Anne-Robert-Jacques Turgot

Probably Turgot's most important contribution to economics was to point out that capital was necessary for economic growth, and that the only way to accumulate capital was for people not to consume all they had produced. Most capital, he believed, was accumulated by landowners who saved the surplus product after paying the cost of materials and of labor. Turgot agreed with Quesnay's notion of the circular flow of savings and investment, where savings in one period become investment in the next.

In Reflections Turgot analyzed the interdependence of different rates of return and interest among different investments. Interest is determined by the supply and demand for capital, said Turgot. Although the rates of return on each investment may vary, he argued, in a competitive free-market economy with capital mobility, rates of return on all investments will tend toward equality. Wrote Turgot: "As soon as the profits resulting from an employment of money, whatever it may be, increase or diminish, capitals turn in that direction or withdraw from other employments, or withdraw and turn towards other employments, and this necessarily alters in each of these employments, the relation between the capital and the annual product."

Turgot distinguished between a commodity's market price—determined by supply and demand—and its "natural" price, the price it would tend to if industries were competitive and resources could be reallocated. An increase in demand, for example, could increase a good's price, but if resources were free to enter that industry, the new supply would bring the price back down to its "natural" level. In this reasoning Turgot anticipated Adam Smith.

Turgot also predated Smith in recognizing the importance of the division of labor for an economy's prosperity. Turgot also was the first economist to recognize the law of diminishing returns in agriculture. Predating the Marginalists by a century, he argued that "each increase [in an input] would be less and less productive."

Turgot applied many of his laissez-faire economic beliefs during his thirteen-year appointment as chief administrator for the Limoges district (1761-74) under Louis XV and as minister of finance, trade, and public works from 1774 to 1776 under newly anointed Louis XVI. In the latter job one of his first measures was to abolish all restrictions on sales of grain within France, a measure that the Physiocrats had long advocated. He also ended the government's policy of conscripting labor to build and maintain roads, and replaced it with a more efficient tax in money. Milton Friedman has called the replacing of taxes in kind with taxes in money "one of the greatest advances in human freedom." Turgot also abolished the guild system left over from medieval times. The guild system, like occupational licensing today, prevented workers from entering certain occupations without permission. Turgot also argued against the regulation of interest rates.

Louis XVI did not welcome Turgot's reforms and dismissed him in 1776. Some historians claim that had Turgot's reforms been kept, the French revolution, which erupted thirteen years later, might have been averted.

Turgot himself never lived to witness the upheaval his own reforms might have helped thwart. He died in Paris of gout at age fifty-four.