Utility, Value and Prices
A person is “merely a bundle of needs”, Turgot states in “Plan d’un memoire sur les impositions” (Turgot 1913-23, II: 293). Satisfying these needs brings about utility; the effort spent on this goal involves a pain (disutility).
On the basis of this sensationist approach, Turgot developed a theory of subjective value, which allows him to determine equilibrium prices, which, in the short period, equilibrate supply and demand. This is a remarkable step, which also makes him embark on two genuine tours de force. (1) In the first place, while retaining the whole edifice of the free trade approach developed by Boisguilbert, he gave it a different foundation. Sensationist philosophy now explains the selfish and maximizing behaviour of agents in markets, in place of the theological dogma of the Original Sin and the Fall of Man. (2) In the second place, he showed that the traditional debates about usury were misconceived and that the problem of the nature and the determination of the rate of interest can easily be solved on the basis of his theory of value and price.The question of value is investigated at some length in the 1766 Reflections but a more extensive analysis is formulated in the c. 1769 uncompleted text “Valeurs et monnaies”. What is value? To answer this question, Turgot, probably on the celebrated model of the statue Condillac developed in his 1754 Traite des sensations, first imagines a man alone facing nature. This “savage” has to produce the goods he requires to satisfy his needs, but he must first determine the value each of these goods has for him. This “valeur estimative” or “esteem value” is the subjective “degree of esteem which he attaches to the different objects of his desires” (Turgot 1913-23, II: 87) - the “degree of utility” as Turgot puts it in the 1770 Memoire sur les prets d’argent (Turgot 1913-23, III: 175).
The isolated individual thus establishes a preference-ordering - “order of utility” (ibid.: 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, and (3) the scarcity of the desired object. As a result of this calculation, he attributes a certain “esteem value” to each quantity of each object: this reflects the proportion of his “faculties” which he is prepared to devote to obtaining it, all other things being the same. He also distributes all of his faculties in such a way as to procure the different goods “according to their importance for... his well-being” (1913-23, III: 87), that is, by searching for the greatest possible well-being. It should be noted that Turgot poses the question of the measuring of values, and opts for a purely relative understanding of these. The reason for this is that the unity - the “faculties” - to which the values refer cannot be evaluated. However, the text sometimes presupposes this measurement, that is, cardinality, as it is the case in the determination of the equilibrium price.Turgot then supposes that there are two agents and two goods, in absence of production. Each agent has an initial endowment of a good and needs part of the quantity of the good owned by the other agent; the situation is thus of a bilateral monopoly in a pure exchange economy. The two agents engage in a bargain under the following assumptions: (1) each agent determines for himself the “esteem values” he attributes to the different parts of the endowment he wishes to exchange, as well as to the parts of the other agent’s endowment which he could receive in exchange; (2) the agents do not reveal their preferences: these values are kept a secret by each individual; (3) on this basis, each agent determines the states of indifference, in other words, the reservation price from which the exchange is possible; (4) each of them follows a maximizing behaviour, that is, is animated by “the interest to keep the largest quantity possible of his own good and to acquire in exchange the largest quantity of the other’s good” (Turgot 1913-23, II: 90) - a typical eighteenth-century formulation of the mathematical problem of “maximis et minimis”.
In order for a transaction to take place, it is necessary for each agent to attribute to the quantity of the object received a higher “esteem value” (say λ) than that which he assigns to the quantity of the good given in exchange (l*): λ > λ*.
As Turgot states: “each would stay as he is unless he finds an interest, a personal profit, to exchange; unless he estimates more what he receives than what he gives” (Turgot 1913-23, II: 91). The gains from exchange are clear: (1) free exchange implies an increase in total utility for both parties; (2) moreover, whenever production is possible, exchanges also allow a division of labour and result in an increase of the quantities of goods available to the agents (ibid.: 93).Turgot assumes that the bargaining process converges towards a price on which both agents agree, in between the reservation prices of the two agents. This equilibrium price - called by Turgot “valeur appreciative” - is unique and is determined simultaneously with the quantities exchanged. The final agreement is defined as a situation in which the difference of the “esteem values” of the quantity of the received good over that of the quantity of the good given in exchange is equal for both parties - which could be symbolized, for two agents i and j: λi - λi* = λj - λj*. This is the reason why this equilibrium price is termed “average esteem value”.
This solution, however, could not be satisfactory for those who note that there is a priori no unique solution in the case of a bilateral monopoly. But this approach is nevertheless remarkable for its originality and rigour: it was probably inspired by the celebrated pages on justice and exchange in Aristotle’s Nicomachean Ethics and finds an interpretation in terms of cooperative games (Dos Santos Ferreira 2002). The explanation given by Turgot remains however questionable: this “valeur appreciative” is necessarily attained because, he notes, should the differences between the “esteem values” of the goods be different 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?
Having established his argument for two contracting parties, Turgot intended to generalize it to a large number of agents and goods.
The article “Valeurs et monnaies” unfortunately concludes after taking into consideration a larger number of agents in a two goods context; Turgot assumes that as a result of competitive arbitrages a single price would be established. The general situation (many agents and goods) is only dealt with incidentally in Memoire sur les prets d’argent and the 1770 “Lettres” to Terray. Turgot simply reaffirms his conviction in the realization of a general equilibrium. Nevertheless, two remarks formulated on these occasions are of interest. First, the process by which equilibrium is achieved is explicitly described in the “Lettres” as a process of “tatonnement” (Turgot 1913-23, III: 326). It is however a real “tatonnement” since exchanges are made outside equilibrium: but according to Turgot, no one’s interest would really be damaged - at least statistically - since, given that the variations are made by “imperceptible degrees”, the “losses” and “gains” would compensate for each other in the end. Secondly, Turgot stresses in the Memoire, while prices are actually determined from a subjective basis, they acquire in the end a misleading “objective” appearance in markets. It is this illusion which has given rise to a belief in the existence of an “intrinsic value”, “real value” or “natural price”: but nothing of the like exists in reality (ibid.: 175-6).