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 in
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 Turgots 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 Laws
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 Americas 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.
Smiths Wealth of Nations, a relaxing chatty read
full of history and examples, eclipsed the skeletal language of
Turgot; Turgots Reflexions sank into relative obscurity.
Smith, meantime, was forced to make Turgots 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, Quesnays
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 Turgots 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).
Faustmanns 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 Churchills 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 Faustmanns 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 cats-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 youve seen one redwood, youve
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
Mens 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 Alabamas
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 Californias 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 CEOs 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. Hagmans 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
Faustmanns 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.