Turgot and Faustmann

Tod, Verklarung, und wider Tod

Mason Gaffney

[Draft of a paper written for presentation at the HES meeting, Syracuse, New York, 2010]

I. TURGOT

Turgot, outstanding public servant and economic philosopher Made his mark as Intendant of Limoges, 1761-74. A district of very poor soils; most tenants were sharecroppers, or metayers. Turgot observed the incentive structure closely, and later wrote on it at length.

Friendly with Vincent de Gournay, prominent capitalist entrepreneur and sometime Intendant of Commerce in France. Learned to appreciate commerce and industry, as well as agriculture. Friendly with Quesnay and his group called "Physiocrats", but remained independent of them. In Limousin, encompassing Limoges, abolished corvee, improved roads by other means like taxing the lands thus served. He refused advancement to more fertile lands, to complete his reforms in Limousin. Results were impressive. Kaolin was found near Limoges, and its ceramics grew famous. I find no evidence, but it is plausible that Turgot's economic reforms fostered the growth of this industry . In 1774 Louis XVI made Turgot Comptroller-General for all France. Turgot set about removing interprovincial trade barriers, coining the term Laissez-faire, laissez passer, le monde va de lui-meme. He also set about reforming the tax system, subjecting the previously exempt lands of the 1st and 2nd Estates to a land tax.

These sudden and jolting changes aroused strong opposition, epitomized in the notorious Remonstrance signed by leading members of the 1st and 2nd Estates, containing some of the most reactionary postulates imaginable. They enlisted the new Queen, Marie Antoinette , to their cause. King Louis XVI folded under this pressure and dismissed Turgot. Necker and Calonne, who succeeded him, tried similar reforms but had no better luck, paving 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). He 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 more congenial tutor for Smith than Quesnay was.

Of course, many of America's "Founding Fathers" visited France around the same time, and visited extensively with Turgot, Quesnay, and the sect that gathered around Quesnay. 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.

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 eclipsed the skeletal language of Turgot, and his Reflexions sank into 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 traveling 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. 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 1932. Wage taxes, equivalent to the old corvee, have become our largest revenue source. America has become a Geocracy again, as much as France was under its Ancien Regime. 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, unlike the French, Russian, Chinese, and other Revolutions.


II. Martin Faustmann

III. 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 they could think of. The simple fact is that professional foresters did not like it because it provided a way to show that the highest and best use of land in forestry could often not compete with other uses that yielded quicker and more frequent returns.

Meantime economists, wrestling with the same problem, never consulted the forestry literature at all, 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 (before 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 1919, and 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, picked himself up and hurried on as though nothing had happened. Others like Kenneth Boulding said maximize the internal rate of return on the planting cost.

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 flacks 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 parlous at best.

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 way 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 great hit. A few economists appreciated it for what I meant it to be, a macro-economic analogy showing the benefits of faster capital turnover. 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 my causes, the welfare of society, or speeding capital turnover to maximize employment. I had unwittingly played into their hands, giving them a new tool to forward their case. The CEO of Simpson Timber was especially enthusiastic, and modestly came up with what he considered 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 falling back on the Fisher-Allen solution that I had refuted in 1957. I never asked him why, and this is not the place to speculate. The bare fact is that Faustmann, after his Tod und Verklarung, was buried once again. Ideas may become chic when the stars are aligned, milked for what good they will do people, then washed away with the trash.