeds to a truly noteworthy discussion, anticipating the modern concentration on economics 238 00:25:19.640 --> 00:25:26.480 as the allocation of scarce resources to a large and far less limited number of alternative 239 00:25:26.480 --> 00:25:28.040 ends. 240 00:25:28.040 --> 00:25:34.500 To obtain the satisfaction of these wants, man has only an even more limited quantity 241 00:25:34.500 --> 00:25:37.440 of strength and resources. 242 00:25:37.440 --> 00:25:43.600 Each particular object of enjoyment costs him trouble, hardship, labor, and, at the 243 00:25:43.600 --> 00:25:46.060 very least, time. 244 00:25:46.060 --> 00:25:52.280 It is this use of his resources applied to the quest for each object which provides the 245 00:25:52.280 --> 00:25:59.680 offset to his enjoyment, and forms, as it were, the cost of the thing. 246 00:25:59.680 --> 00:26:06.900 While there is an unfortunate real cost flavor about Turgot's treatment of cost, and he called 247 00:26:06.900 --> 00:26:10.840 the cost of a product, its fundamental value. 248 00:26:10.840 --> 00:26:17.240 He comes down generally to a rudimentary version of the later Austrian view that all costs 249 00:26:17.240 --> 00:26:24.160 are really opportunity costs, sacrifices, forgoing a certain amount of resources that 250 00:26:24.160 --> 00:26:27.560 would have been produced elsewhere. 251 00:26:27.560 --> 00:26:34.360 Thus Turgot's actor, in this case an isolated one, appraises and evaluates objects on the 252 00:26:34.360 --> 00:26:38.360 on the basis of their significance to himself. 253 00:26:38.360 --> 00:26:47.360 First, Turgot says that this significance, or utility, is the importance of his time and toil expended. 254 00:26:47.360 --> 00:26:53.360 But then he treats this concept as equivalent to productive opportunity forgone, 255 00:26:53.360 --> 00:27:00.360 as the portion of his resources which he can use to acquire an evaluated object, 256 00:27:00.360 --> 00:27:07.980 and thereby sacrificing the quest for other objects of equal or greater importance. 257 00:27:07.980 --> 00:27:14.060 Having analyzed the actions of an isolated crusoe, Turgeau brings in Friday. 258 00:27:14.060 --> 00:27:20.140 That is, he now assumes two men and sees how an exchange will develop. 259 00:27:20.140 --> 00:27:26.900 Here, in a perceptive analysis, he works out the Austrian theory of isolated two-person 260 00:27:26.900 --> 00:27:34.020 and Exchange, virtually as it would be arrived at by Carl Menger a century later. 261 00:27:34.020 --> 00:27:40.660 First he has two savages on a desert island, each with valuable goods in his possession, 262 00:27:40.660 --> 00:27:44.420 but the goods being suited to different wants. 263 00:27:44.420 --> 00:27:50.460 One man has a surplus of fish, the other of hides, and the result will be that each will 264 00:27:50.460 --> 00:27:56.800 exchange part of his surplus for the others, so that both parties to the exchange will 265 00:27:56.800 --> 00:28:02.840 will benefit. Commerce, or exchange, has developed. 266 00:28:02.840 --> 00:28:08.160 Torgot then changes the conditions of his example, and supposes that the two goods are 267 00:28:08.160 --> 00:28:15.280 corn and wood, and that each commodity could therefore be stored for future needs, so that 268 00:28:15.280 --> 00:28:22.440 each would not be automatically eager to dispose of his surplus. Each man will then weigh the 269 00:28:22.440 --> 00:28:30.560 The Relative Esteem to him of the two products, and weight the possible exchange accordingly. 270 00:28:30.560 --> 00:28:36.560 Each will adjust his supplies and demands until the two parties agree on a price at 271 00:28:36.560 --> 00:28:42.600 which each man will value what he obtains in exchange more highly than what he gives 272 00:28:42.600 --> 00:28:44.160 up. 273 00:28:44.160 --> 00:28:48.200 Both sides will then benefit from the exchange. 274 00:28:48.200 --> 00:28:55.480 As Turgot lucidly puts it, this superiority of the esteem value attributed by the acquirer 275 00:28:55.480 --> 00:29:02.360 to the thing he acquires over the thing he gives up is essential to the exchange, for 276 00:29:02.360 --> 00:29:05.980 it is the sole motive for it. 277 00:29:05.980 --> 00:29:13.920 Each would remain as he was if he did not find an interest, a personal profit, in exchange. 278 00:29:13.920 --> 00:29:22.280 If in his own mind he did not consider what he receives worth more than what he gives. 279 00:29:22.280 --> 00:29:29.400 Torgot then unfortunately goes off the subjective value track by adding, unnecessarily, that 280 00:29:29.400 --> 00:29:36.160 the terms of exchange arrived at through this bargaining process will have equal exchange 281 00:29:36.160 --> 00:29:42.640 value, since otherwise the person cooler to the exchange would force the other to come 282 00:29:42.640 --> 00:29:55.640 It is unclear here what Turgot means by saying that each gives equal value to receive equal value. 283 00:29:55.640 --> 00:30:06.640 There is perhaps an inchoate notion here that the price arrived at through bargaining will be halfway between the value scales of each. 284 00:30:06.640 --> 00:30:13.960 Turgot, however, is perfectly correct in pointing out that the active exchange increases the 285 00:30:13.960 --> 00:30:17.860 wealth of both parties to the exchange. 286 00:30:17.860 --> 00:30:24.340 He then brings in the competition of two sellers for each of the products, and shows how the 287 00:30:24.340 --> 00:30:29.900 competition affects the value scales of the participants. 288 00:30:29.900 --> 00:30:35.680 As Turgot had pointed out a few years earlier in his most important work, the reflections 289 00:30:35.680 --> 00:30:41.360 Based on the formation and distribution of wealth, the bargaining process, where each 290 00:30:41.360 --> 00:30:48.640 party wants to get as much as he can and give up as little as possible in exchange, results 291 00:30:48.640 --> 00:30:55.680 in a tendency towards one uniform price of each product in terms of the other. 292 00:30:55.680 --> 00:31:02.740 The price of any good will vary in accordance with the urgency of need among the participants. 293 00:31:02.740 --> 00:31:09.940 There is no true price to which the market tends or should tend to conform. 294 00:31:09.940 --> 00:31:17.120 Finally, in his repeated analysis of human action as the result of expectations rather 295 00:31:17.120 --> 00:31:23.980 than in equilibrium or as possessing perfect knowledge, Turgot anticipates the Austrian 296 00:31:23.980 --> 00:31:29.300 emphasis on expectations as the key to actions on the market. 297 00:31:29.300 --> 00:31:39.300 Turgot's very emphasis on expectations, of course, implies that they can be, and often are, disappointed in the market. 298 00:31:47.300 --> 00:31:56.300 In one sense, Turgot's theory of production followed the physiocrats, the unfortunate view that only agriculture is productive, 299 00:31:56.300 --> 00:32:03.400 Productive and that in consequence there should be a single tax on land. But the main thrust 300 00:32:03.400 --> 00:32:10.520 of his theory of production was quite different from that of physiocracy. Thus, before Adam 301 00:32:10.520 --> 00:32:17.480 Smith's famous example of the pin factory and stress on division of labor, Turgot in 302 00:32:17.480 --> 00:32:25.360 his Reflections had worked out a keen analysis of that division. If the same man who on his 303 00:32:25.360 --> 00:32:32.160 his own land cultivates these different articles and uses them to supply his own wants, was 304 00:32:32.160 --> 00:32:37.580 also forced to perform all the intermediate operations himself. 305 00:32:37.580 --> 00:32:40.780 It is certain that he would succeed very badly. 306 00:32:40.780 --> 00:32:47.520 The greater part of these operations require care, attention and a long experience, such 307 00:32:47.520 --> 00:32:55.600 which as are only to be acquired by working continuously and on a great quantity of materials. 308 00:32:55.600 --> 00:33:02.440 And further, even if a man did succeed in tanning a single hide, he only needs one pair 309 00:33:02.440 --> 00:33:03.920 of shoes. 310 00:33:03.920 --> 00:33:06.040 What will he do with the rest? 311 00:33:06.040 --> 00:33:09.760 Shall he kill an ox to make this pair of shoes? 312 00:33:09.760 --> 00:33:15.240 The same thing may be said concerning all the other wants of man, who if he were reduced 313 00:33:15.240 --> 00:33:21.280 to his own field and his own labor would waste much time and trouble in order to be very 314 00:33:21.280 --> 00:33:29.000 badly equipped in every respect, and would also cultivate his land very badly. 315 00:33:29.000 --> 00:33:36.040 Even though only land was supposed to be productive, Torgot readily conceded that natural resources 316 00:33:36.040 --> 00:33:43.400 must be transformed by human labor, and that labor must enter into each stage of the production 317 00:33:43.400 --> 00:33:50.120 Process. Here, Turgot had worked out the rudiments of the crucial Austrian theory that 318 00:33:50.120 --> 00:33:58.520 production takes time and that it passes through various stages, each of which takes time, 319 00:33:58.520 --> 00:34:07.360 and that therefore the basic classes of factors of production are land, labor and time. 320 00:34:07.360 --> 00:34:12.860 One of Turgot's most remarkable contributions to economics, the significance of which was 321 00:34:12.860 --> 00:34:18.780 was lost until the twentieth century, was his brilliant and almost offhand development 322 00:34:18.780 --> 00:34:27.400 of the law of diminishing returns, or as it might be described, the law of variable proportions. 323 00:34:27.400 --> 00:34:33.560 This gem arose out of a contest which he had inspired to be held by the Royal Agricultural 324 00:34:33.560 --> 00:34:41.080 Society of Limoges for prize-winning essays on indirect taxation, Unhappiness with the 325 00:34:41.080 --> 00:34:47.200 The winning physiocratic essay by Guérinot de Saint-Père-Avis led him to develop his 326 00:34:47.200 --> 00:34:54.760 own views in Observations on a Paper by Saint-Père-Avis, 1767. 327 00:34:54.760 --> 00:35:02.040 Here Torgot went to the heart of the physiocratic error in the tableau of assuming a fixed proportion 328 00:35:02.040 --> 00:35:06.560 of the various expenditures of different classes of people. 329 00:35:06.560 --> 00:35:15.560 But, Turgo pointed out, these proportions are variable, as are the proportions of physical factors in production. 330 00:35:15.560 --> 00:35:25.560 There are no constant proportions of factors in agriculture, for example, since the proportions vary according to the knowledge of the farmers, 331 00:35:25.560 --> 00:35:33.560 the value of the soil, the techniques used in production, and the nature of the soil and the climatic conditions. 332 00:35:33.560 --> 00:35:51.560 Developing this theme further, Torgot 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. 333 00:35:51.560 --> 00:35:59.320 Product. Not only are the proportions of factors to product variable, but also after a point, 334 00:35:59.320 --> 00:36:05.400 all further expenditures would be useless, and that such increases could even become 335 00:36:05.400 --> 00:36:13.080 detrimental. In this case, the advances would be increased without increasing the product. 336 00:36:13.080 --> 00:36:20.280 There is therefore a maximum point of production which it is impossible to pass. Furthermore, 337 00:36:20.280 --> 00:36:26.840 After the maximum point is passed, it is more than likely that as the advances are increased 338 00:36:26.840 --> 00:36:33.600 gradually past this point, up to the point where they return nothing, each increase would 339 00:36:33.600 --> 00:36:36.840 be less and less productive. 340 00:36:36.840 --> 00:36:42.920 On the other hand, if the farmer reduces the factors from the point of maximum production, 341 00:36:42.920 --> 00:36:47.340 the same changes in proportion would be found. 342 00:36:47.340 --> 00:36:53.780 In short, Turgot had worked out in fully developed form an analysis of the law of diminishing 343 00:36:53.780 --> 00:37:01.180 returns which would not be surpassed or possibly equaled until the 20th century. 344 00:37:01.180 --> 00:37:08.860 According to Schumpeter, not until a journal article by Edgeworth in 1911, we have Turgot 345 00:37:08.860 --> 00:37:15.420 spelling out in words the familiar diagram in modern economics. 346 00:37:15.420 --> 00:37:21.660 Banking the quantity of factors, in short, raises the marginal productivity, the quantity 347 00:37:21.660 --> 00:37:28.980 produced by each increase of factors, until a maximum point is reached, after which the 348 00:37:28.980 --> 00:37:36.780 marginal productivity falls, eventually, to zero, and then becomes negative. 349 00:37:36.780 --> 00:37:39.540 5. 350 00:37:39.540 --> 00:37:46.100 The Theory of Capital, Entrepreneurship, Savings and Interest 351 00:37:46.100 --> 00:37:52.520 In the roster of A.R.J. Turgot's outstanding contributions to economic theory, the most 352 00:37:52.520 --> 00:38:00.140 remarkable was his theory of capital and interest, which, in contrast with such fields as utility, 353 00:38:00.140 --> 00:38:06.340 sprang up virtually full-blown without reference to preceding contributions. 354 00:38:06.340 --> 00:38:13.580 Not only that, Turgot worked out almost completely the Austrian theory of capital and interest 355 00:38:13.580 --> 00:38:21.300 a century before it was set forth in definitive form by Eugen von Boehm-Bawerk. 356 00:38:21.300 --> 00:38:26.700 Turgot's theory of capital proper was echoed in the British classical economists as well 357 00:38:26.700 --> 00:38:28.180 as the Austrians. 358 00:38:28.180 --> 00:38:34.740 Thus, in his Great Reflections, Turgot pointed out that wealth is accumulated by means of 359 00:38:34.740 --> 00:38:42.380 of Unconsumed and Saved Annual Produce. Savings are accumulated in the form of money, and 360 00:38:42.380 --> 00:38:49.440 then invested in various kinds of capital goods. Furthermore, as Torgot pointed out, 361 00:38:49.440 --> 00:38:56.380 the capitalist entrepreneur must first accumulate saved capital in order to advance his payment 362 00:38:56.380 --> 00:39:03.600 to laborers while the product is being worked on. In agriculture, the capitalist entrepreneur 363 00:39:03.600 --> 00:39:10.720 Turgot must save funds to pay workers, buy cattle, pay for buildings and equipment, etc., 364 00:39:10.720 --> 00:39:16.600 until the harvest is reaped and sold, and he can recoup his advances. 365 00:39:16.600 --> 00:39:20.800 And so it is in every field of production. 366 00:39:20.800 --> 00:39:26.440 Some of this was picked up by Adam Smith and the later British classicists, but they failed 367 00:39:26.440 --> 00:39:29.800 to absorb two vital points. 368 00:39:29.800 --> 00:39:35.760 One was that Turgot's capitalist was also a capitalist entrepreneur. 369 00:39:35.760 --> 00:39:41.240 He not only advanced savings to workers and other factors of production. 370 00:39:41.240 --> 00:39:48.400 He also, as Catillon had first pointed out, bore the risks of uncertainty on the market. 371 00:39:48.400 --> 00:39:55.320 Catillon's theory of the entrepreneur as a pervasive risk-bearer facing uncertainty, 372 00:39:55.320 --> 00:40:02.680 whereby equilibrating market conditions had lacked one key element, an analysis of capital 373 00:40:02.680 --> 00:40:08.940 and the realization that the major driving force of the market economy is not just any 374 00:40:08.940 --> 00:40:17.220 entrepreneur, but the capitalist entrepreneur, the man who combines both functions. 375 00:40:17.220 --> 00:40:22.620 Yet Torgot's memorable achievement in developing the theory of the capitalist entrepreneur 376 00:40:22.620 --> 00:40:31.260 has, as Professor Hoselitz pointed out, been completely ignored until the 20th century. 377 00:40:31.260 --> 00:40:37.360 If the British classicists totally neglected the entrepreneur, they also failed to absorb 378 00:40:37.360 --> 00:40:45.020 Torgot's Proto-Austrian emphasis on the crucial role of time in production, and the fact that 379 00:40:45.020 --> 00:40:52.380 industries may require many stages of production with lengthy periods of advance payment before 380 00:40:52.380 --> 00:40:55.060 for Production and Sale. 381 00:40:55.060 --> 00:41:00.620 Torgot perceptively pointed out that it is the owner of capital who will wait for the 382 00:41:00.620 --> 00:41:07.780 sale of the leather to return him not only all his advances, but also a profit sufficient 383 00:41:07.780 --> 00:41:12.940 to compensate him for what his money would have been worth to him had he turned it to 384 00:41:12.940 --> 00:41:20.140 the acquisition of an estate, and, moreover, the wages due to his labor and care, to his 385 00:41:20.140 --> 00:41:23.540 His Risk, and even to his skill. 386 00:41:23.540 --> 00:41:30.740 In this passage, Turgot anticipated the Austrian concept of opportunity cost, and pointed out 387 00:41:30.740 --> 00:41:37.460 that the capitalist will tend to earn his imputed wages and the opportunity that the 388 00:41:37.460 --> 00:41:42.300 capitalist sacrificed by not investing his money elsewhere. 389 00:41:42.300 --> 00:41:49.040 In short, the capitalist's accounting profits will tend to a long-run equilibrium, plus 390 00:41:49.040 --> 00:41:53.640 and the imputed wages of his own labor and skill. 391 00:41:53.640 --> 00:41:59.720 In agriculture, manufacturing, or any other field of production, there are two basic classes 392 00:41:59.720 --> 00:42:07.260 of producers in society, the entrepreneurs, owners of capital, which they invest profitably 393 00:42:07.260 --> 00:42:14.520 as advances for setting men at work, and the workers, or simple artisans, who have no other 394 00:42:14.520 --> 00:42:43.520 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. 395 00:42:43.520 --> 00:43:13.520 Integrating his analyses of money and capital, Torgot 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. 396 00:43:13.520 --> 00:43:21.440 Seeing that advances of savings to factors of production are a key to investment, and 397 00:43:21.440 --> 00:43:28.020 that this process is only developed in a money economy, Turgot then proceeded to a crucial 398 00:43:28.020 --> 00:43:30.340 Austrian point. 399 00:43:30.340 --> 00:43:36.940 Since money and capital advances are indispensable to all enterprises, laborers are therefore 400 00:43:36.940 --> 00:43:43.220 willing to pay capitalists a discount out of production for the service of having money 401 00:43:43.220 --> 00:43:47.260 paid them in advance of future revenue. 402 00:43:47.260 --> 00:43:54.220 In short, the interest return on investment, what the Swedish Austrian Newt Wichsel would 403 00:43:54.220 --> 00:44:01.140 over a century later call the natural rate of interest, is the payment by laborers to 404 00:44:01.140 --> 00:44:07.160 the capitalists for the function of advancing them present money so that they do not have 405 00:44:07.160 --> 00:44:10.900 to wait for years for their income. 406 00:44:10.900 --> 00:44:17.100 As Turgot put it in his reflections, since capitals are the indispensable foundation of 407 00:44:17.100 --> 00:44:24.500 all lucrative enterprises, those who with their industry and love of labor have no capitals 408 00:44:24.500 --> 00:44:30.380 or do not have sufficient for the enterprise they wish to embark on, have no difficulty 409 00:44:30.380 --> 00:44:36.360 in deciding to give up to the owners of such capital or money who are willing to trust 410 00:44:36.360 --> 00:44:42.800 it to them, a portion of the profits they expect to receive over and above the return 411 00:44:42.800 --> 00:44:45.920 of their advances. 412 00:44:45.920 --> 00:44:51.800 The following year, in his scintillating comments on the paper by Saint-Père-Avis, 413 00:44:51.800 --> 00:44:58.040 Torgot expanded his analysis of savings and capital to set forth an excellent anticipation 414 00:44:58.040 --> 00:45:00.640 of Say's law. 415 00:45:00.640 --> 00:45:07.120 Turgot rebutted pre-Keynesian fears of the physiocrats that money not spent on consumption 416 00:45:07.120 --> 00:45:13.040 would leak out of the circular flow and thereby wreck the economy. 417 00:45:13.040 --> 00:45:18.360 As a result, the physiocrats tended to oppose savings per se. 418 00:45:18.360 --> 00:45:25.400 Turgot, however, pointed out that advances of capital are vital in all enterprises, and 419 00:45:25.400 --> 00:45:29.980 where might the advances come from if not out of savings? 420 00:45:29.980 --> 00:45:36.100 He also noted that it made no difference if such savings were supplied by landed proprietors 421 00:45:36.100 --> 00:45:38.660 or by entrepreneurs. 422 00:45:38.660 --> 00:45:45.980 For entrepreneurial savings to be large enough to accumulate capital and expand production, 423 00:45:45.980 --> 00:45:51.380 profits have to be higher than the amount required to reproduce current entrepreneurial 424 00:45:51.380 --> 00:45:52.660 spending. 425 00:45:52.660 --> 00:46:00.960 that is, replace inventory, capital goods, etc. as they are drawn down or wear out. 426 00:46:00.960 --> 00:46:07.480 Torgot goes on to point out that the physiocrats assume without proof that savings simply leak 427 00:46:07.480 --> 00:46:10.760 out of circulation and lower prices. 428 00:46:10.760 --> 00:46:15.120 Instead, money will return to circulation. 429 00:46:15.120 --> 00:46:21.360 Savings will immediately be used either to buy land, to be invested as advances to workers 430 00:46:21.360 --> 00:46:26.120 and Other Factors, or to be loaned out at interest. 431 00:46:26.120 --> 00:46:31.920 All these uses of savings return money to the circular flow. 432 00:46:31.920 --> 00:46:37.880 Advances of capital, for example, return to circulation in paying for equipment, buildings, 433 00:46:37.880 --> 00:46:40.960 raw material, or wages. 434 00:46:40.960 --> 00:46:46.720 The purchase of land transfers money to the seller of land, who in turn will either buy 435 00:46:46.720 --> 00:47:04.800 Turgot then engaged in a similar analysis of spending flows if savings are loaned at interest. 436 00:47:04.800 --> 00:47:10.760 If consumers borrow the money, they borrow in order to spend, and so the money expended 437 00:47:10.760 --> 00:47:13.360 returns to circulation. 438 00:47:13.360 --> 00:47:18.620 If they borrow to pay debts or buy land, the same thing occurs. 439 00:47:18.620 --> 00:47:24.560 And if entrepreneurs borrow the money, it will be poured into advances and investment, 440 00:47:24.560 --> 00:47:29.720 and the money will once again return to circulation. 441 00:47:29.720 --> 00:47:35.120 Money saved, therefore, is not lost, it returns to circulation. 442 00:47:35.120 --> 00:47:41.320 Furthermore, the value of savings invested in capital is far greater than piled up in 443 00:47:41.320 --> 00:47:48.320 and Hoards, so that money will tend to return to circulation quickly. Furthermore, Turgo 444 00:47:48.320 --> 00:47:55.660 pointed out, even if increased savings actually withdrew a small amount of money from circulation 445 00:47:55.660 --> 00:48:02.240 for a considerable time, the lower price of the produce will be more than offset for the 446 00:48:02.240 --> 00:48:08.560 entrepreneur by the increased advances and the consequent greater output and lowering 447 00:48:08.560 --> 00:48:15.960 of the Cost of Production. Here, Turgot had the germ of the much later von Mises von Hayek 448 00:48:15.960 --> 00:48:23.340 analysis of how savings narrows but lengthens the structure of production. 449 00:48:23.340 --> 00:48:30.920 The acme of Turgot's contribution to economic theory was his sophisticated analysis of interest. 450 00:48:30.920 --> 00:48:37.320 We have already seen Turgot's remarkable insight in seeing interest return on investment as 451 00:48:37.320 --> 00:48:46.320 as a price paid by laborers to capitalist entrepreneurs for advances of savings in the form of present money. 452 00:48:46.320 --> 00:48:56.320 Turgot also demonstrated, far ahead of his time, the relationship between this natural rate of interest and the interest on money loans. 453 00:48:56.320 --> 00:49:14.320 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. 454 00:49:14.320 --> 00:49:21.680 The lender sells the use of his money now, and the borrower buys that use, and the price 455 00:49:21.680 --> 00:49:27.680 of those loans, that is, the loan rate of interest, will be determined, as in the case 456 00:49:27.680 --> 00:49:34.640 of any commodity, by the variations in supply and demand on the market. 457 00:49:34.640 --> 00:49:40.440 Increased demand for loans, many borrowers, will raise interest rates. 458 00:49:40.440 --> 00:49:45.120 Most supply of loans, many lenders, will lower them. 459 00:49:45.120 --> 00:49:51.040 People borrow for many reasons, as we have seen, to try to make an entrepreneurial profit, 460 00:49:51.040 --> 00:49:58.740 to purchase land, pay debts or consume, while lenders are concerned with just two matters, 461 00:49:58.740 --> 00:50:03.120 interest return and the safety of their capital. 462 00:50:03.120 --> 00:50:09.080 While there will be a market tendency to equate loan rates of interest and interest returns 463 00:50:09.080 --> 00:50:16.760 on Investment. Loans tend to be a less risky form of channeling savings. Thus, investment 464 00:50:16.760 --> 00:50:22.740 in risky enterprises will only be made if entrepreneurs expect that their profit will 465 00:50:22.740 --> 00:50:26.600 be greater than the loan rate of interest. 466 00:50:26.600 --> 00:50:32.800 Turgot also pointed out that government bonds will tend to be the least risky investment, 467 00:50:32.800 --> 00:50:38.520 so that they will earn the lowest interest return. He went on to declare that the true 468 00:50:38.520 --> 00:50:44.480 The true evil of government debt is that it presents advantages to the public creditors, 469 00:50:44.480 --> 00:50:51.000 but channels their savings into sterile and unproductive uses, and maintains a high interest 470 00:50:51.000 --> 00:50:54.640 rate in competition with productive uses. 471 00:50:54.640 --> 00:51:03.200 Or as we would say nowadays, public debt crowds out productive private uses of savings. 472 00:51:03.200 --> 00:51:08.920 Moving on to an analysis of the nature and use of lending at interest, Turgot engaged 473 00:51:08.920 --> 00:51:14.800 in an incisive and hard-hitting critique of usury laws, which the physiocrats were still 474 00:51:14.800 --> 00:51:16.800 trying to defend. 475 00:51:16.800 --> 00:51:24.280 A loan, Turgot pointed out, is a reciprocal contract, free between the two parties, which 476 00:51:24.280 --> 00:51:28.620 they make only because it is advantageous to them. 477 00:51:28.620 --> 00:51:37.340 That a contracted loan is then ipso facto advantageous to both the lender and the borrower. 478 00:51:37.340 --> 00:51:40.100 Turgot moved in for the clincher. 479 00:51:40.100 --> 00:51:47.300 Now on what principle can a crime be discovered in a contract advantageous to two parties, 480 00:51:47.300 --> 00:51:54.040 with which both parties are satisfied, and which certainly does no injury to anyone else? 481 00:51:54.040 --> 00:52:00.920 There is no exploitation in charging interest, just as there is none in the sale of any commodity. 482 00:52:00.920 --> 00:52:06.520 To attack a lender for taking advantage of the borrower's need for money by demanding 483 00:52:06.520 --> 00:52:12.520 interest is as absurd an argument as saying that a baker who demands money for the bread 484 00:52:12.520 --> 00:52:17.700 he sells takes advantage of the buyer's need for bread. 485 00:52:17.700 --> 00:52:24.020 And if the money spent on bread might be considered its equivalent, then in the same way the money 486 00:52:24.020 --> 00:52:34.020 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. 487 00:52:34.020 --> 00:52:43.020 In short, a loan contract establishes the present value of a future payment of capital and interest. 488 00:52:43.020 --> 00:52:47.020 The borrower gets use of the money during the term of the loan. 489 00:52:47.020 --> 00:52:50.020 The lender is deprived of such use. 490 00:52:50.020 --> 00:52:55.660 The price of this advantage or disadvantage is interest. 491 00:52:55.660 --> 00:53:02.340 It is true, Turgot says to the anti-usury wing of the scholastics, that money as a mass 492 00:53:02.340 --> 00:53:06.140 of metal is barren and produces nothing. 493 00:53:06.140 --> 00:53:11.340 But money employed successfully in enterprises yields a profit. 494 00:53:11.340 --> 00:53:14.900 Or invested in land yields revenue. 495 00:53:14.900 --> 00:53:20.760 The lender gives up, during the term of the loan, not only possession of the metal, but 496 00:53:20.760 --> 00:53:26.860 also the profit he could have obtained by investment, the profit or revenue he would 497 00:53:26.860 --> 00:53:33.180 have been able to procure by it, and the interest which indemnified him for this loss cannot 498 00:53:33.180 --> 00:53:36.240 be looked on as unjust. 499 00:53:36.240 --> 00:53:43.360 Thus Torgot integrates his analysis and justification for interest with a generalized view of opportunity 500 00:53:43.360 --> 00:53:48.160 Cost, of Income Forgone from Lending Money. 501 00:53:48.160 --> 00:53:54.040 And then, above all, Turgo declares, there is the property right of the lender, a crucial 502 00:53:54.040 --> 00:53:57.000 point that must not be overlooked. 503 00:53:57.000 --> 00:54:03.680 A lender has the right to require an interest for his loan simply because the money is his 504 00:54:03.680 --> 00:54:05.520 property. 505 00:54:05.520 --> 00:54:08.840 Since it is property, he is free to keep it. 506 00:54:08.840 --> 00:54:15.480 If then he does lend, he may attach such conditions to the loan as he sees fit. 507 00:54:15.480 --> 00:54:21.120 In this he does no injury to the borrower since the latter agrees to the conditions 508 00:54:21.120 --> 00:54:26.040 and has no right of any kind over the sum lent. 509 00:54:26.040 --> 00:54:31.800 As for the biblical passage in Luke that had for centuries been used to denounce interest, 510 00:54:31.800 --> 00:54:37.720 the passage that urged lending without gain, Torgot pointed out that this advice was simply 511 00:54:37.720 --> 00:54:46.440 a precept of charity, a laudable action inspired by generosity, and not a requirement of justice. 512 00:54:46.440 --> 00:54:52.480 The opponents of usury, Turgot explained, never press on to a consistent position of 513 00:54:52.480 --> 00:54:58.960 trying to force everyone to lend his savings at zero interest. 514 00:54:58.960 --> 00:55:05.360 In one of his last contributions, the highly influential Paper on Lending at Interest, 515 00:55:05.360 --> 00:55:13.680 in 1970, A.R.J. Turgot elaborated on his critique of usury laws at the same time amplifying 516 00:55:13.680 --> 00:55:16.560 his noteworthy theory of interest. 517 00:55:16.560 --> 00:55:23.320 He pointed out that usury laws are not rigorously enforced, leading to widespread black markets 518 00:55:23.320 --> 00:55:24.960 in loans. 519 00:55:24.960 --> 00:55:31.920 But the stigma of usury remains, along with pervasive dishonesty and disrespect for law. 520 00:55:31.920 --> 00:55:39.920 Yet, every once in a while, the usury laws are sporadically and unpredictably enforced, with severe penalties. 521 00:55:39.920 --> 00:55:47.920 Most importantly, Turgot, in the paper on lending at interest, focused on the crucial problem of interest. 522 00:55:47.920 --> 00:55:53.920 Why are borrowers willing to pay the interest premium for the use of money? 523 00:55:53.920 --> 00:56:00.920 The opponents of usury, he noted, hold that the lender, in requiring more than the principal to be returned, 524 00:56:00.920 --> 00:56:07.520 and Returned is receiving a value in excess of the value of the loan, and that this excess 525 00:56:07.520 --> 00:56:10.260 is somehow deeply immoral. 526 00:56:10.260 --> 00:56:13.960 But then Turgot came to the critical point. 527 00:56:13.960 --> 00:56:20.240 It is true that in repaying the principal the borrower returns exactly the same weight 528 00:56:20.240 --> 00:56:23.880 of the metal which the lender had given him. 529 00:56:23.880 --> 00:56:29.840 But why, he adds, should the weight of the money-metal be the crucial consideration, 530 00:56:29.840 --> 00:56:35.880 and not the value and usefulness it has for the lender and the borrower. 531 00:56:35.880 --> 00:56:44.140 Specifically, arriving at the vital Boehm-Bawerkian-Austrian concept of time preference, Turgot urges us 532 00:56:44.140 --> 00:56:50.280 to compare the difference in usefulness which exists at the date of borrowing between a 533 00:56:50.280 --> 00:56:57.360 sum currently owned and an equal sum which is to be received at a distant date. 534 00:56:57.360 --> 00:57:03.920 The key is time preference, the discounting of the future and the concomitant placing 535 00:57:03.920 --> 00:57:07.280 of a premium upon the present. 536 00:57:07.280 --> 00:57:13.480 Torgot points to the well-known motto, a bird in the hand is worth two in the bush. 537 00:57:13.480 --> 00:57:19.320 Since a sum of money actually owned now is preferable to the assurance of receiving a 538 00:57:19.320 --> 00:57:26.720 similar sum in one or several years' time, the same sum of money paid and returned is 539 00:57:26.720 --> 00:57:34.800 is scarcely an equivalent value, for the lender gives the money and receives only an assurance. 540 00:57:34.800 --> 00:57:40.720 But cannot this loss in value be compensated by the assurance of an increase in the sum 541 00:57:40.720 --> 00:57:43.900 proportion to the delay? 542 00:57:43.900 --> 00:57:49.460 Turgot concluded that this compensation is precisely the rate of interest. 543 00:57:49.460 --> 00:57:55.660 He added that what has to be compared in a loan transaction is not the value of money 544 00:57:55.660 --> 00:58:02.500 Money loaned with the sum of money repaid, but the value of the promise of a sum of money 545 00:58:02.500 --> 00:58:06.820 compared to the value of money available now. 546 00:58:06.820 --> 00:58:13.740 For a loan is precisely the transfer of a sum of money in exchange for the current promise 547 00:58:13.740 --> 00:58:16.060 of a sum of money in the future. 548 00:58:16.060 --> 00:58:23.700 Hence, a maximum rate of interest imposed by law would deprive virtually all risky enterprises 549 00:58:23.700 --> 00:58:31.780 In addition to developing the Austrian theory of time preference, Turgot was the first person 550 00:58:31.780 --> 00:58:39.260 in his reflections to point to the corresponding concept of capitalization, that is, the present 551 00:58:39.260 --> 00:58:45.980 capital value of land or other capital good on the market, tends to equal the sum of its 552 00:58:45.980 --> 00:58:53.620 expected annual future rents or returns, discounted by the market rate of time preference or 553 00:58:53.620 --> 00:58:56.380 or Rate of Interest. 554 00:58:56.380 --> 00:59:02.500 As if this were not enough to contribute to economics, Turgot also pioneered a sophisticated 555 00:59:02.500 --> 00:59:08.620 analysis of the interrelation between the interest rate and the quantity theory of money. 556 00:59:08.620 --> 00:59:14.340 There is little connection, he pointed out, between the value of currency in terms of 557 00:59:14.340 --> 00:59:17.140 prices and the interest rate. 558 00:59:17.140 --> 00:59:23.540 The supply of money may be plentiful, and hence the value of money low in terms of commodities. 559 00:59:23.540 --> 00:59:27.540 But interest may at the same time be very high. 560 00:59:27.540 --> 00:59:31.540 Perhaps following David Hume's similar model, 561 00:59:31.540 --> 00:59:37.540 Torgot asks what would happen if the quantity of silver money in a country suddenly doubled, 562 00:59:37.540 --> 00:59:44.540 and that increase were magically distributed in equal proportions to every person. 563 00:59:44.540 --> 00:59:52.540 Specifically, Torgot asks us to assume that there are one million ounces of silver money in existence in a country, 564 00:59:52.540 --> 00:59:58.540 of Country, and that there is brought into the State, in some manner or other, a second 565 00:59:58.540 --> 01:00:04.860 million ounces of silver, and that this increase is distributed to every purse in the same 566 01:00:04.860 --> 01:00:12.820 proportion as the first million, so that he who had two ounces before now has four. 567 01:00:12.820 --> 01:00:18.880 Torgot then explains that prices will rise, perhaps doubling, and that therefore the value 568 01:00:18.880 --> 01:00:39.880 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. 569 01:00:39.880 --> 01:00:47.880 The new money will not be loaned out, since only saved money is loaned and invested. 570 01:00:47.880 --> 01:00:55.080 Indeed, Turgot points out that depending on how the spending savings proportions are affected, 571 01:00:55.080 --> 01:01:00.280 a rise in the quantity of money could raise interest rates. 572 01:01:00.280 --> 01:01:06.960 Suppose, he says, that all wealthy people decide to spend their incomes and annual profits 573 01:01:06.960 --> 01:01:12.560 on consumption and spend their capital on foolish expenditures. 574 01:01:12.560 --> 01:01:18.680 The greater consumption spending will raise the prices of consumer goods, and there being 575 01:01:18.680 --> 01:01:26.720 far less money to lend or to spend on investments, interest rates will rise along with prices. 576 01:01:26.720 --> 01:01:34.320 In short, spending will accelerate and prices rise, while at the same time, time preference 577 01:01:34.320 --> 01:01:42.440 rates rise, people spend more and save less, and interest rates will increase. 578 01:01:42.440 --> 01:01:48.720 Hans Turgot is over a century ahead of his time in working out the sophisticated Austrian 579 01:01:48.720 --> 01:01:55.040 relationship between what von Mises would call the money relation, the relation between 580 01:01:55.040 --> 01:02:02.280 the supply and demand for money, which determines prices or the price level, and the rates of 581 01:02:02.280 --> 01:02:09.360 time preference, which determine the spending-saving proportion and the rate of interest. 582 01:02:09.360 --> 01:02:15.120 Year Two was the beginning of the rudiments of the Austrian theory of the business cycle, 583 01:02:15.120 --> 01:02:21.820 of the relationship between expansion of the money supply and the rate of interest. 584 01:02:21.820 --> 01:02:27.760 As for the movements in the rate of time preference or interest, an increase in the spirit of 585 01:02:27.760 --> 01:02:33.880 thrift will lower interest rates and increase the amount of savings and the accumulation 586 01:02:33.880 --> 01:02:39.940 of Capital. A rise in the spirit of luxury will do the opposite. 587 01:02:39.940 --> 01:02:47.060 The spirit of thrift, Turgot notes, has been steadily rising in Europe over several centuries, 588 01:02:47.060 --> 01:02:53.400 and hence interest rates have tended to fall. The various interest rates and rates of return 589 01:02:53.400 --> 01:03:00.980 on loans, investments, land, etc., will tend to equilibrate throughout the market and tend 590 01:03:00.980 --> 01:03:08.300 towards a Single Rate of Return. Capital, Torgot notes, will move out of lower-profit 591 01:03:08.300 --> 01:03:12.660 industries and regions and into higher-profit industries.