Death and the Transfiguration:
The Ideas of Turgot and Faustmann
Mason Gaffney
[A paper presented at the annual meeting of the
History of Economics Society, Syracuse, New York; July, 2010.
Reprinted from GroundSwell, September-October, 2010]
This is a story of the ideas of an 18th Century Frenchman, A.R.
Jacques Turgot, and a 19th Century German, Martin Faustmann. Their
bones were buried, like all, and their ideas lost two voices. Yet the
ideas were born again, and again. They always will be, because they
illumine and solve universal and ongoing economic and human concerns.
I. Turgot
Anne-Robert Jacques Turgot was an outstanding public servant ,
economic philosopher and social reformer in 18th Century France. He
first made his mark as Royally-appointed Intendant of The Limousin,
encompassing Limoges, 1761-74. An intendant enjoyed considerable
latitude and autonomy, although few chose to use it as aggressively
and constructively as Turgot did, for that was hard work and might
interfere with traditional graft and sensual amusements. Limousin was
a district of poor soils; most tenants were sharecroppers (metayers).
Turgot observed the incentive structure closely, and later wrote on it
concisely, anticipating by two centuries some findings of Gale Johnson
and Steven Cheung.
Turgot was a friend of Vincent de Gournay, prominent capitalist
entrepreneur and sometime Intendant of Commerce for all of France.
Thus Turgot learned to appreciate commerce and industry, as well as
agriculture. He was friendly with François Quesnay and his
group called "Physiocrats", but remained independent of
them, to scout their cult-like tendencies and their overemphasis on
agriculture and other extractive industries. Turgot saw that industry
and trade were also productive, and devoted himself to encouraging
them.
In Limousin he abolished the mandatory corvée, (roadwork in
lieu of taxation). He improved roads by other means like taxing the
lands they served. He was offered advancement to jurisdictions more
favored by nature, but he conscientiously refused, in order to
complete his reforms in Limousin. His Results were impressive. Kaolin
was found near Limoges, and its ceramics (Havilland China) grew
famous. It is plausible and likely that Turgot's economic reforms
fostered the growth of this industry.
In 1774 the new King Louis XVI made Turgot Comptroller-General for
all France. Turgot set about removing interprovincial trade barriers,
which he perceived as a major barrier to French prosperity. He coined
the term Laissez-faire (Laissez faire, laissez passer, le monde va de
lui-même). There is a touch of Chinese Taoism in Turgot. He also
set about reforming the tax system, subjecting the previously exempt
lands of the 1st and 2nd Estates to forms of property taxation. This
was in the spirit of the Age, the Age of Enlightenment (Science, Art
and Letters, Philosophy), and Benevolent Despotism. It was appropriate
for France, the most advanced and sophisticated nation of Europe, to
lead the way.
These jolting changes set off alarm bells, however, among the leaders
of the First and Second Estates. They epitomized their reaction in
their notorious Rémonstrance against the six edicts of Turgot
(1776), containing some of the most reactionary postulates imaginable,
so as to seem today like a satire that a Swift or Voltaire might have
forged to mock them. They enlisted the new Queen, Marie Antoinette, to
their cause. King Louis XVI was filled with good intentions, but
wilted under this pressure and replaced Turgot, first with Necker and
then Calonne. These advanced token reforms but without the needed
energy and conviction, for the Geocracy was strong, entrenched and
self-righteous. Necker and Calonne thus simply paved the way to July
14, 1789. Turgot, meantime, retired to the country and died peacefully
in 1781.
While Intendant of Limoges he published his Reflexions sur la
Formation et la Distribution des Richesses (1766). This short, compact
work contains much of the essential wisdom that Adam Smith soon was to
popularize and expand with The Wealth of Nations (1776). Turgot
stressed the important roles of capital, and free markets. He favored
letting the market determine interest rates - not from dogma, but from
observing the results of John Law's ruination of French banking in
1720. He favored combating poverty by relieving the poor of taxes,
while raising revenues instead from taxes on the value of land -
including lands traditionally exempt or undertaxed. Smith visited
France in 1766 and consulted extensively with Turgot, a man whose
practical turn of mind made him a congenial tutor for Smith.
Of course, many of America's "Founding Fathers" visited
France around the same time, and learned from Turgot, Quesnay, and the
sect that gathered around Dr. Quesnay who had been installed at
Versailles as physician to Madame Pompadour, influential mistress to
Louis XV. One could even consider this Frenchman to have himself been
one of our Founding Fathers. The Commerce Clause of the U.S.
Constitution did for the new U.S.A. exactly what Turgot had tried to
do for France, it guaranteed free trade among the states. For a long
time it also prevented states from using excise taxes to raise
revenue, forcing them back on the property tax, just as Turgot
recommended for France. Some noted American visitors included
Franklin, Jefferson, Paine, Madison, Monroe, Adams, and others.
Growing American hostility to England meant growing friendship with
France, and the American Revolution plus the ascendancy of Jefferson
sealed a long Franco-American friendship and alliance.
It was also, of course, the Age of Reason, and the flowering of
Enlightenment and Science. Turgot, like Quesnay, admired the work of
William Harvey on the circulation of blood. Where Quesnay drew up his
complex Tableau Economique (aka "Les Zig-zags" by ladies of
The Court) Turgot simply wrote that investing is "the beneficial
and fruitful circulation that animates all the work of society,
"
- thus capturing the basic idea of modern macro-economics, in much
simpler language than usually imposed on readers.
Smith's Wealth of Nations, a relaxing chatty read full of history and
examples, eclipsed the skeletal language of Turgot; Turgot's
Reflexions sank into relative obscurity. Smith, meantime, was forced
to make Turgot's points in much less direct language, dependent as he
was on his patron, the Duke of Bucchleuch, one of the biggest, if not
THE biggest, landowner in Great Britain. Smith also depended on the
friendship of "Champagne Charlie" Townshend, author of the "Intolerable
Acts" and other excises that Britain sought to impose on the
American colonies. By the time of our Revolution Turgot was dead and
largely forgotten. Other Frenchmen like P.S. DuPont, Quesnay's
disciple, and LaFayette, a non-intellectual romantic, Albert Gallatin,
a transportation planner, Audubon, an ornithologist, and even Jean
LaFitte, a pirate, gained more renown in America. Alexis de
Toqueville, a patronizing French aristocrat whose writings flattered
Americans' image of themselves, was very popular.
However the spirit of Turgot rose from the grave - call it Tod und
Verklarung (Death and Transfiguration) - during the Progressive Era,
in the work of Henry George, the American land reformer. Like Turgot,
George favored raising revenues by taxing the vast lands of "The
Robber Barons" in order to relieve workers and merchants from
taxation. George even dedicated one of his books, Protection or Free
Trade? (1886), to Turgot, and founded a movement that helped lower
American tariffs and raise American property taxes and put more stress
on the land portion of real estate tax valuations.
1917, however, was the high point of Turgot's revival. The Great Red
Scare succeeded in ending the Progressive Era in America. Since then
property taxes have steadily fallen, step by step. Excise taxes, that
Turgot hated so, have returned as state sales taxes, unknown before
about 1931 (Gaffney, 2000-a; Mikesell, 2000; Gaffney, 2000-b). A
highly regressive payroll tax, equivalent to the old corvée,
has become our largest Federal revenue source, swamping out the
corporate income tax, the estate tax, and now even edging out the
personal income tax, which is still at least slightly graduated
nominally (but not really, if you allow for the 15% cap on capital
gains and dividends, the total exemption of imputed property income,
and the effective exclusion of most income from renting out real
estate). America has become a Geocracy again, as much as France was
under its Ancien Régime. That that may surprise many readers is
a measure of how thoroughly property interests have captured and
dominate modern media and higher education, too. If Turgot is to rise
again, it will have to be the work of our generation and the next. Let
us hope for a peaceful transition, as in The Progressive Era, unlike
the French, Russian, Chinese, and other Revolutions when "ignorant
armies clashed by night".
II. Martin Faustmann
Faustmann was a German forester of mathematical bent. In 1849 he
published a short tract with a long German title that we might freely
translate as "When to cut a tree". Basically his answer was,
when it stops growing fast enough to earn interest on its own embodied
capital, plus rent on the land underneath it. He also showed that this
was the way to maximize the annual rent of the land, or Bodenrente,
and the value of the land in perpetuity (Bodenerwartungswerte),
through an infinite chain of cycles. He also showed this is the way to
maximize the net value of a "going concern", or "normalized"
forest, with ages staggered from one to maturity (a demonstration also
found later in Wicksell, who applied it to wines first, and then to
whole economies).
Faustmann's Formula became a footnote in the forestry literature,
where it was generally dismissed as being too mathematical, or too
theoretical, or too abstract, or too severe, or too something,
anything a forester could use to dismiss it. Professional foresters
simply did not like it because it provided a way to show that the use
of land in forestry could often not compete with other uses that
yielded quicker and more frequent returns, not just in the short run
but sustainably over time - infinite time.
Meantime professional economists, wrestling myopically with the same
problem, never consulted the forestry literature, and came up with a
variety of wrong solutions. Some like the U.S. Forest Service said aim
for the "culmination of mean annual increment" (CMAI), which
ignores the time value of money in the trees, but maximizes the annual
return to the land if one can ignore interest costs. Others like
Irving Fisher and R.G.D. Allen said cut the tree when its growth rate
falls below the rate of interest, ignoring the cost of holding the
land. Austrian economists like Menger, supposedly obsessed with their
"period of production" as exemplified by timber, and
surrounded by German foresters, never heard of Faustmann or his ideas.
The one economist to take heed was Bertil Ohlin, who derived the
solution himself in 1921, but never consulted the forestry literature
to discover Faustmann had scooped him by 70 years. Then, like Winston
Churchill's man who stumbled across the truth, Ohlin got up and
hurried on as though nothing had happened. Others like Kenneth
Boulding said maximize the internal rate of return on the planting
cost - a remarkably banker-like position for a man known as a green
conservationist.
There were elegant variations on all these. Friedrich and Vera Smith
Lutz said Faustmann's idea (they had another name for it) was right
for individual trees, but wrong for normalized or staggered rotations.
Some liked CMAI if you deduct planting costs; others would not deduct
planting costs. Some said that the cost of planting a replacement tree
should be treated as part of logging costs (the Hanzlik formula), thus
letting it be expensed for income tax purposes. Powerful Senators and
Congressmen from timberland regions (1/3 of the U.S. is timberland)
promoted formulae designed to maximize income-tax benefits for
timberland owners, have timber declared to be a "capital asset"
with a lower tax rate, and planting to be a current expense deductible
from ordinary income. In state capitols, timber interests got timber
exempted from property taxes, substituting yield taxes much too low to
be revenue-neutral. In several states, standing timber itself is
exempt from property taxes, while the land under it is separately
assessed using formulas written by the industry, or its cat's-paws in
Schools of Forestry, designed to minimize the tax valuation of the
land.
The most valid criticisms of Faustmann came from ecologists and the
like ("tree-huggers" to the loggers), because Faustmann
(like Ronald Reagan later) put little or no value on scenic beauty ("if
you've seen one redwood, you've seen 'em all"). Watershed
protection is finally getting more recognition as a relevant value.
Wildlife habitat is a value. To many people, virgin forests are a
religious experience (loggers sneer at these as "Druids").
Forests are also beloved by hunters, whose alliance with "tree-huggers"
and "Druids" is an ironic marriage of opposites.
In 1957 this writer took advantage of a Ford grant, arranged by my
Chairman Addison Hickman, to whom I am eternally grateful. I probed
into the interesting question, "When to Cut a Tree?". I came
up with what seemed to me a correct math solution, and prepared to
claim it as my own. Prudentially, I first surveyed the forestry
literature and discovered Faustmann had been ahead of me by about 108
years - but had been virtually ignored by foresters, and totally
unknown to economists.
To my delightful surprise, my little monograph, crudely mimeographed
as an Ag Experiment Station Bulletin in North Carolina, made a hit. A
few economists appreciated it for what I meant it to be, a
macro-economic metaphor showing the benefits of faster capital
turnover, using forest management simply as an easily expounded
example. I slowly learned, though, that its popularity had a different
cause, partly a product of the stage of the business cycle. Many
forest owners and their bankers were looking for new reasons to log
faster, caring little or nothing for the causes I was pushing (the
welfare of society by speeding capital turnover to maximize
employment). I had unwittingly played into their hands, giving them a
new tool to forward their case. John Walker, CEO of Simpson Timber
Company, was especially enthusiastic, and modestly came up with
improvements on my exposition.
Next thing I knew Bill Allen of UCLA, who had greeted my Faustmann
idea so warmly in 1967, published a textbook (Alchian and Allen, 1972)
falling back on the Fisher-Allen solution (this was R.G.D. Allen, not
Bill) that I had refuted in 1957. I never asked him why, and this is
not the place to speculate. Paul Samuelson, who had written in support
of my Faustmann solution, forgot all about it when upholding his end
of the Cambridge Controversy, although it could have helped him refute
the "Reswitching" model. The sad fact is that Faustmann,
after his Tod und Verklärung, was re-killed. Ideas may become
chic when the stars are aligned, exploited for what good they might do
special interests, then washed away with the trash - especially when
they might be used to support raising taxes on land values or other
property income.
This writer became persona non grata at Resources for the Future,
Inc., in 1972. I was not without fault, but a sea of troubles beset me
when it became clear that I was extending my forestry research into
forest taxation, and uncovering the shocking undertaxation of American
forest holdings, both as property and as income-yielding assets. I
declined when a charming forest lobbyist offered to wine, dine, and
entertain me on his yacht, but that was not enough. My then-employer,
from that day to this, has listed some giant forest holders among its
grantors. Problems overwhelmed me, out of proportion to my said
faults. A leading forest economist from Yale wrote threatening to
attack me in scholarly journals if I published my findings. Marion
Clawson, a friend and role model to me, used my mathematics to condemn
forest managers in the National Forest Service and the Bureau of Land
Management, with never a peep against private forest managers. A
Lincoln-Foundation grantee from Claremont Men's College attacked me on
technical grounds in the Western Economic J. while the Editor of that
Journal, whose office abutted his, refused to publish my reply.
Even more overt have been the recent experiences of Governor Bob
Riley of Alabama, and Professor Susan Pace Hamill of the University of
Alabama School of Law. Hamill is an activist Christian who also
teaches tax law, and became conscientiously aware of how Alabama's
highly regressive tax system violates biblical principles of social
justice. Alabama is highly churched, so she and Riley joined forces to
bring its tax system into line with churchly doctrines. They began
with its forest lands, which are vast, and virtually untaxed. Many
churches supported a Riley-Hamill Initiative, but many others, with
the most money and influence, disappointed them, campaigning actively
against and defeating their initiative.
New Hampshire State Legislator Richard Noyes, representing North
Salem, was a conservative Republican who even supported the efforts of
George H.W. Bush to sunset the capital gains tax, a cause dear to
timber owners but not to me. At the state level, however, he pushed
for a statewide tax on land values, consistent with his belief in
making state governments work better. He did not target timberlands
per se, and it is doubtful if his proposed tax would in fact have
shifted the tax burden from cities and farms and summer resorts to
timberlands. He never had a chance to find out, however, because the
timber owners of New Hampshire, stirring up NRA lobbyists and hunters,
took the lead in beating down his bills. The same is true in most
states that have essayed statewide property taxes. To many moderns
such taxes may appear novel and radical, but in fact in 1920 and
before they were the mainstay of state-level revenues, not just of
local revenues.
Dean Henry Vaux of the California State School of Forestry, Berkeley,
in 1958 offered me an Assistant Professorship. I was not to ramble at
will through the world of ideas, but to focus narrowly on the value of
forest recreation - nothing about taxation. Vaux himself soon drafted
California's Timber Preserve Zone (TPZ) Act, preempting forest land
assessments from County Assessors and mandating use of a formula he
worked out to assess forest land for taxation at about 10% or less of
its true market value. Years later, when I had moved to U.C.
Riverside, his son, Henry Vaux, Jr. played a key role in maneuvering
to eliminate the entire Department of Economics, including my tenure -
but not his. Hardly anyone but a few corporate CEO's would even know
there was a TPZ were it not for UCLA Law Professor Donald Hagman, a
property tax expert and reformer of renown among urbanists. Hagman's
great career was cut short when he fell off a cliff while jogging
through Mendocino County, the heart of redwood terroir.
One could go on from state to state, but the bottom line is that
Faustmann's great contribution to economic analysis, dating from 1849,
died for over a century, was transfigured and reborn for a brief
career after 1957, only to die again after a second life of about 20
years. Now will it, like Jimmy Carter, be born again? That is a
question for present and future generations to answer.
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