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Friday, June 14, 2013

Laissez-faire and free trade

Turgot's mentor in economics and in administration was his great friend Jacques Claude Marie Vincent, Marquis de Gournay (1712–59). Gournay was a successful merchant who then became royal inspector of manufactures and minister of commerce. Although he wrote little, Gournay was a great teacher of economics in the best sense, through numberless conversations not only with Turgot but with the physiocrats and others. It was Gournay who spread the word in France about Cantillon's achievement. In addition, Gournay translated English economists such as Sir Josiah Child into French, and his extensive notes on these translations were widely circulated in manuscript in French intellectual circles. It was from Gournay that Turgot absorbed his devotion to laissez-faire, and indeed the origin of the phrase ‘laissez-faire, laissez-passer’ has often been incorrectly attributed to him.

It is fitting, then, that Turgot developed his laissez-faire views most fully in one of his early works, the ‘Elegy to Gournay’ (1759) a tribute offered when the Marquis died young after a long illness.

Turgot made it clear that, for Gournay, the network of detailed mercantilist regulation of industry was not simply intellectual error, but a veritable system of coerced cartelization and special privilege conferred by the state. Turgot spoke of

innumerable statutes, dictated by the spirit of monopoly, the whole purpose of which were [sic] to discourage industry, to concentrate trade within the hands of few people by multiplying formalities and charges, by subjecting industry to apprenticeships and journeymanships of ten years in some trades which can be learned in ten days, by excluding those who were not sons of masters, or those born outside a certain class, and by prohibiting the employment of women in the manufacture of cloth...

For Turgot, freedom of domestic and foreign trade followed equally from the enormous mutual benefits of free exchange. All the restrictions ‘forget that no commercial transactions can be anything other than reciprocal’, and that it is absurd to try to sell everything to foreigners while buying nothing from them in return. Turgot then goes on, in his ‘Elegy’, to make a vital pre-Hayekian point about the uses of indispensable particular knowledge by individual actors and entrepreneurs in the free market. These committed, on-the-spot participants in the market process know far more about their situations than intellectuals aloof from the fray.

There is no need to prove that each individual is the only competent judge of the most advantageous use of his lands and of his labour. He alone has the particular knowledge without which the most enlightened man could only argue blindly. He learns by repeated trials, by his successes, by his losses, and he acquires a feeling for it which is much more ingenious than the theoretical knowledge of the indifferent observer because it is stimulated by want.

In proceeding to more detailed analysis of the market process, Turgot points out that self-interest is the prime mover of that process, and that, as Gournay had noted, individual interest in the free market must always coincide with the general interest. The buyer will select the seller who will give him the best price for the most suitable product, and the seller will sell his best merchandise at the lowest competitive price. Governmental restrictions and special privileges, on the other hand, compel consumers to buy poorer products at high prices. Turgot concludes that ‘the general freedom of buying and selling is therefore... the only means of assuring, on the one hand, the seller of a price sufficient to encourage production, and, on the other hand, the consumer of the best merchandise at the lowest price’. Turgot concluded that government should be strictly limited to protecting individuals against ‘great injustice’ and the nation against invasion. ‘The government should always protect the natural liberty of the buyer to buy, and the seller to sell’.

It is possible, Turgot conceded, that there will sometimes, on the free market, be a ‘cheating merchant and a duped consumer’. But then, the market will supply its own remedies: ‘the cheated consumer will learn by experience and will cease to frequent the cheating merchant, who will fall into discredit and thus will be punished for his fraudulence’.

Turgot, in fact, ridiculed attempts by government to insure against fraud or harm to consumers. In a prophetic rebuttal to the Ralph Naders of all ages, Turgot highlighted in a notable passage the numerous fallacies of alleged state protection:

To expect the government to prevent such fraud from ever occurring would be like wanting it to provide cushions for all the children who might fall. To assume it to be possible to prevent successfully, by regulation, all possible malpractices of this kind is to sacrifice to a chimerical perfection the whole progress of industry; it is to restrict the imagination of artificers to all narrow limits of the familiar; it is to forbid them all new experiments...

It means forgetting that the execution of these regulations is always entrusted to men who may have all the more interest in fraud or in conniving at fraud since the fraud which they might commit would be covered in some way by the seal of public authority and by the confidence which this seal inspires in the consumers.

Turgot added that all such regulations and inspections ‘always involve expenses, and that these expenses are always a tax on the merchandise, and as a result overcharge the domestic consumer and discourage the foreign buyer’.
Turgot concludes with a splendid flourish:

Thus, with obvious injustice, commerce, and consequently the nation, are charged with a heavy burden to save a few idle people the trouble of instructing themselves or of making inquiries to avoid being cheated. To suppose all consumers to be dupes, and all merchants and manufacturers to be cheats, has the effect of authorizing them to be so, and of degrading all the working members of the community.

Turgot goes on once more to the ‘Hayekian’ theme of greater knowledge by the particular actors in the market. The entire laissez-faire doctrine of Gournay, he points out, is grounded on the ‘complete impossibility of directing, by invariant rules and continuous inspection a multitude of transactions which by their immensity alone could not be fully known, and which, moreover, are continually dependent on a multitude of ever changing circumstances which cannot be managed or even foreseen’.

Turgot concludes his elegy to his friend and teacher by noting Gournay's belief that most people were ‘well disposed toward the sweet principles of commercial freedom’, but prejudice and a search for special privilege often bar the way. Every person, Turgot pointed out, wants to make an exception to the general principle of freedom, and ‘this exception is generally based on their personal interest’.
One interesting aspect of the elegy is Turgot's noting of the Dutch influence on the laissez-faire views of Gournay. Gournay had had extensive commercial experience in Holland, and the Dutch model of relative free trade and free markets in the seventeenth and eighteenth century, especially under the republic, served as an inspiration throughout Europe. In addition, Turgot notes that one of the books that most influenced Gournay was the Political Maxims of Johan de Witt (1623–72), the great martyred leader of the classical liberal republican party in Holland. Indeed, in an article on ‘Fairs and Markets’, written two years earlier for the great Encyclopédie, Turgot had quoted Gournay as praising the free internal markets of Holland. Whereas other nations had confined trade to fairs in limited times and places, ‘In Holland there are no fairs at all, but the whole extent of the State and the whole year are, as it were, a continuous fair, because commerce in that country is always and everywhere equally flourishing’.

Turgot's final writings on economics were as intendant at Limoges, in the years just before becoming controller-general in 1774. They reflect his embroilment in a struggle for free trade within the royal bureaucracy. In his last work, the ‘Letter to the Abbé Terray [the controller-general] on the Duty on Iron’ (1773), Turgot trenchantly lashes out at the system of protective tariffs as a war of all against all using state monopoly privilege as a weapon, at the expense of the consumers:

I believe, indeed, that iron masters, who know only about their own iron, imagine that they would earn more if they had fewer competitors. There is no merchant who would not like to be the sole seller of his commodity. There is no branch of trade in which those who are engaged in it do not seek to ward off competition, and do not find some sophisms to make people believe that it is in the State's interest to prevent at least the competition from abroad, which they most easily represent as the enemy of the national commerce. If we listen to them, and we have listened to them too often, all branches of commerce will be infected by this kind of monopoly. These fools do not see that this same monopoly which they practice, not, as they would have the government believe, against foreigners but against their own fellow-citizens, consumers of the commodity, is returned to them by these fellow citizens, who are sellers in their turn, in all the other branches of commerce where the first in their turn become buyers.

Turgot indeed, in anticipation of Bastiat three-quarters of a century later, calls this system a ‘war of reciprocal oppression, in which the government lends its authority to all against all’, in short a ‘balance of annoyance and injustice between all kinds of industry’ where everyone loses. He concludes that ‘Whatever sophisms are collected by the self-interest of a few merchants, the truth is that all branches of commerce ought to be free, equally free, and entirely free...’.

Turgot was close to the physiocrats, not only in advocating freedom of trade, but also in calling for a single tax on the ‘net product’ of land. Even more than in the case of physiocrats, one gets the impression with Turgot that his real passion was in getting rid of the stifling taxes on all other walks of life, rather than in imposing them on agricultural land. Turgot's views on taxes were most fully, if still briefly, worked out in his ‘Plan for a Paper on Taxation in General’ (1763), an outline of an unfinished essay he had begun to write as intendant at Limoges for the benefit of the controller-general. Turgot claimed that taxes on towns were shifted backwards to agriculture, and showed how taxation crippled commerce and how urban taxes distorted the location of towns and led to the illegal evasion of duties. Privileged monopolies, furthermore, raised prices severely and encouraged smuggling. Taxes on capital destroyed accumulated thrift and hobbled industry. Turgot's eloquence was confined to pillorying bad taxes rather than elaborating on the alleged virtues of the land tax. Turgot's summation of the tax system was trenchant and hard-hitting: ‘It seems that Public Finance, like a greedy monster, has been lying in wait for the entire wealth of the people’.

On one aspect of politics Turgot parted apparently from the physiocrats. Evidently, Turgot's strategy was the same as theirs: attempting to convince the king of the virtues of laissez-faire. And yet one of Turgot's most incisive epigrams, delivered to a friend, was: ‘I am not an Enclopédiste because I believe in God; I am not an économiste because I would have no king’. However, the latter was clearly not Turgot's publicly stated view; nor did it guide his public actions.

Austrian Perspective on the History of Economic Thought (2 volume set)

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