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Richard Cantillon ( 1680s – May 1734) 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. His work was translated into Spanish by Gaspar Melchor de
Jovellanos, probably in the late 1770s, and considered essential reading for
political economy. Despite having much influence on the early development of
the physiocrat and classical schools 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, Jean-Baptiste Say, Frédéric Bastiat and
François Quesnay.
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 Ballyheigue. 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, specialising 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
labour, 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 its debt at low rates of interest. Law began a financial speculative
bubble by selling shares of the Mississippi Company, using the Banque
Générale's 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 later at higher
prices, even though he had stated he believed Law's "scheme was unsound
and was bound to fail."
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 centred 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 [fr]—a wealthy merchant and former Irish general—spending
much of the remainder of the 1720s travelling throughout Europe with his wife.
Cantillon and Mary had two children, a son who died at an early age and a
daughter, Henrietta, wife successively of the 3rd Earl of Stafford and the 1st
Earl of Farnham. Although he frequently returned to Paris between 1729 and
1733, his permanent residence was in London. In May 1734, 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.
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 Higgs in 1932. Evidence suggests
that Essai had tremendous influence on the early development of economic
science. However, Cantillon's treatise was largely neglected during the 19th
century. In the late 19th century and it was "rediscovered" by
William Stanley Jevons, who considered it the "cradle of political
economy". Since then, Cantillon's Essai has received growing attention.
Essai is considered the first complete treatise on economic theory, and
Cantillon has been called the "father of enterprise economics".
William Petty is considered to be one of Richard Cantillon's greatest
influences.
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.
Methodology:
Cantillon's Essai is written using a distinctive causal methodology, 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 their
underlying (i.e. causing) 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.
Cantillon made frequent use of the concept of ceteris paribus (that
means 'all things being equal' a favorite cop out of economists JS) throughout
Essai in an attempt to neglect 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 often 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.
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 labour (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, 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 localised 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 favourable 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 favourable
balance of trade can be maintained by offering a better product and retaining
qualitative competitiveness. Cantillon's preference towards a favourable
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.
Other contributions:
Traditionally, it is Jean-Baptiste Say 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 centres—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 city, 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 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 theorised 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 recognised 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 industrialised.
Influence:
While the 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 school of thought, including Turgot and other
physiocrats. Cantillon was a major influence on physiocrat François
Quesnay, who has probably had access to his work through the marquis de
Mirabeau, who possessed a manuscript of the Essai since 1740. While it is
evident that the 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 the Essai, but Quesnay did reject a
number of Cantillon's premises, including the scarcity of land and Cantillon's
population theory. Also, Quesnay recognised 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 subsistence 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 argued 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
Jean-Baptiste Say, which is noticeable in the methodology employed in the
latter's Treatise on Political Economy.
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