Competition, capital and the distribution of income

Until now, it was supposed that economic activities were performed by free agents in the context of free trade. The concept of capital was also advanced. It is time to analyse these fundamental features of sensationist political economy.

of the best chapters in Smith’s book... is entirely due to the work of M. Turgot” (Rmderer 1800-1801, 78).

Value and capital

In the line of thought initiated by Boisguilbert, Turgot shared many views with Quesnay, notably a belief in the efficiency of free trade. He also accepted the hypothesis of the exclusive productivity of agriculture and the fundamental impor­tance of the “avances” (capital) in production and trade, and started his analysis with the usual physiocratic division of society into three classes: landowning, pro­ductive and sterile (that he preferred to call “classe stipendiee”, that is, stipendiary class). However, by systematically referring to the concepts of free competition and competition among capitals, he distanced himself from the “sect”. As he wrote to Dupont, criticising the physiocrats on this point:

I find that... you do not make sufficient use of this less abstract principle, but... more enlightening, more fruitful or at least forceful for its simplicity and without exception because of its generality: the principle of competition and of free trade.

(Turgot to Dupont, 20 February 1766, in 1913-23, II, 507)

While insisting, like Quesnay, on the need to invest large sums of money in agricul­ture, Turgot generalised this idea and applied it to all kinds of activities.

Every landed estate is the equivalent of a capital; consequently every land­owner is a capitalist, but not every capitalist is a landowner; and the owner of a moveable capital may choose whether to use it in acquiring a landed estate, or to invest it in the enterprises of the agricultural class, or the indus­trial class.

(Turgot 1766, 596)

Quesnay and his disciples struggled with the question of the origin of capital. While restating the usual physiocratic arguments - its origin lies in savings by the landowners or in a lack of competition which allows entrepreneurs to appropriate part of the “produit net” - Turgot emphasised an alternative explanation. Breaking with the prevailing approach which, from Boisguilbert to Quesnay, emphasised the necessity of “expense” to maintain prosperity, he developed an apology of savings and the “esprit d’economie” as the main source of the accumulation of capital and wealth (1766, 567; see also 1767b, 649 ff.). He insisted on the fact that savings in no way cause a decrease in global demand: while they are not an “expense” - that is to say, a purchase of final goods for consumption - they are not hoarding either, but a formation of capital. Whether they are spent directly or indirectly in purchases of means of production, they produce beneficial effects for growth, productivity and employment. Furthermore, Turgot claimed, savings are for the greater part made by the entrepreneurs themselves, out of their profits, and profits are earned in all activities.

Capital, the origin ofprofit and the uniformity of the profit rate

The motive for investment and capital accumulation is “income or annual profit”.

as soon as the profits resulting from any employment of money increase or decrease, capitals are withdrawn from other employments and flow into it - or are withdrawn from it and flow to other employments - which necessarily changes, in each of these employments, the ratio between the capital and the annual product.

(Turgot 1766, 592)

A situation of equilibrium is thus defined by an equalisation 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 to each activity and the specific 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.

This approach was later to form the core of classical political economy. But it also 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 the whole “produit net” is appropriated by the landowners. Turgot’s texts do not present a clear solution. However, the answer to this question appears clearly in the work of Pierre-Louis Rα'derer. in his 1787 book, Reculement des barrieres - he repeated his analysis, first literally in his Cours d’organisation sociale (1793), then in a paper, “De la generation des richesses. Examen de cette question: d’ou provien- nent les differentes especes de revenus et comment s’opere leur distribution dans la societe?” (1797) and finally in his Memoires sur quelques points d’economie publique (1800-1801) (Faccarello 1991). Rα'derer (1787, 14-26) explains that the net product of the economy, while generated in agriculture, also depends on the other sectors which, indirectly, contribute to its creation: the size of the agricul­tural sector, and hence of the net product, depends in fact on the commodities that manufactures and commerce can offer to the landowners. Without these pos­sibilities of consumption expenditure, the first landowners would certainly have cultivated their land (or had it cultivated) in a way just necessary for their own needs (and those of their servants), since any surplus would be useless. This is the reason why “agriculture [the farmers], manufactures and commerce have an equal, primitive and intimate right to the products of land, and...

It is striking that Marx later adopted a similar approach in Volume 3 of Capital for resolving the problem of the transformation of values into production prices: in the economy, the surplus value is produced by workers in all activities, and the amount of surplus value produced by each sector thus depends, all things being equal, on the amount of labour spent in this sector. The total amount of surplus value forms the total amount of profit, the uniform rate of profit is the ratio of this amount to the total sum of capitals invested in the economy: and this amount is redistributed in the different sectors, not in proportion to the labour alone (variable capital) but to the total capital invested therein.

The class structure of society and the distribution of income

Some significant consequences must be drawn from this analysis. The first con­sequence is the modification of the class structure of the economy. While Turgot first started from the physiocratic triad of a landowning class, a productive class and a sterile class, he ended with another threefold division based on the owner­ship of factors of production: land, capital and labour. As a matter of fact, while the landowning class is homogeneous, the productive and sterile classes are not (Turgot 1766, 569-70 and 572): each of them is divided “into two categories of men, that of the entrepreneurs or capitalists, who make all the advances, and that of the simple wage-earning workers” (1766, 572).

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. In his comments on Saint-Peravy (Turgot 1767b, 655-6) and in a letter to David Hume (25 March 1767, in 1913-23, II, 663), Turgot called it the “prix fondamental” (fundamental price). Under the effect of competition and the migrations of capital, the “prix courant” or market price, directly determined by supply and demand, tends towards this fundamental price. This theme, at the same time developed by Graslin in a similar context, was to be found later in classical economics as the gravitation of market prices around natural prices. However, as seen previously, Turgot’s interest is almost exclusively focused on the determination of the “prix courant” which only exists in trade (Tur­got 1770a, 176). Moreover, the component parts of the “fundamental price” are themselves determined by supply and demand, and subject to perpetual variations (Turgot 1770a, 176).

A further consequence of this approach must also be noted: what has just been said also applies to the labour market and the price of labour, that is, wages. “The price of wages” is “only determined by the relation of supply to demand” (Turgot to Hume, 25 March 1767, in 1913-23, II, 663). Section VI of the Reflexions shows how wages are contained by competition among workers who, not possessing any capital, are obliged to sell their “arms and industry”. The price a worker gets for his labour depends on the state of the labour market and the buyer pays him as little as possible whenever he can choose among a great number of suppliers of labour. With the result that “the wage of the worker is limited to what is necessary for his subsistence” (1766, 537). In his above-mentioned letter to Hume, Turgot is more precise, but the conclusion is the same. The “fundamental price” of wages, he writes, is the price of the subsistence of the worker, plus a “profit”, that is, what is necessary for him “to deal with accidents and raise a family”: this “profit” being fixed by competition at the lowest possible rate. When this fundamental price rises, for example, the market price of labour must adjust. “Needs are always the same. This kind of superfluity, from which it is always possible to cut out, is still a neces­sary element for the subsistence of workers and their families” (Turgot 1913-23, II, 663).

These developments on wages and the distinction between the two classes of workers and capitalists attracted Marx’s attention. He quoted Section VI of Turgot’s Reflexions in his “Unpublished Chapter 6” of Capital (Marx 1863-66, 1068n) and again in Theories of Surplus Value (1861-63, 46). On Turgot, he wrote further in Theories of Surplus Value:

the pure gift of nature is presented as surplus labour, and on the other hand the necessity for the labourer to yield up what there is in excess of his neces­sary wage [is explained] by the separation of the labourer from the conditions of labour, and their confronting him as the property of a class which uses them to trade with.

(Marx 1861-63, 362)

Marx agreed with his son-in-law, Charles Longuet, on the fact that the so-called “iron law of wages” was stated by Turgot and Ricardo (Marx to his daughter Jenny, 6 April 1862, in 1975-2004, vol. 46, 230), not by Ferdinand Lassalle.^[107]

A further and important development on wages was to be made by Condorcet and Raderer: the theory of capital helps to explain the hierarchy of wages. The minimum wage is what is necessary to sustain the worker and his family in a given socio-economic environment. Any additional amount is just the remu­neration of the capital invested in the person, through education and training for instance. According to Raderer, this capital, which must yield profits like any other capital, is a “fonds d’industrie” (fund of industry, in the sense of economic activity in general), and the person in which it is invested is a “proprietaire d’industrie” (owner of industry). This was later to give rise to the concept of human capital.

Finally, there is the question of rent. As seen earlier, rent is seen as the profit of capital invested in land. But plots of land are of unequal quality: is this compatible in the long run with the principle of the uniformity of the profit rate? One answer is that better plots of land are more expensive than less fertile ones, and thus, while more productive, the capital invested in purchasing them must also be greater. Turgot’s analysis does not go further. While acknowledging the possible different fertility of land, he did not develop a theory of differential rent. However, he did state for the first time the so-called law of non-proportional returns. This was in his 1767 comments on a memoir by Guerineau de Saint-Peravy - a physiocrat and the successful competitor of Graslin in the Limoges contest on indirect taxation for which Graslin wrote his Essai analytique. There, Turgot criticised the physiocrats’ habit of assuming constant returns in agriculture. He insisted on the great variety of possible physical returns, depending on the quality of land and the quantity of capital invested in a given plot of land.

Production requires some advances; but equal advances on plots of land of unequal fertility yield very different products, and this is enough to show that the products cannot be proportional to the advances; they cannot even be proportional when [advances are] applied to a single plot of land, and we can never assume that doubling the advances doubles the product.

(1767b, 644)

He takes the example of a variable quantity of capital (a certain number of units of ploughing labour) employed on a given plot of land where a certain amount of seeds have been sown - this “land and seed” bundle being what would later be called a fixed factor of production. He then states that, as greater quantities of the variable factor are invested in the land, its physical additional product initially increases, then reaches a maximum and finally diminishes.

Seed thrown on a soil which is naturally fertile, but has not been prepared at all, would be virtually a waste of expenditure. If the soil were tilled once, the produce would be greater; tilling it a second or a third time would not just double or triple, but quadruple or decuple the produce, which will thus increase in a much larger proportion than the expenditure, and this would be the case up to a certain point, at which the produce would be as large as pos­sible relative to the advances. Past this point, if the advances are still further increased, the product will still increase, but less so, and continuously less and less until an addition to the advances would add nothing further to the produce, because the fertility of the soil is exhausted and art cannot increase the product any further.

(1767b, 645)

Turgot 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 until the additional product becomes nil (Turgot 1767b, 643-5).

During the 1760s, other authors referred to the unequal fertility of land: Claude-Franςois-Joseph d’Auxiron, for example, in his Principes de tout gou- vernement (Auxiron 1766). Graslin too noted that the unequal fertility of land is one of the causes of the emergence of the “inverted order of society” (1767, 80). But what is certainly most interesting is the content of a critical review of Graslin’s Essai analytique, published anonymously^[108] in the Ephemerides du citoyen in the tenth issue of 1768. The author of the review remarks that the different fertility of plots of land poses a problem for the determination of the price of an agricultural product, which must be unique. As it is preferable that all the land be cultivated, that the population live well and the net product and the resources of the State be at a significantly high level, it is necessary that the most unproductive land should also be cultivated: in consequence, the price “must be measured on the product of the least fertile lands, provided that they are devoted to the kind of cultivation most adapted to their quality” (Anonymous 1768, 195). Will the most fertile plots of land be favoured by this price, because their production could in principle be sold at a much lower price? No, because, while it is true that the first expenses for clearance, etc., are lower on them than on less fertile land, the price of these plots of land is well above the price of relatively unproductive land. In consequence, the capital invested in buying land of various qualities yields approximately the same rate of “rent” (1768, 196-7): the landowners “will only have an income proportional to the price of the capital which was spent for the acquisition of their estate” (1768, 197). All this is very much in Turgot’s line of thought.

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