Mises Daily Articles
Cantillon for Laymen
[Originally published June 7, 2006.]
The "father of modern economics," said economist Murray Rothbard, was a "gallicized Irish merchant, banker, and adventurer who wrote the first treatise on economics more than four decades before the publication of the Wealth of Nations." (Rothbard 1995, p. 345)
Richard Cantillon's Essay on the Nature of Commerce in General, or Essai sur la Nature du Commerce en General, was penned in French in the early 1730s, or thereabouts, but was not published until 1755 (Rothbard 1995, p. 347). It did, however, became a celebrated text for its systematic treatment of political economy and methodology, especially among those associated with the French Liberal School.
Cantillon's book was written during an era of mercantilist ascendancy in France. He diverged from that set, mostly because he didn't arrive at his analysis via an unstructured amalgamation of judgments geared toward specific political ends. Rather, he was the first theorist to maintain an "independent area of investigation — economics — and to write a general treatise on all its aspects." (Rothbard 1995, p. 347) This set Cantillon apart from his politically influential mercantilist counterparts, and has led many scholars, to label him — not Adam Smith — the father of modern economics (Thornton 1999, pp. 13-15).
The Essai, as it is often called, was originally a manuscript that was first circulated in tightly knit intellectual and literary circles; it was published only posthumously, in 1755 (Rothbard 1995, p. 347). In effect, Cantillon's Essai is divided into three major parts, and it follows a progressive blueprint of intertwined ideas that essentially puts forth an entire structure by which a comprehensive treatise of economic theory is elucidated (Thornton 1999, p. 15). Friedrich A. Hayek characterized the three parts of the Essai "On Wealth or Production," "On Exchange," and "On International Trade," respectively (Hayek 1985).
In Part I of the Essai, Cantillon introduces his economy of pre-capitalist, human society: princes, lords, landlords, farmers, and laborers — and the villages, market towns, and cities in which they live. Interestingly enough, Cantillon focuses on the importance of the sedentary merchant, a post-feudal concept wherein the merchants trade their wares in established "market towns," to be visited by the villagers on "market-days" (Cantillon 2001, pp. 8-9), so as to circumvent the higher costs and logistical difficulties incurred by the merchants for transportation. In addition, this enabled a more efficient system for bartering, price shopping, and quality comparison for local villagers. It is here that Cantillon establishes his initial insights on the importance of the market and unhindered, free trade.
This first part of the Essai is where Cantillon makes the distinction between entrepreneurs and workers, and their divergent functions in a market economy. Accordingly, throughout the Essai, there are at least 110 separate references to the word "entrepreneur" (Hülsmann 2001). This term is thought to have been first used by Cantillon, and it was later popularized by John Stuart Mill in his more fashionable Principles of Political Economy in 1848 (Casson).
Cantillon visualizes the entrepreneur as being a risk-taker, dealing with uncertain returns in a market where prices and quantities are non-fixed and unknown. This bearing of risk, on the part of the entrepreneur, is what warrants him an appropriate profit in exchanges with willing buyers. Cantillon went on to explain production and risk, and championed the notion of the entrepreneur as one who, in the pursuit of profit, allocates resources based upon market demand.
In Part II of the Essai, Cantillon lays out his monetary theory, explaining money and its circulation, market prices, hard money, and the influence of monetary changes on relative prices in a market economy. This theory of money and credit got him appropriately lauded by Austrian economists as one of their own.
The Essai's Part III — as Hayek notes in the book's introduction — focuses on the international economy, foreign exchange and exchange rates, and the role of banks in the economy. Cantillon was a banker, and one who understood the true nature of wealth as it relates to production. Therefore, in this part of the Essai, he undertook a rather caustic critique of mercantilism and the mercantilist conception of wealth creation. In fact, he reflects in detail on the John Law "South Sea Bubble" debacle — a disastrous, mercantilist financial scheme on which he had made a fortune some time earlier, due to his understanding of the nature of finance and monetary systems.
Richard Cantillon, believed to be born in about the 1680s (c. early 1680s-1734), was most likely born in Ireland, immigrated to Paris, and later on, moved to London, where details of his life are somewhat fuzzy. He was a successful and wealthy Paris banker and London merchant who made a great deal of money as a speculator, benefiting from John Law's Mississippi scheme in France (Ekelund and Hebert 1986, p. 65). He later left France with his millions, knowing that financial turmoil was on the horizon (Rothbard 1995, p. 346).
Not much is known about Cantillon's life except that his origins were "in the landed gentry," and that he also had a career, in his younger years, as an assistant to the British paymaster James Brydges, where he became skilled in the acts of accounting, negotiating, banking, and international finance (Thornton 2001, p. 15). This is perhaps where this consummate economist and theorist first came to understand the value of the entrepreneur and the knack for risk-taking. Cantillon's Essai is his only surviving work,1 and was most likely a result of his participation in business and banking, and vast amounts of economic understanding gained through his daily work and transactions.
Cantillon's groundbreaking tract was of great importance for several reasons, the central reason being that he explained the economy as dynamic and unified, wherein entrepreneurs made profit in the pursuit of self-interest, what Adam Smith later termed "the invisible hand." Cantillon hypothesized in a Newtonian sense, thinking "of the economy as Newton thought of the cosmos — as an interconnected whole made up of rationally functioning parts" (Ekelund and Hebert 1986, p. 65). Accordingly, this set him apart from the mercantilists in both logic and perception.
His intellectual rise came on the heels of Louis XIV's oppressive and absolutist reign, which ended with Louis's death in 1715. (Liggio 1985) In essence, Cantillon's Essai was a scholarly mutiny against the prevailing statism of the times, especially Colbertism, an extreme form of mercantilism built around war-financing schemes, high taxation, and central planning. The omnipotent state of King Louis's reign was one of perpetual war, fervent nationalism, and a massive, national debt. Mostly, the mercantilist message that likened the accumulation of bullion to absolute wealth was what Cantillon — and the French Physiocrats who followed him — sought to refute.
Cantillon's Essai, though widely distributed amongst the intelligentsia, went unpublished for about twenty years, until about 1755. Even then, this magnum opus went largely unnoticed until neoclassical economist William Stanley Jevons, in the 1880s, established an enduring place in economic history for this great work, which he declared, "more emphatically than any other single work, the Cradle of Political Economy" (Jevons 1881).
Other economists who unearthed and venerated Cantillon's remarkable contributions were Joseph Schumpeter, the economic historian; Friedrich Hayek, the Nobel Prize winner; and lastly, Murray Rothbard, whose revisionism placed Cantillon forever and firmly in the proto-Austrian camp. Hayek went so far as to say "this gifted independent observer, enjoying an unsurpassed vantage point in the midst of the action, coordinated what he saw with the eyes of the born theoretician, and was the first person who succeeded in penetrating and presenting to us almost the entire field which we now call economics" (Hayek 1985).
Alas, Richard Cantillon's life ended in a startling death. He was said to have been murdered, in his sleep, possibly by a former household servant, who then set fire to Cantillon's house in an attempt to conceal the homicide (Rothbard 1995, p. 347). Thankfully, the first-ever treatise on economics survived this catastrophe, and even upon his death, Cantillon's influence upon the entire history of economic thought was just beginning.
Cantillon and the Entrepreneur
Richard Cantillon's Essai is the first known source of the word "entrepreneur." He described the entrepreneur as having a distinct function from that of the wage-earners, or hired people. The entrepreneurs, to Cantillon, are an integral part of the marketplace, for it is they who are responsible for bringing about competition and the decentralization of markets through the application of entrepreneurial decision-making and risk-taking.
Economist Israel Kirzner, in his theory of competition and entrepreneurship, asserts that "decisions necessarily involve an entrepreneurial element." The non-entrepreneurial element consists mostly of tasks such as calculation, whereas the entrepreneurial element involves a "shrewd and wise assessment of the realities (both present and future) within the context of which the decision must be taken" (Kirzner 1985, pp. 16-17).
Austrian Economist Murray Rothbard stressed that Cantillon's dynamic theory of entrepreneurship and uncertainty is perhaps his most remarkable contribution to economic thought (Rothbard 1995, p. 351):
To this real-world merchant, banker, and speculator, it would have been inconceivable to fall into the Ricardian, Walrasian, and neoclassical trap of assuming that the market is characterized by perfect knowledge and a static world of uncertainty. (p. 351)
Rothbard goes further to say that "Cantillon's theory of entrepreneurship focuses his function, his role as uncertainty-bearer in the market." Thus, Cantillon carves out a role for the entrepreneur as the ultimate mechanism of a free-market economy (Rothbard 1995, p. 352).
In the Essai, risk-taking and entrepreneurial decisions are at the heart of Cantillon's competitive process. While observing a blend of entrepreneurs during his era, Cantillon noted the existence and consequences of risk-taking.
As the farmers and Masters of Crafts in Europe are all Undertaking work at a risk, some get rich and some gain more than a double subsistence, others are ruined and become bankrupt, as will be explained more in detail in treating of Undertakers. (Cantillon 2001, p. 20)
To Cantillon, the "Undertakers" — translation from the French word entrepreneur — were merchants, or those who bought and traded mostly agricultural produce at an uncertain price, thus bearing the direct financial risk. Hence, the entrepreneurs would "undertake" tasks and assume risk for some new venture. In addition to the retailing merchant as Undertaker, Cantillon remarked that the farmer was an Undertaker in his own right — one who had fixed costs tied up in the rent of land and expense of growing produce, yet faced great uncertainty in peddling his product.
And yet the price of the Farmer's produce depends naturally upon these unforeseen circumstances, and consequently he conducts the enterprise of his farm at an uncertainty. (Cantillon 2001, p. 24)
Cantillon's other notable Undertakers were the Hatters, Butchers, Wine Merchants, Bakers, and Manufacturers, all of whom could never know the extent of expenses, demand, or competition facing them in the market.
The Undertaker, according to Cantillon, can exist within two different frameworks, or models, of the economy. David O' Mahoney notes Cantillon's clear distinction between instances where decision-making is centralized and where decentralized entrepreneurial oversight is present:
In the first version the proprietor directs the whole estate himself. He employs overseers to manage the day-to-day work of the laborers and artisans. But he decides what they are to do and how the land is to be used. Everything is done on his direct instructions. There is uncertainty, of course, but it arises only because of natural forces such as the weather as a result of which harvests may be good or bad from or from accidental circumstances such as the presence of foreign troops. But as there is no trade and no competition, the particular kind of uncertainty associated with the market process does not exist, and so there is no entrepreneurship.
But in the second version, while the demand of the proprietors, and now also those who emulate them, is paramount, their instructions are conveyed indirectly via the prices they are willing to offer in the market. These prices cannot be foreseen with certainty so the overseers, now become Undertakers, have to use their judgment as to what will pay best. (Mahoney 1985)
The entrepreneur, says Cantillon, will allocate resources to production according to the demand for any given product line, and they will adjust to the right amount of sellers and buyers in a market, as demand brings suppliers into a market role, or knocks them out of a given niche. Cantillon notes that all Undertakers
become consumers and customers in regards to each other, the Draper of the Wine Merchant and vice versa. They proportion themselves in a State to the Customers or consumption. If there are too many hatters in a city or in a street for the number of people who buy hats there, some who are at least patronized must become bankrupt: if they be too few it will be a profitable Undertaking which will encourage new Hatters to open shops there and so it is that the Undertakers of all kinds adjust themselves to risks in a State.
Importance in the History of Economic Thought
One notable aspect of Cantillon's work is that he is quoted in Adam Smith's Wealth of Nations, and citing others is something that Smith rarely did (Thornton 2001, p. 14). However, the most recognized influence gleaned from Cantillon's work was in regard to the Physiocrats, the first "school" of economists (Rothbard 1995, p. 360), which began as an assemblage of French, laissez-faire intellectuals opposing the oppressive reign of Louis XIV. The Physiocrats, influenced by Cantillon's still unpublished Essai (Bell 1967, p. 107), went on to espouse some of the earliest classical liberalism. François Quesnay, the most notable of that group, and fellow traveler A.R.J. Turgot, along with French economist J.B. Say, both "precursors to the modern Austrian school," (Thornton 2001, p.14) were heavily influenced by Cantillon. Quesnay's circular-flow model, the Tableau Économique, drew heavily from Cantillon's discussion of the circulation of money in an economy of rural and urban sectors as well as Cantillon's own version of a circulation model. Most notably, Joseph Schumpeter remarked that "Cantillon was the first to draw a tableau économique" (Schumpeter 1954, p. 222).
Perhaps a less eminent but more significant role of Cantillon's treatise is its contribution to the marginalist or individualist-subjectivist (Rothbard 1995, p. 361) revolution, and subjective valuation theory. As Mark Thornton elaborates:
Cantillon's contributions to the method of economics, while unappreciated in his time and largely forgotten, are truly remarkable when placed in historical context. What impressed important economists such as Jevons, Schumpeter, Hayek, and Rothbard was Cantillon's scientific approach and the logical-deductive theorizing that is so characteristic of the Austrian school and the marginal revolution (Thornton 2001, p. 17).
Economist Joe Salerno calls this one of Cantillon's "greatest achievements" (Salerno 1985). Cantillon inspired a host of Austrians, starting with Carl Menger.
To begin with, pervading the Essai is the modern subjectivist insight that, in the words of Professor Kirzner, "…consumer demand constitutes a vibrant, active market force, with a powerful positive impact on resource allocation, prices, and other phenomena." According to Cantillon, it is the ever-changing "Humors and Fancies of men" which ultimately determine market prices and productive incomes and through them the allocation of land and labor resources. (Salerno 1985)
Salerno notes that, ultimately, Cantillon's methodology was a major breakthrough for its "emphasis on subjective factors as the ultimate and active determinants of the direction and extent of economic activity" (Salerno 1985).
To understand the importance of Cantillon's place in economic history, one must assess the significance of his original contributions to the field of economics. According to authors Robert Ekelund, Jr and Robert Hebert, Cantillon's original contributions include:
- Treating economic growth as an integral part of the economic process
- Developing an economic explanation of the location of cities and sites of production
- Making a distinction between market price and intrinsic value (i.e., equilibrium price) and showing how the two may converge over time
- Demonstrating that changes in velocity are equivalent to changes in the stock of money
- Tracing the channels through which changes in the stock of money influence prices
- Describing the mechanism by which prices adjust in international trade
- Analyzing income flows between major sectors of the economy
Ultimately, Cantillon followed a legion of economists, from the mercantilists and earlier on, who had not been able to divorce their theoretical pronouncements from their political leanings, and in fact, used economic analysis to support political agendas and moral judgments. Take the medieval and renaissance scholastics, for instance, who had "embedded their economic analysis in a moral and theological framework" (Rothbard 1995, p. 348).
His work was not rife with opinion and value judgments, but rather, he used profound, economic reasoning to debate the inner workings of economic life. He understood that "to break out of the mercantilist morass, it was necessary to step aside, to focus on the economic features of human action and to analyze them, abstracting them from other concerns, however important" (Salerno 1985). Therefore, the "first of the moderns" (Rothbard 1995, p. 347) was set in motion.
Bell, John Fred. 1967. A History of Economic Thought. New York: The Ronald Press Company.
Cantillon, Richard. 2001. Essay on the Nature of Commerce in General. New Brunswick: Transaction Publishers.
Casson, Mark. Entrepreneurship. The Concise Encyclopedia of Economics.
Ekelund, Robert B., and Robert F. Hebert. 1983. A History of Economic Theory and Method. New York: McGraw-Hill.
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Hebert, Robert F. "Was Richard Cantillon an Austrian Economist?" Journal of Libertarian Studies 7, No. 2, (1985): 269-279.
Hulsmann, Jorg Guido. "More on Cantillon as a Proto-Austrian." Journal des Economistes et des Etudes Humaines, Vol. XI-Numero 4 (2001): 693-703.
Jevons, William Stanley. "Richard Cantillon and the Nationality of Political Economy."
Kirzner, Israel M. 1985. Discovery and the Capitalist Process. Chicago: University of Chicago Press.
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Mahoney, David O. "Richard Cantillon — A Man of His Time: A Comment on Tarascio." Journal of Libertarian Studies 7, No. 2 (1985): 259-267.
Murphy, Antoin E. "Richard Cantillon — Banker and Economist." Journal of Libertarian Studies 7, No. 2 (1985): 185-215.
Rothbard, Murray N. 1995. Economic Thought Before Adam Smith. Vol. 1. An Austrian Perspective on the History of Economic Thought. Cheltenham, U.K.: Edward Elgar.
Salerno, Joseph. "The Influence of Cantillon's Essai on the Methodology of J.B. Say." Journal of Libertarian Studies 7, No. 2 (1985): 305-316.
Schumpeter, Joseph. 1996. History of Economic Analysis. USA: Oxford University Press
Thornton, Mark, "Richard Cantillon: The Origins of Economic Theory." Holcombe, Randall G., ed. 15 Great Austrian Economists. Auburn, AL: Ludwig von Mises Institute, 1999.
- 1. Cantillon, Essay on the Nature of Commerce in General, p. xii. See the Introduction by Anthony Brewer, who refers to the Essai as "the foundation stone on which all subsequent economic theory has built."