Richard Cantillon
Encyclopedia
Richard Cantillon was an Irish
-French
economist
and author of Essai sur la Nature du Commerce en Général (Essay on the Nature of Trade in General), a book considered by William Stanley Jevons
to be the "cradle of political economy
". Although little information exists on Cantillon's life, it is known that he became a successful banker and merchant at an early age. His success was largely derived from the political and business connections he made through his family and through an early employer, James Brydges
. During the late 1710s and early 1720s, Cantillon speculated in, and later helped fund, John Law
's Mississippi Company
, from which he acquired great wealth. However, his success came at a cost to his debtors, who pursued him with lawsuits, criminal charges, and even murder plots until his death in 1734.
Essai remains Cantillon's only surviving contribution to economics. It was written around 1730
and circulated widely in manuscript form, but was not published until 1755. Despite having much influence on the early development of the physiocrat and classical school
s of thought, Essai was largely forgotten until its rediscovery by Jevons in the late 19th century. Cantillon was influenced by his experiences as a banker, and especially by the speculative bubble of John Law's Mississippi Company. He was also heavily influenced by prior economists, especially William Petty
.
Essai is considered the first complete treatise on economics, with numerous contributions to the science. These contributions include: his cause and effect methodology
, monetary theories, his conception of the entrepreneur as a risk-bearer, and the development of spatial economics. Cantillon's Essai had significant influence on the early development of political economy, including the works of Adam Smith
, Anne Turgot
, and François Quesnay
.
. Sometime in the middle of the first decade of the 18th century Cantillon moved to France, where he attained French citizenship. By 1711, Cantillon found himself in the employment of British Paymaster General James Brydges
, in Spain
, where he organised payments to British prisoners of war during the War of Spanish Succession. Cantillon remained in Spain until 1714, cultivating a number of business and political connections, before returning to Paris
. Cantillon then became involved in the banking industry working for a cousin, who at that time was lead-correspondent of the Parisian branch of a family bank. Two years later, thanks in large part to financial backing by James Brydges, Cantillon bought his cousin out and attained ownership of the bank. Given the financial and political connections Cantillon was able to attain both through his family and through James Brydges, Cantillon proved a fairly successful banker, specializing in money transfers between Paris and London
.
At this time, Cantillon became involved with British mercantilist
John Law
through the Mississippi Company
. Based on the monetary theory proposed by William Potter in his 1650 tract The Key of Wealth, John Law posited that increases in the money supply
would lead to the employment of unused land and labor, leading to higher productivity. In 1716, the French government granted him both permission to found the Banque Générale and virtual monopoly over the right to develop French territories in North America, named the Mississippi Company. In return, Law promised the French government to finance their debt at low rates of interest. Law began a financial speculative bubble by selling shares of the Mississippi Company, using the Banque Générales virtual monopoly on the issue of bank notes to finance his investors.
Richard Cantillon amassed a great fortune from his speculation, buying Mississippi Company shares early and selling them at inflated prices. Cantillon's financial success and growing influence caused friction in his relationship with John Law, and sometime thereafter Law threatened to imprison Cantillon if the latter did not leave France within twenty-four hours. Cantillon replied: "I shall not go away; but I will make your system succeed." To that end, in 1718 Law, Cantillon, and wealthy speculator Joseph Gage
formed a private company centered on financing further speculation in North American real estate.
In 1719, Cantillon left Paris for Amsterdam
, returning briefly in early 1720. Lending in Paris, Cantillon had outlying debt repaid to him in London and Amsterdam. With the collapse of the "Mississippi bubble", Cantillon was able to collect on debt accruing high rates of interest. Most of his debtors had suffered financial damage in the bubble collapse and blamed Cantillon—until his death, Cantillon was involved in countless lawsuits filed by his debtors, leading to a number of murder plots and criminal accusations.
On 16 February 1722, Cantillon married Mary Mahony, daughter of Count Daniel O'Mahony—a wealthy merchant and former Irish general—spending much of the remainder of the 1720s traveling throughout Europe with his wife. Cantillon and Mary had two children, a son who died at an early age and a daughter, Henrietta, who would go on to marry William Howard Earl of Stafford
in 1743. Although he frequently returned to Paris between 1729 and 1733, his permanent residence was in London. In , his residence in London was burned to the ground, and it is generally assumed that Cantillon died in the fire. While the fire's causes are unclear, the most widely accepted theory is that Cantillon was murdered. One of Cantillon's biographers, Antoine Murphy, has advanced the alternative theory that Cantillon staged his own death to escape the harassment of his debtors, appearing in Suriname
under the name Chevalier de Louvigny.
in 1932. Although there is evidence which suggests that Essai had tremendous influence on the early development of economic science, Cantillon's treatise was largely neglected during the 19th century. In the late 19th century, it was "rediscovered" by William Stanley Jevons
, who considered it the "cradle of political economy". Since then, Cantillon's Essai has received growing attention, thanks in large part to Henry Higgs
, Joseph Schumpeter
, Friedrich Hayek
and Murray Rothbard
, all of whom have written on the subject. Essai is considered the first complete treatise on economic theory, and Cantillon has been called the "father of enterprise economics".
One of the greatest influences on Cantillon's writing was English economist William Petty
and his 1662 tract Treatise on Taxes. Although Petty provided much of the groundwork for Cantillon's Essai, Anthony Brewer argues that Petty's influence has been overstated. Apart from Petty, other possible influences on Cantillon include John Locke
, Cicero
, Livy
, Pliny the Elder
, Pliny the Younger
, Charles Davenant
, Edmond Halley
, Isaac Newton
, Sébastien Le Prestre de Vauban, and Jean Boisard
. Cantillon's involvement in John Law's speculative bubble proved invaluable and likely heavily influenced his insight on the relationship between increases in the supply of money, price, and production.
, separating Cantillon from his mercantilist predecessors. Essai is peppered with the word "natural", which in the case of Cantillon's treatise is meant to imply a cause and effect relationship between economic actions and phenomena. Economist Murray Rothbard credits Cantillon with being one of the first theorists to isolate economic phenomena with simple models, where otherwise uncontrollable variables can be fixed. Economist Jörg Guido Hülsmann likens some of the models presented in Essai, which assume constant equilibrium, to Ludwig von Mises
's concept of the "evenly rotating economy". Cantillon made frequent use of the concept of ceteris paribus
throughout Essai in an attempt to neutralize independent variables. Furthermore, he is credited with employing a methodology similar to Carl Menger
's methodological individualism, by deducing complex phenomena from simple observations.
A cause and effect methodology led to a relatively value-free approach to economic science, in which Cantillon was uninterested in the merit of any particular economic action or phenomenon, focusing rather on the explanation of relationships. This led Cantillon to separate economic science from politics and ethics to a greater degree than previous mercantilist writers. This has led to disputes on whether Cantillon can justly be considered a mercantilist or one of the first anti-mercantilists, given that Cantillon oftentimes cited government-manipulated trade surpluses
and specie
accumulation as positive economic stimuli. Others argue that in instances where Cantillon is thought to have supported certain mercantilist policies, he actually provided a more neutral analysis by explicitly stating possible limitations of mercantilist policies.
In Essai, Richard Cantillon provided an advanced version of John Locke's quantity theory of money
, focusing on relative inflation and the velocity of money
. Cantillon suggested that inflation occurs gradually and that the new supply of money has a localized effect on inflation, effectively originating the concept of non-neutral money
. Furthermore, he posited that the original recipients of new money enjoy higher standards of living at the expense of later recipients. The concept of relative inflation, or a disproportionate rise in prices among different goods in an economy, is now known as the Cantillon Effect. Cantillon also considered changes in the velocity of money (quantity of exchanges made within a specific amount of time) influential on prices, although not to the same degree as changes in the quantity of money. While he believed that the money supply consisted only of specie, he conceded that increases in money substitutes—or bank notes—could affect prices by effectively increasing the velocity of circulating of deposited specie. Apart from distinguishing money from money substitute, he also distinguished between bank notes offered as receipts for specie deposits and bank notes circulating beyond the quantity of specie—or fiduciary media—suggesting that the volume of fiduciary media is strictly limited by people's confidence in its redeemability. He considered fiduciary media a useful tool to abate the downward pressure that hoarding of specie has on the velocity of money.
Addressing the mercantilist belief that monetary intervention could cause a perpetually favorable balance of trade, Cantillon developed a specie-flow mechanism foreshadowing future international monetary equilibrium theories. He suggested that in countries with a high quantity of money in circulation prices will increase and therefore become less competitive in relation to countries where there is a relative scarcity of money. Thus, Cantillon also held that increases in the supply of money, regardless of the source, cause increases in the price level and therefore reduce the competitiveness of a particular nation's industry in relation to a nation with lower prices. However, Cantillon did not believe that international markets tended toward equilibrium, and instead suggested that government hoard specie to avoid rising prices and falling competitiveness. Furthermore, he suggested that a favorable balance of trade can be maintained by offering a better product and retaining qualitative competitiveness. Cantillon's preference towards a favorable balance of trade possibly stemmed from the mercantilist belief in exchange being a zero-sum
game, in which one party gains at the expense of another.
A relatively advanced theory of interest is also presented. Cantillon believed that interest originates from the need of borrowers for capital and from the fear of loss of the lenders, meaning that borrowers have to recompense lenders for the risk of the possible insolvency of the debtor. In turn, interest is paid out of earned profits originating from the return on invested capital. While previously it was believed that the rate of interest varied inversely to the quantity of money, Cantillon posited that the rate of interest was determined by the supply and demand on the loanable funds market—an insight usually attributed to Scottish
philosopher David Hume
. As such, while saved money impacts the rate of interest, new money that is instead used for consumption does not; Cantillon's theory of interest is therefore similar to John Maynard Keynes
's liquidity preference
theory.
who is credited for coining the word and advancing the concept of the entrepreneur
, but in fact it was Cantillon who first introduced the term in Essai. Cantillon divided society into two principal classes—fixed income wage-earners and non-fixed income earners. Entrepreneurs, according to Cantillon, are non-fixed income earners who pay known costs of production but earn uncertain incomes, due to the speculative nature of pandering to an unknown demand for their product. Cantillon, while providing the foundations, did not develop a dedicated theory of uncertainty—the topic was not revisited until the 20th century, by Ludwig von Mises, Frank Knight
, and John Maynard Keynes, among others. Furthermore, unlike later theories of entrepreneurship which saw the entrepreneur as a disruptive force, Cantillon anticipated the belief that the entrepreneur brought equilibrium to a market by correctly predicting consumer preferences.
Spatial economics deal with distance and area, and how these may affect a market through transportation costs and geographical limitations. The development of spatial economics is usually ascribed to German economist Johann Heinrich von Thünen
; however, Cantillon addressed spatial economics nearly a century earlier. Cantillon integrated his advancements in spatial economic theory into his microeconomic analysis of the market, describing how transportation costs influence the location of factories, markets and population centers—that is, individuals strive to lower transportation costs. Conclusions on spatial economics were derived from three premises: cost of raw materials of equal quality will always be higher near the capital, due to transportation costs; transportation costs vary on transportation type (for example, water transportation was considered cheaper than land-based transportation); and larger goods that are more difficult to transport will always be cheaper closer to their area of production. For example, Cantillon believed markets were designed as they were in order to decrease costs to both merchants and villagers in terms of time and transportation. Similarly, Cantillon posited that the locations of cities were the result in large part of the wealth of inhabiting property owners and their ability to afford transportation costs—wealthier property owners tended to live farther from their property, because they could afford the transportation costs. In Essai, spatial economic theory was used to derive why markets occupied the geographical area they did and why costs varied across different markets.
Apart from originating theories on the entrepreneur and spatial economics, Cantillon also provided a dedicated theory on population growth. Unlike William Petty, who believed there always existed a considerable amount of unused land and economic opportunity to support economic growth, Cantillon theorized that population grows only as long as there are economic opportunities present. Specifically, Cantillon cited three determining variables for population size: natural resources, technology, and culture. Therefore, populations grow only as far as the three aforementioned variables allowed. Furthermore, Cantillon's population theory was more modern than that of Malthus in the sense that Cantillon recognized a much broader category of factors which affect population growth, including the tendency for population growth to fall to zero as a society becomes more industrialized.
of thought, including Turgot and other physiocrats
. Cantillon was a major influence on physiocrat François Quesnay
, who may have learned of Cantillon's work through Marquis of Mirabeau
. While it is evident that Essai influenced Quesnay, to what degree remains controversial. There is evidence that Quesnay did not fully understand, or was not completely aware of, Cantillon's theories. Many of Quesnay's economic beliefs were elucidated previously in Essai, but Quesnay did reject a number of Cantillon's premises, including the scarcity of land and Cantillon's population theory. Also, Quesnay recognized the scarcity of capital and capital accumulation as a prerequisite for investment. Nevertheless, Cantillon was considered the "father of physiocracy" by Henry Higgs, due to his influence on Quesnay. It is also possible that Cantillon influenced Scottish economist James Steuart
, both directly and indirectly.
Cantillon is one of the few economists cited by Adam Smith, who directly borrows Cantillon's sustenance theory of wages. Large sections of Smith's economic theory were possibly directly influenced by Cantillon, although in many respects Adam Smith advanced well beyond the scope of Cantillon. Some economic historians have stated that Adam Smith provided little of value from his own intellect, notably Schumpeter and Rothbard. In any case, through his influence on Adam Smith and the physiocrats, Cantillon was quite possibly the pre-classical economist who contributed most to the ideas of the classical school. Illustrative of this was Cantillon's influence on Say, which is noticeable in the methodology employed in the latter's Treatise on Political Economy.
Irish people
The Irish people are an ethnic group who originate in Ireland, an island in northwestern Europe. Ireland has been populated for around 9,000 years , with the Irish people's earliest ancestors recorded having legends of being descended from groups such as the Nemedians, Fomorians, Fir Bolg, Tuatha...
-French
French people
The French are a nation that share a common French culture and speak the French language as a mother tongue. Historically, the French population are descended from peoples of Celtic, Latin and Germanic origin, and are today a mixture of several ethnic groups...
economist
Economist
An economist is a professional in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy...
and author of Essai sur la Nature du Commerce en Général (Essay on the Nature of Trade in General), a book considered by William Stanley Jevons
William Stanley Jevons
William Stanley Jevons was a British economist and logician.Irving Fisher described his book The Theory of Political Economy as beginning the mathematical method in economics. It made the case that economics as a science concerned with quantities is necessarily mathematical...
to be the "cradle of political economy
Political economy
Political economy originally was the term for studying production, buying, and selling, and their relations with law, custom, and government, as well as with the distribution of national income and wealth, including through the budget process. Political economy originated in moral philosophy...
". Although little information exists on Cantillon's life, it is known that he became a successful banker and merchant at an early age. His success was largely derived from the political and business connections he made through his family and through an early employer, James Brydges
James Brydges, 1st Duke of Chandos
James Brydges, 1st Duke of Chandos, MP, PC was the first of fourteen children by Sir James Brydges, 3rd Baronet of Wilton Castle, Sheriff of Herefordshire, 8th Baron Chandos; and Elizabeth Barnard...
. During the late 1710s and early 1720s, Cantillon speculated in, and later helped fund, John Law
John Law (economist)
John Law was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade...
's Mississippi Company
Mississippi Company
The "Mississippi Company" became the "Company of the West" and expanded as the "Company of the Indies" .-The Banque Royale:...
, from which he acquired great wealth. However, his success came at a cost to his debtors, who pursued him with lawsuits, criminal charges, and even murder plots until his death in 1734.
Essai remains Cantillon's only surviving contribution to economics. It was written around 1730
1730 in literature
The year 1730 in literature involved some significant events and new books.-Events:* Voltaire's Brutus is finally staged.* Colley Cibber becomes Poet Laureate of Great Britain.* Metastasio settles in Vienna....
and circulated widely in manuscript form, but was not published until 1755. Despite having much influence on the early development of the physiocrat and classical school
Classical school
The Classical School in criminology is usually a reference to the 18th-century work during the Enlightenment by the utilitarian and social contract philosophers Jeremy Bentham and Cesare Beccaria. Their interests lay in the system of criminal justice and penology and, indirectly through the...
s of thought, Essai was largely forgotten until its rediscovery by Jevons in the late 19th century. Cantillon was influenced by his experiences as a banker, and especially by the speculative bubble of John Law's Mississippi Company. He was also heavily influenced by prior economists, especially William Petty
William Petty
Sir William Petty FRS was an English economist, scientist and philosopher. He first became prominent serving Oliver Cromwell and Commonwealth in Ireland. He developed efficient methods to survey the land that was to be confiscated and given to Cromwell's soldiers...
.
Essai is considered the first complete treatise on economics, with numerous contributions to the science. These contributions include: his cause and effect methodology
Methodology
Methodology is generally a guideline for solving a problem, with specificcomponents such as phases, tasks, methods, techniques and tools . It can be defined also as follows:...
, monetary theories, his conception of the entrepreneur as a risk-bearer, and the development of spatial economics. Cantillon's Essai had significant influence on the early development of political economy, including the works of Adam Smith
Adam Smith
Adam Smith was a Scottish social philosopher and a pioneer of political economy. One of the key figures of the Scottish Enlightenment, Smith is the author of The Theory of Moral Sentiments and An Inquiry into the Nature and Causes of the Wealth of Nations...
, Anne Turgot
Anne Robert Jacques Turgot, Baron de Laune
Anne-Robert-Jacques Turgot, Baron de Laune , often referred to as Turgot, was a French economist and statesman. Turgot was a student of Francois Quesnay and as such belonged to the Physiocratic school of economic thought...
, and François Quesnay
François Quesnay
François Quesnay was a French economist of the Physiocratic school. He is known for publishing the "Tableau économique" in 1758, which provided the foundations of the ideas of the Physiocrats...
.
Biography
While details regarding Richard Cantillon's life are scarce, it is thought that he was born sometime during the 1680s in County Kerry, Ireland. He was son to land-owner Richard Cantillon of BallyheigueBallyheigue
Ballyheigue, officially Ballyheige , is a coastal village in County Kerry, Ireland. It is approximately north of Tralee on the R551. Its name is pronounced ....
. Sometime in the middle of the first decade of the 18th century Cantillon moved to France, where he attained French citizenship. By 1711, Cantillon found himself in the employment of British Paymaster General James Brydges
James Brydges, 1st Duke of Chandos
James Brydges, 1st Duke of Chandos, MP, PC was the first of fourteen children by Sir James Brydges, 3rd Baronet of Wilton Castle, Sheriff of Herefordshire, 8th Baron Chandos; and Elizabeth Barnard...
, in Spain
Spain
Spain , officially the Kingdom of Spain languages]] under the European Charter for Regional or Minority Languages. In each of these, Spain's official name is as follows:;;;;;;), is a country and member state of the European Union located in southwestern Europe on the Iberian Peninsula...
, where he organised payments to British prisoners of war during the War of Spanish Succession. Cantillon remained in Spain until 1714, cultivating a number of business and political connections, before returning to Paris
Paris
Paris is the capital and largest city in France, situated on the river Seine, in northern France, at the heart of the Île-de-France region...
. Cantillon then became involved in the banking industry working for a cousin, who at that time was lead-correspondent of the Parisian branch of a family bank. Two years later, thanks in large part to financial backing by James Brydges, Cantillon bought his cousin out and attained ownership of the bank. Given the financial and political connections Cantillon was able to attain both through his family and through James Brydges, Cantillon proved a fairly successful banker, specializing in money transfers between Paris and London
London
London is the capital city of :England and the :United Kingdom, the largest metropolitan area in the United Kingdom, and the largest urban zone in the European Union by most measures. Located on the River Thames, London has been a major settlement for two millennia, its history going back to its...
.
At this time, Cantillon became involved with British mercantilist
Mercantilism
Mercantilism is the economic doctrine in which government control of foreign trade is of paramount importance for ensuring the prosperity and security of the state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic policy and discourse from...
John Law
John Law (economist)
John Law was a Scottish economist who believed that money was only a means of exchange that did not constitute wealth in itself and that national wealth depended on trade...
through the Mississippi Company
Mississippi Company
The "Mississippi Company" became the "Company of the West" and expanded as the "Company of the Indies" .-The Banque Royale:...
. Based on the monetary theory proposed by William Potter in his 1650 tract The Key of Wealth, John Law posited that increases in the money supply
Expansionary monetary policy
In economics, expansionary policies are fiscal policies, like higher spending and tax cuts, that encourage economic growth. In turn, an expansionary monetary policy is monetary policy that seeks to increase the size of the money supply...
would lead to the employment of unused land and labor, leading to higher productivity. In 1716, the French government granted him both permission to found the Banque Générale and virtual monopoly over the right to develop French territories in North America, named the Mississippi Company. In return, Law promised the French government to finance their debt at low rates of interest. Law began a financial speculative bubble by selling shares of the Mississippi Company, using the Banque Générales virtual monopoly on the issue of bank notes to finance his investors.
Richard Cantillon amassed a great fortune from his speculation, buying Mississippi Company shares early and selling them at inflated prices. Cantillon's financial success and growing influence caused friction in his relationship with John Law, and sometime thereafter Law threatened to imprison Cantillon if the latter did not leave France within twenty-four hours. Cantillon replied: "I shall not go away; but I will make your system succeed." To that end, in 1718 Law, Cantillon, and wealthy speculator Joseph Gage
Joseph Gage
Joseph Edward Gage was an entrepreneur and speculator. He was the son of Joseph Gage of Sherborne Castle and Elizabeth Penruddock and the brother of Thomas Gage, 1st Viscount Gage Bt...
formed a private company centered on financing further speculation in North American real estate.
In 1719, Cantillon left Paris for Amsterdam
Amsterdam
Amsterdam is the largest city and the capital of the Netherlands. The current position of Amsterdam as capital city of the Kingdom of the Netherlands is governed by the constitution of August 24, 1815 and its successors. Amsterdam has a population of 783,364 within city limits, an urban population...
, returning briefly in early 1720. Lending in Paris, Cantillon had outlying debt repaid to him in London and Amsterdam. With the collapse of the "Mississippi bubble", Cantillon was able to collect on debt accruing high rates of interest. Most of his debtors had suffered financial damage in the bubble collapse and blamed Cantillon—until his death, Cantillon was involved in countless lawsuits filed by his debtors, leading to a number of murder plots and criminal accusations.
On 16 February 1722, Cantillon married Mary Mahony, daughter of Count Daniel O'Mahony—a wealthy merchant and former Irish general—spending much of the remainder of the 1720s traveling throughout Europe with his wife. Cantillon and Mary had two children, a son who died at an early age and a daughter, Henrietta, who would go on to marry William Howard Earl of Stafford
Baron Stafford
The title Baron Stafford, referring to Stafford, has been created several times in the Peerage of England. In the 14th century, the barons of the 1st creation were made earls. Those of the fifth creation, in the century became first viscounts and then earls....
in 1743. Although he frequently returned to Paris between 1729 and 1733, his permanent residence was in London. In , his residence in London was burned to the ground, and it is generally assumed that Cantillon died in the fire. While the fire's causes are unclear, the most widely accepted theory is that Cantillon was murdered. One of Cantillon's biographers, Antoine Murphy, has advanced the alternative theory that Cantillon staged his own death to escape the harassment of his debtors, appearing in Suriname
Suriname
Suriname , officially the Republic of Suriname , is a country in northern South America. It borders French Guiana to the east, Guyana to the west, Brazil to the south, and on the north by the Atlantic Ocean. Suriname was a former colony of the British and of the Dutch, and was previously known as...
under the name Chevalier de Louvigny.
Contributions to economics
Although there is evidence that Richard Cantillon wrote a wide variety of manuscripts, only his Essai Sur La Nature Du Commerce En Général (abbreviated Essai) survives. Written in 1730, it was published in French in 1755, and was translated into English by Henry HiggsHenry Higgs
Henry Higgs was a British civil servant, economist, and historian of economic thought.Higgs joined the War Office as a Lower Division Clerk in 1882. From there he moved to the Postmaster General's Office in 1884 when he also began taking courses at University College, London. He received an LLB...
in 1932. Although there is evidence which suggests that Essai had tremendous influence on the early development of economic science, Cantillon's treatise was largely neglected during the 19th century. In the late 19th century, it was "rediscovered" by William Stanley Jevons
William Stanley Jevons
William Stanley Jevons was a British economist and logician.Irving Fisher described his book The Theory of Political Economy as beginning the mathematical method in economics. It made the case that economics as a science concerned with quantities is necessarily mathematical...
, who considered it the "cradle of political economy". Since then, Cantillon's Essai has received growing attention, thanks in large part to Henry Higgs
Henry Higgs
Henry Higgs was a British civil servant, economist, and historian of economic thought.Higgs joined the War Office as a Lower Division Clerk in 1882. From there he moved to the Postmaster General's Office in 1884 when he also began taking courses at University College, London. He received an LLB...
, Joseph Schumpeter
Joseph Schumpeter
Joseph Alois Schumpeter was an Austrian-Hungarian-American economist and political scientist. He popularized the term "creative destruction" in economics.-Life:...
, Friedrich Hayek
Friedrich Hayek
Friedrich August Hayek CH , born in Austria-Hungary as Friedrich August von Hayek, was an economist and philosopher best known for his defense of classical liberalism and free-market capitalism against socialist and collectivist thought...
and Murray Rothbard
Murray Rothbard
Murray Newton Rothbard was an American author and economist of the Austrian School who helped define capitalist libertarianism and popularized a form of free-market anarchism he termed "anarcho-capitalism." Rothbard wrote over twenty books and is considered a centrally important figure in the...
, all of whom have written on the subject. Essai is considered the first complete treatise on economic theory, and Cantillon has been called the "father of enterprise economics".
William Petty
Sir William Petty FRS was an English economist, scientist and philosopher. He first became prominent serving Oliver Cromwell and Commonwealth in Ireland. He developed efficient methods to survey the land that was to be confiscated and given to Cromwell's soldiers...
and his 1662 tract Treatise on Taxes. Although Petty provided much of the groundwork for Cantillon's Essai, Anthony Brewer argues that Petty's influence has been overstated. Apart from Petty, other possible influences on Cantillon include John Locke
John Locke
John Locke FRS , widely known as the Father of Liberalism, was an English philosopher and physician regarded as one of the most influential of Enlightenment thinkers. Considered one of the first of the British empiricists, following the tradition of Francis Bacon, he is equally important to social...
, Cicero
Cicero
Marcus Tullius Cicero , was a Roman philosopher, statesman, lawyer, political theorist, and Roman constitutionalist. He came from a wealthy municipal family of the equestrian order, and is widely considered one of Rome's greatest orators and prose stylists.He introduced the Romans to the chief...
, Livy
Livy
Titus Livius — known as Livy in English — was a Roman historian who wrote a monumental history of Rome and the Roman people. Ab Urbe Condita Libri, "Chapters from the Foundation of the City," covering the period from the earliest legends of Rome well before the traditional foundation in 753 BC...
, Pliny the Elder
Pliny the Elder
Gaius Plinius Secundus , better known as Pliny the Elder, was a Roman author, naturalist, and natural philosopher, as well as naval and army commander of the early Roman Empire, and personal friend of the emperor Vespasian...
, Pliny the Younger
Pliny the Younger
Gaius Plinius Caecilius Secundus, born Gaius Caecilius or Gaius Caecilius Cilo , better known as Pliny the Younger, was a lawyer, author, and magistrate of Ancient Rome. Pliny's uncle, Pliny the Elder, helped raise and educate him...
, Charles Davenant
Charles Davenant
Charles Davenant , English economist, eldest son of Sir William Davenant, the poet, was born in London.-Overview:He was educated at Cheam grammar school and Balliol College, Oxford, but left the university without taking a degree...
, Edmond Halley
Edmond Halley
Edmond Halley FRS was an English astronomer, geophysicist, mathematician, meteorologist, and physicist who is best known for computing the orbit of the eponymous Halley's Comet. He was the second Astronomer Royal in Britain, following in the footsteps of John Flamsteed.-Biography and career:Halley...
, Isaac Newton
Isaac Newton
Sir Isaac Newton PRS was an English physicist, mathematician, astronomer, natural philosopher, alchemist, and theologian, who has been "considered by many to be the greatest and most influential scientist who ever lived."...
, Sébastien Le Prestre de Vauban, and Jean Boisard
Jean Boisard
Jean Boisard was a learned Frenchman, who died around 1725. His birth date is not known. He is considered to be one of founders, in the 17th century, of numismatics, the science or specialized knowledge and collection of ancient medals and coins. He was Counsellor at the French royal “Cour des...
. Cantillon's involvement in John Law's speculative bubble proved invaluable and likely heavily influenced his insight on the relationship between increases in the supply of money, price, and production.
Methodology
Cantillon's Essai is written using a distinctive causal methodologyMethodology
Methodology is generally a guideline for solving a problem, with specificcomponents such as phases, tasks, methods, techniques and tools . It can be defined also as follows:...
, separating Cantillon from his mercantilist predecessors. Essai is peppered with the word "natural", which in the case of Cantillon's treatise is meant to imply a cause and effect relationship between economic actions and phenomena. Economist Murray Rothbard credits Cantillon with being one of the first theorists to isolate economic phenomena with simple models, where otherwise uncontrollable variables can be fixed. Economist Jörg Guido Hülsmann likens some of the models presented in Essai, which assume constant equilibrium, to Ludwig von Mises
Ludwig von Mises
Ludwig Heinrich Edler von Mises was an Austrian economist, philosopher, and classical liberal who had a significant influence on the modern Libertarian movement and the "Austrian School" of economic thought.-Biography:-Early life:...
's concept of the "evenly rotating economy". Cantillon made frequent use of the concept of ceteris paribus
Ceteris paribus
or is a Latin phrase, literally translated as "with other things the same," or "all other things being equal or held constant." It is an example of an ablative absolute and is commonly rendered in English as "all other things being equal." A prediction, or a statement about causal or logical...
throughout Essai in an attempt to neutralize independent variables. Furthermore, he is credited with employing a methodology similar to Carl Menger
Carl Menger
Carl Menger was the founder of the Austrian School of economics, famous for contributing to the development of the theory of marginal utility, which contested the cost-of-production theories of value, developed by the classical economists such as Adam Smith and David Ricardo.- Biography :Menger...
's methodological individualism, by deducing complex phenomena from simple observations.
A cause and effect methodology led to a relatively value-free approach to economic science, in which Cantillon was uninterested in the merit of any particular economic action or phenomenon, focusing rather on the explanation of relationships. This led Cantillon to separate economic science from politics and ethics to a greater degree than previous mercantilist writers. This has led to disputes on whether Cantillon can justly be considered a mercantilist or one of the first anti-mercantilists, given that Cantillon oftentimes cited government-manipulated trade surpluses
Balance of trade
The balance of trade is the difference between the monetary value of exports and imports of output in an economy over a certain period. It is the relationship between a nation's imports and exports...
and specie
Commodity money
Commodity money is money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money....
accumulation as positive economic stimuli. Others argue that in instances where Cantillon is thought to have supported certain mercantilist policies, he actually provided a more neutral analysis by explicitly stating possible limitations of mercantilist policies.
Monetary theory
Differences between prior mercantilists and Cantillon arise early in Essai, regarding the origins of wealth and price formation on the market. Cantillon distinguishes between wealth and money, considering wealth in itself "nothing but the food, conveniences, and pleasures of life." While Cantillon advocated an "intrinsic" theory of value, based on the input of land and labor (cost of production), he is considered to have touched upon a subjective theory of value. Cantillon held that market prices are not immediately decided by intrinsic value, but are derived from supply and demand. He considered market prices to be derived by comparing supply, the quantity of a particular good in a particular market, to demand, the quantity of money brought to be exchanged. Believing market prices to tend towards the intrinsic value of a good, Cantillon may have also originated the uniformity-of-profit principle—changes in the market price of a good may lead to changes in supply, reflecting a rise or fall in profit.In Essai, Richard Cantillon provided an advanced version of John Locke's quantity theory of money
Quantity theory of money
In monetary economics, the quantity theory of money is the theory that money supply has a direct, proportional relationship with the price level....
, focusing on relative inflation and the velocity of money
Velocity of money
300px|thumb|Similar chart showing the velocity of a broader measure of money that covers M2 plus large institutional deposits, M3. The US no longer publishes official M3 measures, so the chart only runs through 2005....
. Cantillon suggested that inflation occurs gradually and that the new supply of money has a localized effect on inflation, effectively originating the concept of non-neutral money
Neutrality of money
Neutrality of money is the idea that a change in the stock of money affects only nominal variables in the economy such as prices, wages and exchange rates, with no effect on real variables, like employment, real GDP, and real consumption....
. Furthermore, he posited that the original recipients of new money enjoy higher standards of living at the expense of later recipients. The concept of relative inflation, or a disproportionate rise in prices among different goods in an economy, is now known as the Cantillon Effect. Cantillon also considered changes in the velocity of money (quantity of exchanges made within a specific amount of time) influential on prices, although not to the same degree as changes in the quantity of money. While he believed that the money supply consisted only of specie, he conceded that increases in money substitutes—or bank notes—could affect prices by effectively increasing the velocity of circulating of deposited specie. Apart from distinguishing money from money substitute, he also distinguished between bank notes offered as receipts for specie deposits and bank notes circulating beyond the quantity of specie—or fiduciary media—suggesting that the volume of fiduciary media is strictly limited by people's confidence in its redeemability. He considered fiduciary media a useful tool to abate the downward pressure that hoarding of specie has on the velocity of money.
Addressing the mercantilist belief that monetary intervention could cause a perpetually favorable balance of trade, Cantillon developed a specie-flow mechanism foreshadowing future international monetary equilibrium theories. He suggested that in countries with a high quantity of money in circulation prices will increase and therefore become less competitive in relation to countries where there is a relative scarcity of money. Thus, Cantillon also held that increases in the supply of money, regardless of the source, cause increases in the price level and therefore reduce the competitiveness of a particular nation's industry in relation to a nation with lower prices. However, Cantillon did not believe that international markets tended toward equilibrium, and instead suggested that government hoard specie to avoid rising prices and falling competitiveness. Furthermore, he suggested that a favorable balance of trade can be maintained by offering a better product and retaining qualitative competitiveness. Cantillon's preference towards a favorable balance of trade possibly stemmed from the mercantilist belief in exchange being a zero-sum
Zero-sum
In game theory and economic theory, a zero-sum game is a mathematical representation of a situation in which a participant's gain of utility is exactly balanced by the losses of the utility of other participant. If the total gains of the participants are added up, and the total losses are...
game, in which one party gains at the expense of another.
A relatively advanced theory of interest is also presented. Cantillon believed that interest originates from the need of borrowers for capital and from the fear of loss of the lenders, meaning that borrowers have to recompense lenders for the risk of the possible insolvency of the debtor. In turn, interest is paid out of earned profits originating from the return on invested capital. While previously it was believed that the rate of interest varied inversely to the quantity of money, Cantillon posited that the rate of interest was determined by the supply and demand on the loanable funds market—an insight usually attributed to Scottish
Scotland
Scotland is a country that is part of the United Kingdom. Occupying the northern third of the island of Great Britain, it shares a border with England to the south and is bounded by the North Sea to the east, the Atlantic Ocean to the north and west, and the North Channel and Irish Sea to the...
philosopher David Hume
David Hume
David Hume was a Scottish philosopher, historian, economist, and essayist, known especially for his philosophical empiricism and skepticism. He was one of the most important figures in the history of Western philosophy and the Scottish Enlightenment...
. As such, while saved money impacts the rate of interest, new money that is instead used for consumption does not; Cantillon's theory of interest is therefore similar to John Maynard Keynes
John Maynard Keynes
John Maynard Keynes, Baron Keynes of Tilton, CB FBA , was a British economist whose ideas have profoundly affected the theory and practice of modern macroeconomics, as well as the economic policies of governments...
's liquidity preference
Liquidity preference
In macroeconomic theory, Liquidity preference refers to the demand for money, considered as liquidity. The concept was first developed by John Maynard Keynes in his book The General Theory of Employment, Interest and Money to explain determination of the interest rate by the supply and demand...
theory.
Other contributions
Traditionally it is Jean-Baptiste SayJean-Baptiste Say
Jean-Baptiste Say was a French economist and businessman. He had classically liberal views and argued in favor of competition, free trade, and lifting restraints on business...
who is credited for coining the word and advancing the concept of the entrepreneur
Entrepreneur
An entrepreneur is an owner or manager of a business enterprise who makes money through risk and initiative.The term was originally a loanword from French and was first defined by the Irish-French economist Richard Cantillon. Entrepreneur in English is a term applied to a person who is willing to...
, but in fact it was Cantillon who first introduced the term in Essai. Cantillon divided society into two principal classes—fixed income wage-earners and non-fixed income earners. Entrepreneurs, according to Cantillon, are non-fixed income earners who pay known costs of production but earn uncertain incomes, due to the speculative nature of pandering to an unknown demand for their product. Cantillon, while providing the foundations, did not develop a dedicated theory of uncertainty—the topic was not revisited until the 20th century, by Ludwig von Mises, Frank Knight
Frank Knight
Frank Hyneman Knight was an American economist who spent most of his career at the University of Chicago, where he became one of the founders of the Chicago school. Nobel laureates James M. Buchanan, Milton Friedman and George Stigler were all students of Knight at Chicago. Knight supervised...
, and John Maynard Keynes, among others. Furthermore, unlike later theories of entrepreneurship which saw the entrepreneur as a disruptive force, Cantillon anticipated the belief that the entrepreneur brought equilibrium to a market by correctly predicting consumer preferences.
Spatial economics deal with distance and area, and how these may affect a market through transportation costs and geographical limitations. The development of spatial economics is usually ascribed to German economist Johann Heinrich von Thünen
Johann Heinrich von Thünen
Johann Heinrich von Thünen was a prominent nineteenth century economist. Von Thünen was a Mecklenburg landowner, who in the first volume of his treatise, The Isolated State , developed the first serious treatment of spatial economics, connecting it with the theory of rent...
; however, Cantillon addressed spatial economics nearly a century earlier. Cantillon integrated his advancements in spatial economic theory into his microeconomic analysis of the market, describing how transportation costs influence the location of factories, markets and population centers—that is, individuals strive to lower transportation costs. Conclusions on spatial economics were derived from three premises: cost of raw materials of equal quality will always be higher near the capital, due to transportation costs; transportation costs vary on transportation type (for example, water transportation was considered cheaper than land-based transportation); and larger goods that are more difficult to transport will always be cheaper closer to their area of production. For example, Cantillon believed markets were designed as they were in order to decrease costs to both merchants and villagers in terms of time and transportation. Similarly, Cantillon posited that the locations of cities were the result in large part of the wealth of inhabiting property owners and their ability to afford transportation costs—wealthier property owners tended to live farther from their property, because they could afford the transportation costs. In Essai, spatial economic theory was used to derive why markets occupied the geographical area they did and why costs varied across different markets.
Apart from originating theories on the entrepreneur and spatial economics, Cantillon also provided a dedicated theory on population growth. Unlike William Petty, who believed there always existed a considerable amount of unused land and economic opportunity to support economic growth, Cantillon theorized that population grows only as long as there are economic opportunities present. Specifically, Cantillon cited three determining variables for population size: natural resources, technology, and culture. Therefore, populations grow only as far as the three aforementioned variables allowed. Furthermore, Cantillon's population theory was more modern than that of Malthus in the sense that Cantillon recognized a much broader category of factors which affect population growth, including the tendency for population growth to fall to zero as a society becomes more industrialized.
Influence
While Essai was not published until 1755 as a result of heavy censorship in France, it did widely circulate in the form of an unpublished manuscript between its completion and its publication. It notably influenced many direct forerunners of the classical schoolClassical economics
Classical economics is widely regarded as the first modern school of economic thought. Its major developers include Adam Smith, Jean-Baptiste Say, David Ricardo, Thomas Malthus and John Stuart Mill....
of thought, including Turgot and other physiocrats
Physiocrats
Physiocracy is an economic theory developed by the Physiocrats, a group of economists who believed that the wealth of nations was derived solely from the value of "land agriculture" or "land development." Their theories originated in France and were most popular during the second half of the 18th...
. Cantillon was a major influence on physiocrat François Quesnay
François Quesnay
François Quesnay was a French economist of the Physiocratic school. He is known for publishing the "Tableau économique" in 1758, which provided the foundations of the ideas of the Physiocrats...
, who may have learned of Cantillon's work through Marquis of Mirabeau
Victor de Riqueti, marquis de Mirabeau
Victor de Riquetti, marquis de Mirabeau was a French economist of the Physiocratic school. He was the father of great Honoré, Comte de Mirabeau and is, in distinction, often referred to as the elder Mirabeau....
. While it is evident that Essai influenced Quesnay, to what degree remains controversial. There is evidence that Quesnay did not fully understand, or was not completely aware of, Cantillon's theories. Many of Quesnay's economic beliefs were elucidated previously in Essai, but Quesnay did reject a number of Cantillon's premises, including the scarcity of land and Cantillon's population theory. Also, Quesnay recognized the scarcity of capital and capital accumulation as a prerequisite for investment. Nevertheless, Cantillon was considered the "father of physiocracy" by Henry Higgs, due to his influence on Quesnay. It is also possible that Cantillon influenced Scottish economist James Steuart
James Denham-Steuart
Sir James Steuart, 3rd Baronet of Goodtrees and eventually 7th Baronet of Coltness; late in life Sir James Steuart Denham, also called Sir James Denham Steuart was a prominent Jacobite, who wrote one of the first noteworthy books in English about economics...
, both directly and indirectly.
Cantillon is one of the few economists cited by Adam Smith, who directly borrows Cantillon's sustenance theory of wages. Large sections of Smith's economic theory were possibly directly influenced by Cantillon, although in many respects Adam Smith advanced well beyond the scope of Cantillon. Some economic historians have stated that Adam Smith provided little of value from his own intellect, notably Schumpeter and Rothbard. In any case, through his influence on Adam Smith and the physiocrats, Cantillon was quite possibly the pre-classical economist who contributed most to the ideas of the classical school. Illustrative of this was Cantillon's influence on Say, which is noticeable in the methodology employed in the latter's Treatise on Political Economy.