Send us your blog post, blog address, address of other great sites or suggestions by email.

Sunday, June 16, 2013

The Theory Of Production And Distribution

In one sense Turgot's theory of production followed the physiocrats: the unfortunate view that only agriculture is productive, and that, in consequence, there should be a single tax on land. But the main thrust of his theory of production was quite different from that of physiocracy. Thus, before Adam Smith's famous example of the pin factory and stress on division of labour, Turgot, in his ‘Reflections’, had worked out a keen analysis of that division:

If the same man who, on his own land, cultivates these different articles, and uses them to supply his own wants, was also forced to perform all the intermediate operations himself, it is certain that he would succeed very badly. The greater part of these operations require care, attention and a long experience, such as are only to be acquired by working continuously and on a great quantity of materials.

And further, even if a man

did succeed in tanning a single hide, he only needs one pair of shoes; what will he do with the rest? Shall he kill an ox to make this pair of shoes?... The same thing may be said concerning all the other wants of man, who, if he were reduced to his own field and his own labour, would waste much time and trouble in order to be very badly equipped in every respect, and would also cultivate his land very badly.

Even though only land was supposed to be productive, Turgot readily conceded that natural resources must be transformed by human labour, and that labour 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, labour 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 law of diminishing returns, or, as it might be described, the law of variable proportions. This gem arose out of a contest which he had inspired to be held by the Royal Agricultural Society of Limoges, for prize-winning essays on indirect taxation. Unhappiness with the winning physiocratic essay by Guérineau de Saint-Péravy led him to develop his own views in ‘Observations on a Paper by Saint-Péravy’ (1767). Here Turgot went to the heart of the physiocratic error, in the Tableau, of assuming a fixed proportion of the various expenditures of different classes of people. But, Turgot pointed out, these proportions are variable, as are the proportions of physical factors in production. There are no constant proportions of factors in agriculture, for example, since the proportions vary according to the knowledge of the farmers, the value of the soil, the techniques used in production, and the nature of the soil and the climatic conditions.

Developing this theme further, Turgot declared that ‘even if applied to the same field it [the product] is not proportional [to advances to the factors], and it can never be assumed that double the advances will yield double the product’. 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, after the maximum point is passed, 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 equalled, until the twentieth century.
(According to Schumpeter, not until a journal article by Edgeworth in 1911!) We have Turgot spelling out in words the familiar diagram in modern economics:

Increasing the quantity of factors, in short, raises the marginal productivity (the quantity produced by each increase of factors) until a maximum point, AB, is reached, after which the marginal productivity falls, eventually to zero, and then becomes negative.

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

No comments:

Post a Comment