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Saturday, June 15, 2013

Value, exchange and price

One of the most remarkable contributions by Turgot was an unpublished and unfinished paper, ‘Value and Money’, written around 1769.3 In this paper Turgot, working in a method of successive approximations and abstractions, 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. In short, praxeological theory transcends and is deeper than market exchange; it applies to all action.

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 on various economic goods, and compares and chooses between them on the basis of their relative worth to him. Thus these goods acquire different values. Crusoe chooses not only between various present uses of goods but also between consuming them now and accumulating them for ‘future needs’. He also sees clearly that more abundance of a good leads to a lower value, and vice versa. Like his French and other continental precursors, then, 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 (their ‘esteem-value’ to consumers) 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 measurement (and therefore to most mathematical procedures).

Turgot begins his analysis at the very beginning; one isolated man, one object of valuation:

Let us consider this man as exerting his abilities on a single object only; he will seek after it, avoid it, or treat it with indifference. In the first case, he would undoubtedly have a motive for seeking after this object; he would judge it to be suitable for his enjoyment, he will find it good, and this relative goodness could generally speaking be called value, it would not be susceptible to measurement...

Then, Turgot brings in other goods:

If the same man can choose between several objects suitable to his use, he will be able to prefer one to the other, find an orange more agreeable than chestnuts, a fur better for keeping out the cold than a cotton garment; he will regard one as worth more than another; he will consequently decide to undertake those things which he prefers, and leave the others.

This ‘comparison of value’, this evaluation of different objects, changes continually: ‘These appraisals are not permanent, they change 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 scare 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. Each particular object of enjoyment costs him trouble, hardship, labour 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.

While there is an unfortunate ‘real cost’ flavour about Turgot's treatment of cost, and he 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 analysed 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 other's, 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 weight the possible exchange accordingly. Each will adjust his 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. As Turgot lucidly puts it:

This superiority of the esteem value attributed by the acquirer to the thing he acquires over the thing he gives up is essential to the exchange for it is the sole motive for it. Each would remain as he was, if he did not find an interest, a personal profit, in exchange; if, in his own mind, he did not consider what he receives worth more than what he gives.

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 halfway between the value scales of each.

Turgot, however, is perfectly correct in pointing out that the act of exchange increases the wealth of both parties to the exchange. 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.

As Turgot had pointed out a few years earlier in his most important work, ‘The Reflections on the Formation and Distribution of Wealth’,4 the bargaining process, where each party wants to get as much as he can and give up as little as possible in exchange, results in a tendency towards one uniform price of each product in terms of the other. The price of any good will vary in accordance with the urgency of need among the participants. There is no ‘true price’ to which the market tends, or should tend, to conform.

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.

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

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