Richard Cantillon Global Value and Price

Richard Cantillon Global Value and Price

Cantillon engaged in the first sophisticated modern analysis of market pric­ing, showing in detail how demand interacts with existing stock to form prices. In contrast to the later Smith-Ricardo classicists, and foreshadowing the Austrians, Cantillon was largely interested in price formation in the real world, i.e. actual market prices, rather than in the chimera of long-run 'nor­mal' pricing. In an important recent interchange on Cantillon, Professor Vincent Tarascio interprets him as a classicist or neoclassicist, at least in so far as holding that market prices tend in the long run to approach the 'intrin­sic value' of a good, that is, the cost of production, in terms of land and labour inputs, of the product. This was the Smith-Ricardo theory of 'equilib­rium' pricing, which has been basically expanded into Walrasian 'general equilibrium' theory.

But while there are passages in Cantillon justifying this approach, and the term 'intrinsic value' is certainly an unfortunate one, Professor David O'Mahony, in a perceptive comment on the Tarascio article, points out that Cantillon's approach was, in reality, pre-Austrian. First, O'Mahony shows that Cantillon's market price analysis was the Austrian one of a given exist­ing stock of a good evaluated and demanded by consumers.

Quoting from Cantillon: 'It is clear that the quantity of product or of merchandise offered for sale, in proportion to the demand or number of Buyers, is the basis on which is fixed or always supposed to be fixed the actual market prices...'. Demand, in turn, is subjective, dependent on 'hu­mours, fancies, mode of living', etc. These subjective valuations are what impart value to the products offered for sale. It is the 'consent of mankind', says Cantillon, which gives value to 'lace, linen, fine cloths, copper and other metals'. For Cantillon, actual market prices are determined by demand: 'It often happens that many things which actually have this intrinsic value are not sold in the market at that value: That will depend on the humors and fancies of men and on their consumption'. Thus the value of products is imparted by consumer valuation: a crucial proto-Austrian insight derived from medieval and late Spanish scholastics. For centuries, in fact, the scho­lastic and post-scholastic position had been that the value of goods is deter­mined by 'utility' and 'scarcity', by subjective valuation of a given supply. The more utility the higher the value, and the more abundant the supply the lower the value and price of any good on the market. Cantillon's is a sophisti­cated and elaborated development of the scholastic approach.

While Cantillon considers the 'intrinsic value of a thing' 'the measure of the Land and Labour which enter into its Production', he concedes immedi­ately that subjective valuation by consumers rather than 'intrinsic value' determines price.

Going into detail on intrinsic value, Cantillon refers to the hypothetical case of an American who travels to Europe to sell beaver skins for hats, but is then 'rightly astonished to learn that woollen hats are as serviceable as those made of beaver, and that all the difference, which causes so long a sea journey, is in the fancy of those who think beaver hats lighter and more agreeable to the eye and the touch'. In short: the entire cost of production, all the labour and effort that went into the production and transport of beaver skins, means nothing unless the product satisfies the consumer enough to pay for the costs, and to enable the product to compete with another commodity made more cheaply at home. It is consumer demand that determines sales as well as price.

O'Mahony goes on to point out that Cantillon's monopoly estate model clearly shows that demand (in this case that of the world monopoly land­owner) and not cost of production determines price. Cantillon, then, did not foreshadow the classical equilibrium theory that cost of production consti­tuted the long-run, and presumably therefore the most important, determinant of market price. On the contrary, for Cantillon, cost of production had a very different function: deciding whether a business could make profits or else have to suffer losses and go out of business. If consumer value and therefore the selling price of a product is high enough to more than cover costs, the firm makes a profit; if not high enough, it suffers losses and eventually has to go out of business. This is an important part of the Austrian view of the role of costs. Thus Cantillon discusses costs and prices in the manufacture of Brussels lace:

If the price which the Ladies pay for the Lace does not cover all the costs and profits there will be no encouragement for this Manufacture, and the undertaker will cease to carry it on or become bankrupt; but as we have supposed this Manufacture is continued, it is necessary that all costs be covered by the prices paid by the Ladies of Paris....

Hence the movement toward long-run equilibrium is not a process of adjust­ing market prices to intrinsic long-run costs of production, but one of labourers and entrepreneurs moving in and out of various lines of production until costs of production and selling prices are equal. As O'Mahony well puts it:

For Cantillon then it is not so much that intrinsic values exist automatically and spontaneously and that market prices are drawn towards them, as that the prices offered in the market determine whether or not it is worth producing things. In other words, it is the prices offered that determine what production costs can be incurred not that production costs determine what the prices must be.

Of course, there is a big gap, both in Cantillon's approach and that of the later Smith - Ricardo classicists, as well as of the modern Ricardian neo-classicists: Where do the 'costs of production' come from? In contrast to the Cantillon and classical approach, they are neither intrinsic nor mandated from some mysterious force outside the economic system. Costs of produc­tion, as it took the Austrians to finally point out, are themselves determined by the expected consumer demand for goods and services.