Competition, Capital and Profit

Turgot shared many views with Quesnay, notably the belief in the efficiency of free trade, the hypothesis of the exclusive productivity of agriculture and the fundamental importance of the “avances” (capital) in production and trade.

While insisting there, like Quesnay, on the need to invest large sums of capital in agri­culture, Turgot generalizes this idea and applies it to all kinds of activities. He focuses on the word “capital” - defined as a quantity of value which can be embodied in all sorts of objects and adopt any form. This is a first polemical position against the Physiocrats since it establishes an equivalence between all sorts of “accumulated value”: land owner­ship is only one of many forms of capital, and the landowner a capitalist.

Quesnay and his disciples struggled with the question of the origin of capital. While restating the usual Physiocratic arguments - savings by the landowners, lack of com­petition which allows entrepreneurs to appropriate part of the “produit net” - Turgot, more importantly, emphasizes an alternative explanation. Breaking with the prevailing approach which, from Boisguilbert to Quesnay, put a stress on the necessity of “expense” to maintain prosperity, he develops a vibrant apology of savings and the “esprit d’economie” as the main source of the accumulation of capital and wealth (see also his comments on Saint-Peravy, Turgot 1913-23, II: 649 ff.).

The motive for investment and capital accumulation is “income or annual profit”. Why would an individual invest in agricultural, industrial or commercial enterprises if he did not in return receive his expenses and the amortization of fixed capital, a compensa­tion for his effort and the risks incurred, and - Turgot insists - a surplus equivalent to that which he would have received, without work and risk, had his capital been used to buy land? The logic of the argument is clear. The particular branch of production is of little importance: individuals invest in it if the return is not less than the minimal expected remuneration. If this return is higher elsewhere, movements of capital take place: capital leaves trades in which the rate of return is relatively low towards those activities where it is more attractive. The mobility of capital, through its action on relative supplies and demands, modifies relative prices and the rates of return tend to be equalized through­out the economy, all things being equal: “the products of the different employments limit themselves each other, and are maintained... in a kind of equilibrium” (Turgot 1913-23, II: 591).

[A]s soon as profits which result from any employment of money, increase or decrease, capitals are withdrawn from other employments and directed to it - or withdrawn from it and directed to the other employments - what necessarily changes, in each employment, the ratio between the capital and the annual product...

A situation of equilibrium is thus defined by this equalization of the rates of return, or, more precisely, by a stable hierarchy of global rates of return, if we take into account the elements of risk proper of each activity, and the contribution of the entrepreneur. The lowest rate is the rate on land, that is, the rent rate calculated on the value of the land - Turgot evidently thought that he could thereby eliminate differences in land quality because the best pieces of land are more expensive. The highest rates are the profit rates for agricultural, industrial and commercial enterprises. The rate of interest lies in between: as a result of the risk incurred by the lender, it is higher than the rent rate; but it is lower than the rates related to employments which, apart from risk, also include work. It is important to note here that the hierarchy and levels of the rates of return are established at equilibrium - contrary to what Eugen von Bohm-Bawerk asserts (1884: ch. 3), this is not an explanation of the rent and profit rates through the interest rate and Turgot’s explanation is not “an explanation in a circle” (ibid.: 65).

This approach will later form the core of classical political economy. But it also seem­ingly undermines Physiocratic theory: the emphasis on the existence of profits in all activities poses the problem of the compatibility of this perspective with the dogma of the exclusive productivity of agriculture and the assertion that all the “produit net” is appropriated by the landowners. Turgot seems to be aware of the problem but his texts do not present a clear solution. The answer to this question however appears clearly in the work of one of his followers, Pierre-Louis Rmderer (1754-1835), in 1787, and is developed in Rmderer’s subsequent writings (Faccarello 1991).

Some significant consequences are to be drawn from this analysis. A first consequence is the modification of the class structure of the economy. While Turgot first started from the Physiocratic triad of a land-owning class, a productive class and a sterile class, he ended with another threefold division based on the ownership of land, capital and labour - because, while the land-owning class is homogeneous, the productive and sterile classes are not: each of them is divided “in two categories of men, that of the entrepreneurs or capitalists who make all the advances, and that of the simple wage-earning workers” (Turgot 1913-23, II: 572). As Turgot insists in his comments on Graslin: “These are... two very different catego­ries of men who contribute in a very different way to the grand work of the annual reproduc­tion of wealth” (ibid.: 633). It could be asserted, however, that Turgot could also have ended with only two classes, the landowners being only, in his view, a sub-group among the owners of capital. J.C.L. Simonde de Sismondi was later to draw this consequence.

A second consequence is the determination of a sort of minimal price for each commodity - a cost of production lato sensu - beneath which the agents decrease their production or stop producing altogether.

Another consequence was to be clearly stated by Condorcet and Rmderer: the theory of capital helps in explaining the hierarchy of wages. The minimum wage is what is neces­sary to sustain the worker and his family. Any additional amount is just the remunera­tion of the capital invested in the person, through education, training, and so on.

Note finally that, in addition to this path-breaking approach, Turgot’s texts include other innovative aspects. For example, in his 1767 comments on a memoir by Saint-Peravy, and in searching for the optimal quantity of “avances” - the number of units of labour - to be employed with a given quantity of a fixed factor in agriculture - a certain quantity of seed employed on a given piece of land - Turgot clearly states the law of non-proportional returns: the physical marginal product of the variable factor is first increasing and then diminishing. He clearly distinguishes between intensive and extensive diminishing returns and also points out the fact that it is always advantageous, in physical terms, to go beyond the point of maximal average product till the marginal product becomes nil (Turgot 1913-23, II: 643-5).