Eighteenth Century Economics: Turgot, Beccaria and Smith and Their Contemporaries

By Peter Groenewegen | Go to book overview

17

A re-interpretation of Turgot’s theory of capital and interest1

Turgot’s theory of capital and interest, although often praised by commentators in the past, 2 still lacks a complete interpretation. This can be explained by the fact that Turgot’s analysis of capital and interest, as in the case of so much of his other economics, must be put together from the various papers in which he dealt with the subject. The commentators who have dealt with his theory in some detail 3 have based their opinion on the material contained in the ‘Reflections’, and have generally neglected his ‘Mémoire sur les prêts d’argent’ as well as some of his other relevant writings. 4 Their treatment is therefore incomplete, and this alone is reason for a new interpretation of Turgot’s theory of capital and interest.

Furthermore, it can be argued that some of his commentators have in fact misinterpreted Turgot’s theory. Böhm-Bawerk, for example, who devoted a separate chapter to Turgot’s theory of interest in his critical history, was wrong when he described it as a fructification theory on the ground that Turgot had justified and explained interest rates by appealing to the rate of return to land. 5 It can easily be shown that this is a misrepresentation: first of all, in the ‘Mémoire sur les prêts d’argent’, which dealt exclusively with the topic of justifying interest on loan transactions, Turgot makes no reference at all to a relationship between the rate of interest and the rate of return to land; second, in the ‘Reflections’, he explicitly argued that the price of land was determined by the current rate of interest. 6

Cassel’s interpretation, although correct, is incomplete because he failed to do full justice to Turgot’s treatment of ‘the causes which govern the demand for capital’, despite his contention that what Turgot ‘has to say on this subject is. … of the highest value’. 7 Similarly, Schumpeter, although he praised Turgot’s contribution as ‘by far the greatest performance in the field of interest theory the eighteenth century produced’ and as one which ‘foreshadowed much of the best thought of the last decades of the nineteenth century’, failed to interpret Turgot’s theory in the context of the general theory of exchange, 8 which is an important omission. The three leading commentators on Turgot’s theory have therefore either misinterpreted or else omitted important features of his analysis of capital and interest.

It is the purpose of this chapter to re-interpret Turgot’s theory of capital and interest in order to complete and correct this particular episode in the history of

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