Turgot and the development of a subjective theory of value and prices

Human beings know the external world through sensations and the feelings of pleasure and pain: they consequently seek pleasure and try to avoid pain.

The objects, whose distance and movements around our body we observe, are of interest to us...

the distance of our body to the other stationary objects... helps in seeking the objects whose approach gives us pleasure, and in avoiding those whose approach generates pain. The presence of these objects becomes the source of our desires and fears, and the cause of the movement of our body.

(Turgot 1756, 522)

This places the concept of need at the centre of the analysis. A need is a pain, and its satisfaction causes the cessation of the pain, that is, a pleasure. Moreover, this atti­tude generates a maximising behaviour of the agents who try to minimise pain and maximise pleasure. This is an important point to note. Liberal political economy was founded by Boisguilbert, who placed the maximising behaviour of agents in markets at the centre of the analysis: but he based this selfish attitude on a Chris­tian theological scheme - the doctrine of original sin and the Fall - as understood by the Jansenist tradition. Now, sensationist philosophy explains this attitude in a different and “empirical” way, thus getting rid of theology. Moreover, if all knowl­edge derives from the sensations, this means that we cannot know any hypothetical ultimate “nature of things” but only the relationships existing between them: any science is a science of signs. The notion of “substance” of value, for example, is meaningless, only the proportions between different values can be dealt with, that is, relative values or prices.

From this general framework, two different approaches to the determination of values and prices were proposed almost at the same time during the 1760s.

The foundations of a subjective theory of value

A person is “merely a bundle of needs”, Turgot wrote in his “Plan d’un memoire sur les impositions” (1763, 297). Satisfying these needs brings about utility and the effort spent in this direction generates pain. Individual agents act accordingly and try to minimise pain and maximise utility. In this respect, Turgot, like many other authors during the Enlightenment, thought that economic problems could be solved by a “maximis et minimis” approach - sometimes understood in a broad and metaphorical sense - proposed by the seventeenth-century French mathematician Pierre de Fermat and developed by Isaac Newton and Gottfried Wilhelm Leibniz (see Chapter 8, this volume).

Some developments on value can be found in Turgot’s 1766 Reflexions, but an extensive analysis is presented in the 1769 draft “Valeurs et monnaies”. To uncover the nature of value, Turgot first imagines a man alone facing nature. This man is free and endowed with reason. As Locke stressed, he has the power to suspend his desires and to calculate the best way to achieve happiness.

Whatever necessity determines to the pursuit of real bliss, the same necessity with the same force establishes suspense, deliberation, and scrutiny of each successive desire, whether the satisfaction of it does not interfere with our true happiness and mislead us from it.

(Locke 1690, I, 220)

In order to act, that is to say, to produce the goods necessary to satisfy his needs, Turgot’s Robinson first determines the value each of these goods has for him. This is what Turgot calls the “valeur estimative” (esteem value), that is, the subjective “degree of esteem which he attaches to the different objects of his desires” (1769, 87) - their “degree of utility” as Turgot puts it in Memoire sur les prets d’argent (1770a, 175). The isolated individual thus establishes a preference-ordering - a “ranking of utility” (1769, 86, 97) - on all of the goods, taking into account (1) the ability of each object to satisfy a kind of need, (2) the temporal element generated by foresight (some provisions are to be made for a bad season) and (3) the scarcity of the desired object. As a result of his calculation, he attributes a certain “esteem value” to the quantity of each object he needs: this expresses the proportion of his “faculties” which he is prepared to devote to obtaining it, all other things being equal. He also distributes his faculties in such a way as to procure the different goods “according to their importance for... his well-being” (1769, 87), that is, by searching for the greatest possible well-being. It should be noted that Turgot opts for a purely relative measure of values. The reason for this is that the unity - the “faculties” - to which the values refer cannot be evaluated.^[90]

Turgot then supposes that there are two agents, two goods and no production.

In order for a transaction to take place, each agent must attribute a higher esteem value (say λ) to the quantity of the object received than he attributes to the quantity of the good given in exchange (λ*), that is, λ > λ* “each would stay as he is unless he finds an interest, a personal profit, to exchange; unless he values more what he receives than what he gives” (1769, 91). Or, as Turgot sums up in his Memoire sur lesprets d’argent:

The exchange, being free on both sides, can only be motivated by the prefer­ence of each of the contracting parties for the thing he receives over the thing he gives. This preference presumes that each attributes a greater value to the thing he acquires than to the thing he gives up, relative to his personal utility and to the satisfaction of his needs and desires........................... This value only depends

on the opinion of the two contracting parties as regards the degree of utility of the things exchanged.

(1770a, 174-5)

The gains from exchange are clear: (1) the total utility of each agent increases; (2) whenever production is possible, exchange also allows a division of labour and results in an increase in the quantities of goods available to the agents (1769, 93).

This is the reason why this equilibrium price is termed “average esteem value” (1769, 92). This solution is not satisfactory because, as we know today, there is a priori no unique solution in the case of a bilateral monopoly. But this approach is nevertheless remarkable for the time and for its originality and rigour.^[91] However, the explana­tion given by Turgot remains questionable: this “valeur appreciative” is necessarily attained because, he notes, should the differences (λ_i - λ_i ) and (λ_j∙ - λ_j∙ ) differ between agents, it would be in the interest of one of the two agents to continue the bargaining process. But how could the agents know each other’s differences when preferences are not revealed, and moreover utilities are not comparable?

Some developments

Having established his argument for two contracting parties, Turgot intended to generalise it to a large number of agents and goods. Unfortunately, “Valeurs et monnaies” concludes after only considering a larger number of agents in a two- good context: Turgot assumes that, as a result of competitive arbitrages, a single price will be established. The general situation (many agents and many goods) is, however, mentioned incidentally in Memoire sur les prets d’argent (1770a) and his letters to Terray (1770b).

(1) The process by which an equilibrium is achieved is described as a process of “tatonnement”: an actual “tatonnement”, however, since exchanges are made outside equilibrium. “The debate between each buyer and each seller is a kind of tatonnement which lets each of them know with certainty the true price of things” (1770b, 326). No one’s interest, however, would really be dam­aged - at least statistically - since, given that the price variations are made by “imperceptible degrees”, the “losses” and “gains” are supposed to compensate for each other in the end but, “if somebody were harmed, this damage being the unavoidable effect of the course of things, it would be accepted as we accept the evils that we can only ascribe to necessity” (1770b, 326).

(2) In the second place, while prices are actually determined on a subjective basis, they acquire a misleadingly objective appearance in markets: “each seller and each buyer in particular plays so small a part in the formation of this general opinion and the resulting current evaluation, that this evaluation can be seen as an independent fact” (1770a, 175). It is this illusion, Turgot stresses, which has given rise to a belief in the existence of an “intrinsic value” or “real value”: a thing “strictly speaking, has no real and intrinsic value” and usage alone “allows us to call this current value the real value of a thing” (1770a, 176).

[T]hrough comparison of the total supplies and the total demands, a cur­rent value establishes itself, which only differs from that established in the exchange between two isolated men, in that it is the mean [“le milieu”] of the different values which would have resulted from the haggling between the contracting parties in each separated exchange. But this mean or cur­rent value does not acquire any reality independent from the opinion and the comparison of the reciprocal needs and does not cease to be continuously variable.

(1770a, 175)

It will be seen how this line of reasoning is also implemented to deal with the concepts of money and interest rate and in public economics. After Turgot, the approach was developed in various directions. Condorcet (1793), for example, used it to determine the optimal amount of public expenditure and taxes for a given period (below). Some echoes are also to be found in Morellet’s Prospectus (1769) and Condillac’s Le commerce et le gouvernement (1776) and, later, in authors like Isnard, Canard and Bicquilley (see Chapter 8, this volume). This kind of approach is also to be found in the press. The Journal encyclopedique ou universel, for example, published on 1 and 15 October 1776 an anonymous review of Smith’s Wealth of Nations. The author notes that for Smith, “the word value has a dual meaning; it expresses both the quality of a particular object, and the faculty that enables this object to be used as a means for the purchase of others”, but remarks that this distinction “appears to us to have greater subtlety than importance, for it is always utility, the real merit or opinion, which makes this object the price of another” (1 October 1776, 8-9).

3.