Richard Cantillon Economic Theory Ideas

Richard Cantillon

Richard Cantillon (c. 1680-1734) was an unusual figure in the history of economic ideas. His birth date and place of birth are not completely certain, but the consensus is that he was born between 1680 and 1690 in Ireland. He lived most of his life in Paris and was successful in amassing a fortune as a banker. His one book was evidently written around 1730 and was widely read in both France and England by intellectuals who were interested in economics. He died in England in 1734; his book was not published until 1755.

What is unique about Cantillon is that his book was unusually sophisticated and advanced in its understanding of economic questions, yet it was not given much attention in England after the publication of Adam Smith's Wealth of Nations in 1776. In 1881 William Stanley Jevons rediscovered Cantillon's book and heaped praise on it, describing it as "the first systematic treatment in political economy" and "the cradle of political economy."

What is Cantillon's place in the history of economic thought? He evidently had little subsequent influence on writers, although his book was read by the physiocrats and cited by Smith in his Wealth of Nations. Even though it is a brilliant and insightful work, its only important influence that can be traced is on the physiocrat Frangois Quesnay. Cantillon himself acknowledged the influ­ence of John Locke, for his theory of money, and William Petty, for his emphasis on the importance of measuring economic phenomena. Cantillon was part mercantilist (mostly in his views on foreign trade), part physiocrat (in his emphasis on the primary role of agriculture in the economy), and part physiocrat-classical (in his vision of the interrelatedness of the various sectors of the economy). Unlike Petty, who produced works of a practical nature exploring various topics in economics, Cantillon was modern in that (1) he started with the goal of establishing basic principles of economics through the process of reasoning, and, more important, (2) he wanted to collect data to use in the process of verifying his principles. Unfortunately, his statistical work is lost.

Cantillon's seminal vision, which was to a lesser extent possessed by some of the physiocrats and liberal mercantilists, was of a market system that coordinated the activities of producers and consumers through the medium of individual self-interest. The key actors in this self-regulating system were entrepreneurs, who, in their pursuit of profit, produced social results superior to ones that could be produced by government interference. Given competitive markets in which entrepreneurs pursue customers in final goods markets and compete with one another in factor markets, Cantillon was able to point to the adjustment processes as demands, costs, technology, and other factors change. He did not make the plea for laissez faire with the force of Smith, however, which may account for his neglected recognition.

He tended always to treat any element of the economy as part of an integrated structure; for example, population changes were endogenous to his system, not exogenous. His explanation of the forces that determine prices was surprisingly modern in that he distinguished between market prices, determined by short-run factors, and what he called intrinsic value, long-run equilibrium prices. He was able to apply his analysis of prices and markets to international trade and view the adjustment processes that take place there.

Some of his most accomplished technical analysis was not in microeco­nomics but in the macroeconomic aspects of the effects of changes in the supply of money on prices and production. He divided the economy into sectors and analyzed the flow of income between them; although he did not explicitly formulate an economic table to represent these flows, he clearly influenced Quesnay, who did. Cantillon acknowledged his debt to John Locke and his early statement of the quantity theory of money, but Cantillon was able to see subtleties in Locke's analysis that escaped Smith and his contemporaries. The consequences of an increase in the quantity of money were not simply macroeconomic effects on output or prices. In an early examination of the microeconomic foundations of macroeconomics, Cantillon saw that the points at which the new funds entered the economy would influence their impact. Accordingly, the general level of prices could change, but relative prices could also change, with subsequent impacts on the various sectors of the economy.

As we suggested in the closing pages of Chapter 1, historians of economic thought must make choices about how much attention to give to various economists. Our criteria assign great weight to the impact of a given writer on the subsequent development of economic ideas, not to his or her creativeness or brilliance. If our criteria emphasized who said it first or who said it best, Cantillon would have a place alongside Smith as a founder of political economy.