A.R.J. Turgot as Austrian Grandfather
by Ryan Safner
[This essay was originally written for ECON 3462 - History of Economic Thought]
Anne-Robert Jacques Turgot’s brief but brilliant writings on political economy portray him as a major intellectual precursor to the modern Austrian school of economics. Many of his primitive yet revolutionary insights into the nature of a free market bear striking resemblance to major Austrian tenets. None is so crucial and so well-developed, however, as his vision of a dynamic and emergent market order. Turgot’s shining brilliance and foresight into this area illuminates the voids of the sycophantic mercantilists and the comparative statics of the classical school. This grandiose vision would be lost for a century until it was recovered, quite independently, by the original Austrian, Carl Menger. If Menger is the father of the Austrian school, Turgot would certainly qualify as the estranged grandfather. Turgot’s prolific vision of market-based progress can be seen through a proto-Austrian lens based upon two key concepts he elucidated – the great role of the capitalist-entrepreneur and that of time. Turgot observed that it is the entrepreneur, or “undertaker,” who forecasts future conditions and undertakes a profitable venture in the context of ubiquitous risk and uncertainty. In particular, it is the capitalist-entrepreneur who forwards the money from his saved capital at a future profit to make such an undertaking possible. Since entrepreneurial action necessitates present action based on future speculation, Turgot is one of the first to highlight the immensely important and often neglected role of time in production and investment. Their combination makes for an economy where entrepreneurs act as the great equibrilators to the constant flux of market dynamics. Their actions, as well as their accumulation of capital, allow for the optimistic possibility of an ever-progressing society.
The entrepreneur plays a central role in both Turgot and the Austrian School’s vision of a dynamically progressing economy. Though Richard Cantillon first sketched out his conception of “the undertaker” in 1755, it was Turgot who explained that the great engine of economic growth is not just the entrepreneur, but specifically the capitalist-entrepreneur.[1] Turgot defines what would be later termed a capitalist, as “Whoever…receives every year a higher income than he needs to spend, [and] may lay up the residue and accumulate…[that which] we name a capital,” (Turgot, 107). Turgot then integrates both the functions of the capitalist and Cantillon’s undertaker into this pivotal agent.
To set the stage for the capitalist (in the example of a tannery operation), Turgot first asks:
How shall that multitude of workmen subsist till the time of their leather being sold, and of whom none individually would be able to prepare a single skin; and where the emolument of the sale of a single skin could not afford subsistence to any one of them? (Turgot, 108)
Turgot then responds, “It must then be one of those proprietors of capitals, or moveable accumulated property that must employ them,” (Turgot, 108). It naturally follows from Turgot’s system that the capitalist obtains the capital to pay the workers sustenance from his own personal savings (that income which he has not consumed).
Integrating the second function of the Cantillonian entrepreneur, Turgot continues:
[The proprietor] of capitals [supplies] them with advances in part for the construction and purchase of materials, and partly for the daily salaries of the workmen that are preparing them. It is he that must expect the sale of the leather, which is to return him not only his advances, but also an emolument sufficient to indemnify him for what his money would have procured him, had he turned it to the acquisition of lands, and moreover of the salary due to his troubles and care, to his risque, and even to his skill. (Turgot, 108, emphasis added)
In this paragraph alone, Turgot captures the essence of three of the entrepreneur’s major functions in the production process: First, that the entrepreneur must forecast the sale of his product in a future market and expect to turn a profit. Only earning potentially higher revenues from a future sale than the overhead paid upfront to the factors of production will make an enterprise worthwhile. Second, if this is the case, he then pays the cooperating factors their incomes immediately in exchange for use of their services, far in advance of the final product’s sale. Third, the entrepreneur is a risk taker; he depends entirely on his forecasting skills to anticipate profit and avoid loss ex ante, and that all production necessarily entails uncertainty as to earning either. He might expect a profitable return and subsequently pay his workers, but if it turns out his forecast was mistaken ex post, he has then suffered unrecoverable expenses, and potentially will be ruined.
Adam Smith and the classical economists would, to their credit, comprehend the profound importance of the capitalist and capital accumulation. However, their praise for the capitalist completely eclipsed that of the dynamic entrepreneur, if he was considered at all. As Turgot keenly noticed, they were two sides of the same economic coin, and sometimes even one-in-the-same person. Instead, the classical paradigm, while not completely sterile, would allow no room for dynamic change through entrepreneurial activity. Instead, it would be preoccupied with a static analysis of comparative equilibria within and across markets. To them, only the long-run distribution mattered and the “natural” costs of production gave value to the final product. The classicals lost the necessary micro processes which guide the growth—as Turgot so aptly described—in their homogenous aggregation into macro growth models.
Only the Austrian School under Carl Menger would reclaim the rich entrepreneurial heritage and expand upon it a century later. The capitalist-entrepreneur, according to Menger, assesses the demands of consumers and plans his investments accordingly. All potential income is the result of subjective consumer valuations imputed backwards from the final product to the factors of production. The factors, such as labor, are only valuable insofar as they contribute to the ultimate consumer product’s revenues: “[A] large number of things derive their goods-character from the fact that they stand only in a more or less indirect causal relationship to the satisfaction of human needs.” (Menger, 64) Turgot, though he seemed to suffer from a physiocratic, and later classical tendency to observe the value of a good as its “natural”
cost of production, made certain brief observations friendly to Menger’s radical theory: “It is always the wants and the ability of the consumer that sets the price on the sale,” (Turgot, 110).
Turgot’s analysis of the capitalist-entrepreneur contains within itself a critical revelation: the role of time in production. Though Turgot may not have analyzed it extensively, his observation of both the advance that the capitalist grants to his workers and the entrepreneur’s expectation of profits, a time differential is necessarily implied. As Carl Menger would remark:
A process of change involves a beginning and a becoming, and these are only conceivable as processes in time. Hence it is certain that we can never fully understand the causal interconnections of the various occurrences in a process, or the process itself, unless we view it in time and apply the measure of time to it. Thus, in the process of change by which goods of higher order are gradually transformed into goods of first order, until the latter finally bring about the state called the satisfaction of human needs, time is an essential feature of our observations. (Menger, 67)
Turgot’s revelation would culminate in his discussion of interest rates and their role in production. He observed that the laborers, “destitute of capital…have no difficulty in resolving to give up to the proprietors of such capital or money…a portion of the profits which they are in expectation of gaining, over and above their advances,” (Turgot, 112). This very Austrian concept describes the “natural interest rate” as representing nothing more than an inter-temporal “payment” from laborers to the capitalists for their time services.[2]
While weaving these bold insights together into a coherent system, Turgot illustrates the beauty and emergent order of the seemingly anarchic free market. He demonstrates how the profit differentials across different industries incentivize entrepreneurs to invest their capital there until all profit tends to even out to zero:
The different uses of the capitals produce very unequal profits; but this inequality does not prevent them from having a reciprocal influence on each other, nor from establishing a species of equilibrium among themselves…In a word, if the profits…augment or diminish, the capitals are converted by withdrawing them from other employings, or are withdrawn by converting them to other ends, which necessarily alters, in each of those employments, the proportion of profits on the capital to the annual product. (Turgot, 116)
Capital tends to flow from highly capitalized industries to lowly capitalized industries. Of course, this would only be a tendency – if this long-run equilibrium were ever achieved, as Smith and the classicals assumed it would, there would be no room for future entrepreneurial action. However, since the demands of consumers are constantly in flux, with future uncertainty to boot, the entrepreneur becomes all the more relevant to economic action. By this continual reinvestment, all walks of society would be collectively lifted up by the enormous increases in productivity and standards of living. This explains Turgot’s great optimism for the perfectibility of mankind through economic action.
Turgot’s profound yet unfortunately ephemeral insights into free market economics went relatively unnoticed for a century. Despite the classical school’s considerable advances in this flourishing new field, they ignored many of Turgot’s insightful contributions at their own peril: The interconnected roles of the capitalist and the entrepreneur and the role of time in the structure of production were buried under a mountain of static analyses. The dynamic legacy was picked up by the Austrian School, and many of Turgot’s ideas can be seen in the writings of Carl Menger, Eugen Böhm-Bawerk, Ludwig von Mises, and F.A. Hayek among others. In this sense, whether the Austrians were conscious of it or not, Anne-Robert Jacques Turgot was their greatest intellectual predecessor.
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Works Cited:
Menger, Carl. Principles of Economics. (The Ludwig von Mises Institute, 2007) <http://mises.org/books/mengerprinciples.pd>
Turgot, Anne Robert Jacques. Reflectio0ns on the Formation and Distribution of Wealth (1770). The History of Economic Thought: A Reader by Steven G. Medema and Warren J. Samuels. (New York, NY: Routledge, 2003)
[1] Turgot makes no reference to Cantillon’s contribution, suggesting that Turgot may have worked out a full explication of the entrepreneur by his own accord.
[2] Granted, actual interest rates never quite match this theoretical “natural rate,” as there is always uncertainty and risk of future investments’ profitability, providing room for the profitable speculations of entrepreneurs, as Turgot keenly considers above.
