economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

, the theory of fructification is a theory of the

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...

rate which was proposed by French economist and finance minister

Anne Robert Jacques Turgot Anne Robert Jacques Turgot, Baron de l'Aulne ( ; ; 10 May 172718 March 1781), commonly known as Turgot, was a French economist and statesman. Originally considered a physiocrat, he is today best remembered as an early advocate for economic libe ...

. The term ''theory of fructification'' is due to

Eugen von Böhm-Bawerk Eugen Ritter von Böhm-Bawerk (; born Eugen Böhm, 12 February 185127 August 1914) was an Austrian economist who made important contributions to the development of the Austrian School of Economics and neoclassical economics. He served intermitten ...

who considered Turgot as the first economist who tried to develop a scientific explanation of the interest rate. According to Turgot, a capitalist can either lend his money, or employ it in the purchase of a plot of land. Because fruitful land yields an annual

rent Rent may refer to: Economics *Renting, an agreement where a payment is made for the temporary use of a good, service or property *Economic rent, any payment in excess of the cost of production *Rent-seeking, attempting to increase one's share of e ...

forever, its price is given by the formula of a perpetual annuity: If ''A'' denotes the land's annual rent and ''r'' denotes the interest rate, the land price is simply ''A''/''r''. From this formula, Turgot concluded that "the lower the interest rate, the more valuable is the land."Turgot, J.(1770) Reflections on the Formation and Distribution of Riches, english translation 1898
/ref> Specifically, if the interest rate approached zero, the land price would become infinite. Because land prices must be finite, it follows that the interest rate is strictly positive. Turgot argued also that the mechanism which keeps interest rates above zero crowds out inefficient capital formation. Böhm-Bawerk, who sponsored a different interest theory, considered Turgot's approach as circular. However, according to

Joseph Schumpeter Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at Ha ...

, the eminent economic historian, "Turgot's contribution is not only by far the greatest performance in the field of interest theory the eighteenth century produced but it clearly foreshadowed much of the best thought of the last decades of the nineteenth." Much later, economists demonstrated that the theory of fructification can be stated rigorously in a

general equilibrium model In economics, general equilibrium theory attempts to explain the behavior of supply, demand, and prices in a whole economy with several or many interacting markets, by seeking to prove that the interaction of demand and supply will result in an ov ...

. They also generalized Turgot's proposition in two respects. First, land which is useful for residential or industrial purposes can be substituted for agricultural land. Second, in a growing economy, the existence of land implies that the interest rate exceeds the growth rate if the land's income share is bounded away from zero. Stefan Homburg (1992
''Efficient Economic Growth'', Berlin.
/ref> The latter result is notable because it states that land ensures dynamic efficiency.

References

Interest Finance theories Exponentials Mathematical finance Actuarial science Economic history studies {{finance-stub