One of the most remarkable contributions by Turgot was an unpublished and unfinished paper, “Value and Money,” written around 1769. Turgot developed an Austrian-type theory first of Crusoe economics, then of an isolated two-person exchange, which he later expanded to four persons, and then to a complete market. By concentrating first on the economics of an isolated Crusoe figure, Turgot was able to work out economic laws that transcend exchange and apply to all individual actions.
First, Turgot examines an isolated man, and works out a sophisticated analysis of his value or utility scale. By valuing and forming preference scales of different objects, Crusoe confers value upon various economic goods, and compares and chooses between them on the basis of their relative worth to him, not only between various present uses of goods but also between consuming them now and accumulating them for “future needs.” Like his French precursors, Turgot sees that the subjective utility of a good diminishes as its supply to a person increases; and like them, he lacks only the concept of the marginal unit to complete the theory. But he went far beyond his predecessors in the precision and clarity of his analysis. He also sees that the subjective values of goods will change rapidly on the market, and there is at least a hint in his discussion that he realized that this subjective value is strictly ordinal and not subject to measure.
Turgot saw that a “comparison of value, this evaluation of different objects, changes continually with the need of the person.” Turgot proceeds not only to diminishing utility, but to a strong anticipation of diminishing marginal utility, since he concentrates on the unit of the particular goods:
“When the savage is hungry, he values a piece of game more than the best bearskin; but let his appetite be satisfied and let him be cold, and it will be the bearskin that becomes valuable to him.”
After bringing the anticipation of future needs into his discussion, Turgot deals with diminishing utility as a function of abundance. Armed with this tool of analysis, he helps solve the value paradox:
Water, in spite of its necessity and the multitude of pleasures which it provides for man, is not regarded as a precious thing in a well-watered country; man does not seek to gain its possession since the abundance of this element allows him to find it all around him.
Turgot then proceeds to a truly noteworthy discussion, anticipating the modern concentration on economics as the allocation of scarce resources to a large and far-less-limited number of alternative ends:
To obtain the satisfaction of these wants, man has only an even more limited quantity of strength and resources. Even a particular object of enjoyment costs him trouble, hardship, labor, and, at the very least, time. It is this use of his resources applied to the quest for each object which provides the offset to his enjoyment, and forms as it were the cost of the thing.
Although Turgot called the cost of a product its “fundamental value,” he comes down generally to a rudimentary version of the later Austrian view that all costs are really “opportunity costs,” sacrifices foregoing a certain amount of resources that would have been produced elsewhere. Thus, Turgot’s actor (in this case an isolated one) appraises and evaluates objects on the basis of their significance to himself. First, Turgot says that this significance, or utility, is the importance of his “time and toil” expended, but then he treats this concept as equivalent to productive opportunity foregone: as “the portion of his resources which he can use to acquire an evaluated object without thereby sacrificing the quest for other objects of equal or greater importance.”
Having analyzed the actions of an isolated Crusoe, Turgot brings in Friday, that is, he now assumes two men and sees how an exchange will develop. Here, in a perceptive analysis, he works out the Austrian theory of isolated two-person exchange, virtually as it would be arrived at by Carl Menger a century later. First, he has two savages on a desert island, each with valuable goods in his possession, but the goods being suited to different wants. One man has a surplus of fish, the other of hides, and the result will be that each will exchange part of his surplus for the others, so that both parties to the exchange will benefit. Commerce, or exchange, has developed.
Turgot then changes the conditions of his example, and supposes that the two goods are corn and wood, and that each commodity could therefore be stored for future needs, so that each would not be automatically eager to dispose of his surplus. Each man will then weigh the relative “esteem” to him of the two products, and supplies and demands until the two parties agree on a price at which each man will value what he obtains in exchange more highly than what he gives up. Both sides will then benefit from the exchange.
Turgot then unfortunately goes off the subjective value track by adding, unnecessarily, that the terms of exchange arrived at through this bargaining process will have “equal exchange value,” since otherwise the person cooler to the exchange “would force the other to come closer to his price by a better offer.” It is unclear here what Turgot means by saying that “each gives equal value to receive equal value”; there is perhaps an inchoate notion here that the price arrived at through bargaining will be half-way between the value-scales of each. He is, however, perfectly correct in pointing out that the exchange increases the wealth of both parties. He then brings in the competition of two sellers for each of the products and shows how the competition affects the value-scales of the participants.
A few years earlier in his most important work, “The Reflections of the Formation and Distribution of Wealth,”4 Turgot had pointed out the bargaining process, where each party wants to get as much as he can and give up as little as possible in exchange. The price of any good will vary in accordance with the urgency of need among the participants; there is no “true price” toward which the market tends.
Finally, in his repeated analysis of human action as the result of expectations, rather than in equilibrium or as possessing perfect knowledge, Turgot anticipates the Austrian emphasis on expectations as the key to actions on the market. Turgot’s very emphasis on expectations, of course, implies that they can be and often are disappointed in the market.