A Biography of A.R.J. Turgot – Part 3 – THE THEORY OF PRODUCTION AND DISTRIBUTION

In one sense, Turgot’s theory of production followed the physiocrats– only agriculture is productive, so there should be a single tax on land. But the major thrust of his theory of production was quite different from that of physiocracy. Even though only land was supposed to be productive, Turgot readily conceded that natural resources must be transformed by human labor, and that labor must enter into each stage of the production process. Here Turgot had worked out the rudiments of the crucial Austrian theory that production takes time and that it passes through various stages, each of which takes time, and that therefore the basic classes of factors of production are land, labor, and time.

One of Turgot’s most remarkable contributions to economics, the significance of which was lost until the twentieth century, was his brilliant and almost off-hand development of the laws of diminishing returns. This gem arose out of a contest which he had inspired to be held by the Royal Agricultural Society of Limoges, for essays on indirect taxation. Unhappiness with the wining physiocratic essay by Guerineau de Saint-Peravy led him to develop his own views in “Observations on a Paper by Saint-Peravy” (1767). Here, Turgot went to the heart of the physiocratic error of assuming a fixed proportion of the various expenditures of different classes of people. But, Turgot pointed out, not only are the proportions of factors to product variable, but also after a point, “all further expenditures would be useless, and that such increases could even become detrimental. In this case, the advances would be increased without increasing the product. There is therefore a maximum point of production which it is impossible to pass.” Furthermore, it is “more than likely that as the advances are increased gradually past this point up to the point where they return nothing, each increase would be less and less productive.” On the other hand, if the farmer reduces the factors from the point of maximum production, the same changes in proportion would be found.

In short, Turgot had worked out, in fully developed form, an analysis of the law of diminishing returns which would not be surpassed, or possibly equaled, until the twentieth century.5 Increasing the quantity of factors raises the marginal productivity (the quantity produced by each increase of factors) until a maximum point is reached, after which the marginal productivity falls, eventually to zero, and then becomes negative.

Intro || Part 1 || Part 2 || Part 3 || Part 4 || Part 5 || Part 6

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