Mises Daily

Richard Cantillon: The Founding Father of Modern Economics

[Excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith (1995). An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]


Most people, economists and laymen alike, think that economics sprang full blown, so to speak, from the head of Adam Smith in the late 18th century. What has become known as the first, or “classical,” period of modern economic thought then developed, out of Smith, through David Ricardo, including an aggregative approach, and a cost-of-production, or even a labor, theory of value.

We now know, however, that this account is flatly incorrect. For modern economic thought, i.e., analysis centering on explaining the market economy, developed a half-century before Smith’s Wealth of Nations, and not in Britain but in France. More significantly, the French writers, despite their diversity, must be set down not as pre-Ricardian but as proto-”Austrian,” that is, as forerunners of the individualistic, microeconomic, deductive, and subjective-value approach that originated in Vienna in the 1870s.

Cantillon the Man

The honor of being called the “father of modern economics” belongs, then, not to its usual recipient, Adam Smith, but to 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. Richard Cantillon (1680s–1734) is one of the most fascinating characters in the history of social or economic thought. Little is known about Cantillon’s life except the fact that he died a multimillionaire, but the best modern researches show that he was born in County Kerry of a family of Irish landed gentry who had been dispossessed by the depredations of the English Puritan invader Oliver Cromwell. Cantillon’s first cousin once removed, also named Richard, emigrated to Paris to become a successful banker, thereby perpetuating the tradition, born in the 16th century, of religiopolitical exiles from Britain emigrating to France.1 The Cantillons were part of the Catholic emigration, centering, by the end of the 17th century, on the Stuart pretender to the throne of Great Britain.

Richard Cantillon joined the emigration to Paris in 1714, quickly becoming the chief assistant to his cousin at the latter’s bank. Moreover, Richard’s mother’s uncle, Sir Daniel Arthur, was a prominent banker in London and Paris, and Arthur had named Richard’s cousin as the Paris correspondent of his London-based bank.2 In two years, Cantillon was in a position to buy his cousin’s ownership of the bank.

Richard Cantillon was now in the important position of banker for the Stuart court in exile, as well as for the bulk of the British and Irish émigrés in Paris. But his most important coup came from his association with the Scottish adventurer and archinflationist John Law (1571–1729), who had captured the imagination and the greed of the regent of France. The death of the aged Louis XIV in 1715 had inaugurated a looser and more optimistic regime, control of which had been seized by the regent, the duke of Orleans. John Law persuaded the regent that France could find permanent prosperity and need have no further worries about the public debt. The French government need only finance heavy deficits by a massive infusion of the relatively new device of governmental paper money.

Becoming the leading financier of the French government, and even controller-general of the finances of France, Law set loose a rampant inflation that generated the wildly speculative Mississippi bubble (1717–1720). The bubble created instant millionaires before it collapsed, leaving John Law in poverty and disgrace. Indeed, the very word “millionaire” was coined during the heady years of the Mississippi bubble.3

But when the dust had settled, the shrewd Richard Cantillon emerged, after being a top partner in John Law’s Mississippi speculations, as a multimillionaire. Legend has it that, at the beginning of his meteoric career running French finances, John Law had come to Cantillon and warned him, “If we were in England we would have to strike a deal and settle matters, but as we are in France, I can send you this evening to the Bastille, if you do not give me your word to leave the kingdom within twenty-four hours.” To which Cantillon is supposed to have replied, “Hold on, I will not go and I will make your system succeed.” In any case, we know that Law, Cantillon, and the English speculator Joseph Edward (”Beau”) Gage formed a private company in November 1718. Gage was so wealthy from paper speculation in Law’s government-sponsored paper-issue bank, the Mississippi Company, that he seriously attempted, in this period, to purchase the kingdom of Poland from its king, Augustus.

As the Mississippi bubble careened onward, Cantillon, an astute analyst of monetary affairs, saw deeply that the bubble was bound to burst soon, and he took steps to make millions out of the foolishness of his partners and clients. Lending money to Gage and others with which to buy inflated Mississippi Company shares, Cantillon quietly sold all of his own shares as well as the inflated shares that his borrowers had left him as collateral, locked all his papers in a strongbox, took his accumulated millions and left town for Italy, there to await in safety “the financial storm that he could see developing.” After Gage and the other Cantillon clients went broke in the 1720 crash, Cantillon pursued them to repay his loans, for which they had been happy to pay a rate of interest up to 55 percent, which had incorporated a huge inflation premium.

Richard Cantillon returned to Paris a multimillionaire, albeit unpopular with his former associates and debtors. Soon he married Mary Anne, daughter of the late Count Daniel O’Mahony, an Irish general. His mother-in-law, Charlotte Bulkeley, was the sister-in-law of James Fitzjames, the duke of Berwick, marshal of France and the natural son of the English King James II; he was, therefore, the Stuart pretender, James III. Cantillon thus married into an Irish military family closely connected with the Stuarts and with the French court.

At some time during the early 1730s, probably around 1730, this successful banker and speculator wrote his great work, in French, the Essai sur la nature du commerce en général. In the fashion of the day, the result of the censorship of that era, this treatise was not published, but circulated widely in manuscript, in literary and intellectual circles, until it was finally published two decades later, in 1755.

Richard Cantillon’s exit from this life was as mysterious and adventurous as his overall career. In May 1734, while living in London, in one of his many houses in the leading cities of Europe, Cantillon died in a fire that burned his house to the ground. It was subsequently found that he was murdered inside the house, the fire being presumably set to cover the murder. Three of his servants were tried for his murder and found not guilty, while his French cook, who had been dismissed three weeks earlier, fled overseas with a considerable amount of valuables. The runaway cook was never found. Earl Egmont, whose brother lived next door to Cantillon, wrote in his diary that Cantillon “was a debauched man, and his servants of bad reputation.” And so died, under highly mysterious circumstances, the only leading economist in history who lost his life as a victim of murder.4


Richard Cantillon’s Essai has been justly called by W. Stanley Jevons “the first treatise on economics,” and the historian of economic thought Charles Gide referred to it as the first systematic treatment of political economy. The best overall assessment is that of F.A. Hayek, the Austrian economist who has done important work in the history of thought: “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.”5

The Scholastics had written general treatises on almost all of human knowledge, in which discussions of economics or the market played a subordinate part; and in the mercantilist era the mercantilists and their critics delivered at best intelligent aperçus on particular economic topics — usually economic policy. But Richard Cantillon was the first theorist to demarcate an independent area of investigation — economics — and to write a general treatise on all its aspects.

One reason that Cantillon was the “first of the moderns” is that he emancipated economic analysis from its previous intertwining with ethical and political concerns. The mercantilists, dominant in economic thought for the preceding century or two, were special pleaders whose tidbits of analysis were pressed into the service of political ends, either in subsidizing particular interests or in building up the power of the state. The medieval and Renaissance Scholastics, while incomparably more thoughtful and systematic, had imbedded their economic analysis in a moral and theological framework. 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. Separating out economic analysis from ethics, politics, or even concrete economic data did not mean that these matters were unimportant or should never be brought back in. For it was impossible to decide the ethics of economic life, or what government should or should not do, without finding out how the market worked, or what the effect of interventions might be. Cantillon presumably, at least dimly, saw the need for this at least temporary emancipation of economic analysis.

“Richard Cantillon understood the grave inner contradiction of mercantilism.”

Furthermore, Cantillon was one of the first to use such unique tools of economic abstraction as what Ludwig von Mises would later identify as the indispensable method of economic reasoning: the Gedankenexperiment (or thought-experiment). Human life is not a laboratory, where all variables can be kept fixed by the experimenter, who can then vary one in order to determine its effects. In human life, all factors, including human action, are variable, and nothing remains constant. But the theorist can analyze cause-and-effect relations by substituting mental abstractions for laboratory experiment. He can hold variables fixed mentally (the method of assuming “all other things equal”) and then reason out the effects of allowing one variable to change.

By starting with simple “models” and introducing successive complications as the simpler ones are analyzed, the economist can at last discover the nature and operations of the market economy in the real world. Thus the economist can validly conclude from his analysis that, “all other things equal (ceteris paribus), an increase in demand will raise price.

In the 1690s, a leader of the emergent classical-liberal opposition to the statism and mercantilism of Louis XIV, the provincial judge the sieur de Boisguilbert, had introduced into economics the method of abstraction and successive approximations, beginning with the simplest model and proceeding in increasing complexity. In illustrating the nature and advantages of specialization and trade, Boisguilbert had begun with the simplest hypothetical exchange — two workers, one producing wool, the other wheat — and then extended his analysis to a small town, and finally to the entire world.

Richard Cantillon greatly developed this systematic method of abstractions and successive approximations. He liberally used the ceteris paribus method. Through this analytic method he uncovered “natural” cause-and-effect relations in the market economy. The France of Cantillon’s day was a country of great landed feudal estates, the result of the conquests of previous centuries. And so Cantillon brilliantly began the economic analysis in his Essai with the assumption that the whole world consists of one giant estate.

In that admittedly “unrealistic” but illuminating construct, all production is dependent on the wishes, the desires, of the monopoly owner, who simply tells everyone what to do. Put another way, production depends on demand, except that here there is in effect one demander, the monopoly landowner.

Cantillon then makes one simple realistic change in his model. The landowner has farmed out the land to various producers of all kinds. But as soon as that happens, the economy cannot continue with one man giving orders. For its continued operation, the individual producers must exchange their products, and a free market economy comes into being, with its attendant competition, trade, and price system. Furthermore, money arises out of this exchange as a commodity serving as a much-needed medium of exchange and “measure” of values.

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 labor 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, that 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 Labor which enter into its Production,” he concedes immediately that subjective valuation by consumers rather than “intrinsic value” determines price.6

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 woolen 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 labor 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 laborers 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 neoclassicists: 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.

Uncertainty and the Entrepreneur

One of Cantillon’s remarkable contributions to economic thought is that he was the first to stress and analyze the entrepreneur.7   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 certainty. The real-world marketplace is permeated by uncertainty, and it is the function of the businessman, the “undertaker,” the entrepreneur, to meet and bear that uncertainty by investing, paying expenses, and then hoping for a profitable return.

Profits, then, are a reward for successful forecasting, for successful uncertainty bearing, in the process of production. The crucial Smithian-Ricardian and Walrasian (classical and neoclassical) assumption that the economy is perpetually in a state of long-run equilibrium fatally rules out the real world of uncertainty. Instead, it focuses on a Never Never Land of no change, and hence of perfect certainty and perfect knowledge of present and future.

Thus Cantillon divides producers in the market economy into two classes: “hired people” who receive fixed wages, or fixed land rents, and entrepreneurs with nonfixed, uncertain returns. The farmer–entrepreneur bears the risk of fixed costs of production and of uncertain selling prices, while the merchant or manufacturer pays similar fixed costs and relies on an uncertain return. Except for those who only sell “their own labour,” business entrepreneurs must lay out monies that, after they have done so, are “fixed” or given from their point of view. Since sales and selling prices are uncertain and not fixed, their business income becomes an uncertain residual.

Cantillon also sees that the pervasive uncertainty borne by the entrepreneurs is partly the consequence of a decentralized market. In a world of one monopoly owner, the owner himself decides upon prices and production, and there is little entrepreneurial uncertainty. But in the real world, the decentralized entrepreneurs face a great deal of uncertainty and must bear its risks. For Cantillon, competition and entrepreneurship go hand in hand.

As in the case of Frank Knight and the modern Austrians, Cantillon’s theory of entrepreneurship focuses on the entrepreneur’s function, his role as uncertainty-bearer in the market, rather than, as in the case of Joseph Schumpeter, on facets of his personality.

Cantillon’s concept also anticipates Mises and the modern Austrians in another respect: his entrepreneur performs not a disruptive (as in Schumpeter) but an equilibrating function — that is, by successfully forecasting and investing resources in the future, the entrepreneur helps adjust and balance supply and demand in the various markets.

Professor Tarascio points out that Cantillon’s pioneering insight into the pervasive uncertainty of the market was largely forgotten and before long dropped out of economic thought until independently resurrected in the 20th century by Knight and by such modern Austrians as Ludwig von Mises and F.A. Hayek. But, as Professor O’Mahony wryly comments, “To acknowledge his [Cantillon’s] recognition of uncertainty when we look at him as Professor Tarascio does from a current perspective is thus more of a reflection on many modern economists whose capacity to ignore uncertainty is nothing short of bizarre than a tribute to Cantillon’s prescience.”

Bizarre it may well be, but there is a method to the madness. For, as Professor O’Mahony himself understands full well, modern economics is a set of formal models and equations purporting to fully determine human behavior, at least in the economic realm. And there is no way that uncertainty can be compressed into determinate mathematical models. As O’Mahony puts it, one might “ask if entrepreneurial activity can in the nature of things be made the subject of formal representations or models at all. If they could, would there be any room for uncertainty, in the true sense of the term, and, therefore, any room for entrepreneurship itself?” Economic theory, in short, must choose between formally elegant but false and distorting mathematical models and the “literary” analysis of real human life itself.

Population Theory

Richard Cantillon’s theory of wages is dependent on population in a way that was copied almost word for word by Adam Smith in the Wealth of Nations, which in turn inspired Malthus’s famous antipopulationist hysteria. Cantillon’s long-run wage theory depends on the supply of labor, which in turn depends on levels and growth of population. In contrast to the later Malthus, however, Cantillon engaged in a sophisticated analysis of the determinants of population growth. Natural resources, cultural factors, and the state of technology he diagnosed as particularly important.

He saw prophetically that the colonization of North America would not be a simple displacement of one people by another, but that new agricultural technology would support a far larger population per acre of land. Hence the extent to which existing resources, land and labor, can be utilized depends on the existing state of technology. Thus precolonial North America was not “overpopulated” by Indians, as some had believed; instead, the Indian population level had adjusted to the given resources and technology available. In short, Cantillon foreshadowed the modern theory of “optimum” population, in which the size of population tends to adjust to the most productive level given the resources and technology available.

“An increased supply of money, therefore, can either lower or raise interest rates temporarily, depending on who receives the new money.”

While Cantillon described a pre-Malthusian alleged tendency of human beings to multiply like “rats in a barn,” without limit, he also recognized that religious and cultural values can modify such tendencies. An increase in the demand for agricultural products that are land-intensive would tend to reduce the demand for agricultural labor and eventually cause a fall in the supply of such labor and hence of the population as a whole. (Cantillon, it must be remembered, was writing in an age when the overwhelming bulk of the population was engaged in agriculture.) An increase in the demand for labor-intensive farm products, on the other hand, would bring about an increase in the demand for labor and hence of the population. Living, once again, in a country and an era of large feudal landed estates, Cantillon observed that it was the tastes of the proprietary classes that determined the consumer tastes and values of society, and hence the demand for products.

It should be noted that, in an unusually sophisticated way, Cantillon pointed out that it was outside the scope of economic analysis to decide whether it is better to have a large population of poorer people or a smaller population of people who enjoy a higher standard of living; that must be for the values of the citizenry to decide.

Professor Tarascio points out that Cantillon’s population analysis was far more subtle and modern than that of Smith, Ricardo, or Malthus. Rather than worry about a future unchecked population explosion, Cantillon’s theoretical framework accounted for the current cultural change to smaller families in industrialized countries, as well as the likelihood that population will adjust itself downward to any future depletion of resources. Cantillon pointed out, for example, that as ancient civilizations declined, their population size declined along with them. The number of inhabitants of the Roman state in Italy, for example, declined from 25 million to about 6 million over a period of 17 centuries.

Spatial Economics

Richard Cantillon was also the founder of spatial economies, of the analysis of economic activity in relation to geographic space. In a sense, of course, mercantilists, by advocating a favorable balance of geographical trade, analyzed (even if badly) economic activities to the extent that they crossed national borders. Spatial analysis, as Professor Hebert has pointed out, deals with distance (transportation cost, and its relation to prices as well as to the location of economic activities) and area (the geographical development and boundaries of markets). Cantillon not only developed location theory but also integrated it into his general microeconomic analysis. In particular, he saw that the prices of produce, even when money and monetary prices were in equilibrium, would always be higher in the cities than in their place of production by an amount needed to cover the costs and risks of transport.

In consequence, products that are bulky and/or perishable would be too costly or impossible to transport to the cities, and hence would be far cheaper at their places of production. Such products, then, would generally be grown in border areas around the cities, where the transport costs to the urban markets are not prohibitive. In manufacturing, furthermore, Cantillon saw that in cases where plants have to use bulky, low value-per-unit-weight raw materials, they would tend to locate near the output of such materials. For in that case it would be less costly to transport the less bulky, more valuable finished products to urban markets than to ship the raw materials.

On the location of areas of urban markets, Cantillon was highly suggestive, pointing out that it is far less costly for buyers and sellers to gather at one spot than to travel around the periphery seeking each other out and finding out the various prices that buyers were willing to pay or sellers were willing to accept. In modern terms, Cantillon might say that central markets develop naturally because they enormously lower the transaction, transport, information, and other costs of trade.

While Cantillon, therefore, saw how markets and the location of economic activity were able to regulate themselves harmoniously, he was not a consistent free-trader internally just as he was not in the foreign-trade area. Internally, he held inconsistently that manufacturers needed “much encouragement and capital” to find and invest in the optimum locations.

Money and Process Analysis

A highlight of Cantillon’s theory of money is his treatment of the value of money as a special case of the value of market commodities in general. As in the case of any product, the alleged “intrinsic value” of gold is the cost of its production. The value of gold and silver, like other commodities, is set by the values and hence the demands of users in the market — by the “consent of mankind.” As in the case of other commodities, too, Cantillon has no cost-of-production theory of the value of gold and silver; he simply holds, as elsewhere, that these products can only be produced if costs can be covered by the value of the product.

The process of aligning costs and values in gold, however, takes a relatively long time since its annual output is a small proportion of the total stock in existence. If the nominal value of gold falls below its cost of production, it will cease being mined; and if costs fall sharply, production of gold will be stepped up, thus tending to align costs and normal values. Cantillon recognized that government paper and bank money virtually have no costs of production, and therefore no “intrinsic value” in his terminology, but he pointed out that market forces keep the value of such fiduciary money at par with the value of the gold or silver in which that paper can be redeemed. As a consequence, an increase in the supply “of fictitious or imaginary money has the same effect as increase in the circulation of real money.”

But, Cantillon noted, let confidence in the money be damaged, and monetary disorder ensues and the fictitious money collapses. He pointed out, too, that government is particularly subject to the temptation to print fictitious money — a lesson he had undoubtedly learned from or at least seen embodied in the John Law experiment. Cantillon also provided a sound analysis of how the market determines the ratio of the values of gold and silver.

One of the superb features of Cantillon’s Essai is that he was the first, in a pre-Austrian analysis, to understand that money enters the economy as a step-by-step process and hence does not simply increase or raise prices in a homogeneous aggregate.8 Hence he criticized John Locke’s naive quantity theory of money — a theory still basically followed by monetarist and neoclassical economists alike — that holds that a change in the total supply of money causes only a uniform proportionate change in all prices. In short, an increased money supply is not supposed to cause changes in the relative prices of the various goods.

Thus Cantillon asks “in what way and in what proportion the increase of money raises prices?” and answers in an excellent process analysis,

in general an increase of actual money causes in a State a corresponding increase of consumption which gradually brings about increased prices. If the increase of actual money comes from Mines of gold and silver in the State the Owner of these Mines, the Adventurers, the Smelters, the Refiners, and all the other workers will increase their expenses in proportion to their gains. They will consume … more … commodities. They will consequently give employment to several Mechanicks who had not so much to do before and who for the same reason will increase their expenses. All this increase of expense in Meat, Wine, Wool, etc. diminishes the share of the other inhabitants of the State who do not participate at first in the wealth of the Mines in question. The alteration of the Market, or the demand for Meat, Wine, Wool, etc., being more intense than usual, will not fail to raise their prices. These high prices will determine the Farmers to employ more land to produce them in another year; these same Farmers will profit by this rise of prices and will increase the expenditure of their Families like the others. Those then who will suffer from this dearness and increased consumption will be first of all the Landowners, during the term of their Leases, then their Domestic Servants and all the Workmen or fixed Wage-earners who support the families on their wages. All these must diminish their expenditure in proportion to the new consumption … it is thus, approximately, that a considerable increase of Money from the Mines increases consumption.

In short, the early receivers of the new money will increase spending according to their preferences, raising prices in these goods at the expense of a lower standard of living among the late receivers of the new money or among those on fixed incomes who don’t receive the new money at all. Furthermore, relative prices will be changed in the course of the general price rise, because the increased spending is “directed more or less to certain kinds of products or merchandise according to the idea of those who acquire the money, [and] market prices will rise more for certain things than for others.” Moreover, the overall price rise will not necessarily be proportionate to the increase in the supply of money. Specifically, because those who receive new money will scarcely do so in the same proportion as their previous cash balances, their demands, and hence prices, will not all rise to the same degree. Thus, “in England the price of Meat might be tripled while the price of Corn rises no more than a fourth.” Cantillon summed up his insight splendidly, while hinting at the important truth that economic laws are qualitative but not quantitative:

An increase of money circulating in a State always causes there an increase of consumption and a higher standard of expenses. But the dearness caused by this money does not affect equally all the kinds of products and merchandise proportionably to the quantity of money, unless what is added continues in the same circulation as the money before, that is to say unless those who offered in the Market one ounce of silver be the same and only ones who now offer two ounces when the amount of money in circulation is doubled in quantity, and that is hardly ever the case. I conceive that when a large surplus of money is brought into a State the new money gives a new turn to consumption and even a new speed to circulation. But it is not possible to say exactly to what extent.9

Not only that, but, as Professor Hebert has pointed out, Cantillon also provided a remarkable proto-Austrian analysis of the different effects of the money going into consumption or investment. If the new funds are spent on consumer goods, then goods will be purchased “according to the inclination of those who acquire the money,” so that the prices of those goods will be driven up and relative prices necessarily changed. If, by contrast, the increased money comes first into the hands of lenders, they will increase the supply of credit and temporarily lower the rate of interest, thereby increasing investment.

Repudiating the common superficial view, brought back to economics in the 20th century by John Maynard Keynes, that interest is purely a monetary phenomenon, Cantillon held that the rate of interest is determined by the number and interactions of lenders and borrowers, just as the prices of particular goods are determined by the interaction of buyers and sellers. Thus, Cantillon pointed out that

If the abundance of money in a State comes into the hands of money-lenders it will doubtless bring down the current rate of interest by increasing the number of money-lenders: but if it comes into the hands of those who spend it will have quite the opposite effect and will raise the rate of interest by increasing the number of entrepreneurs who will find activity by this increased spending and who will need to borrow in order to extend their enterprise to every class of customers.

An increased supply of money, therefore, can either lower or raise interest rates temporarily, depending on who receives the new money — lenders or people who will be inspired by their newfound wealth to borrow for new enterprises. In his analysis of expanding credit lowering the rate of interest, furthermore, Cantillon provides the first hints of the later Austrian theory of the business cycle.

In addition, Cantillon presented the first sophisticated analysis of how the demand for money — or rather its inverse, the speed or velocity of circulation — affects the impact of money and hence the movement of prices. As he put it, “an acceleration or greater rapidity in circulation of money in exchange, is equivalent to an increase of actual money up to a point.” One of the reasons why prices do not change in exact proportion to a change in the quantity of money is alterations in velocity: “A river which runs and winds about in its bed will not flow with double the speed when the amount of water is doubled.” Cantillon also saw that the demand for cash balances will depend on the frequency of payments made in the society. As Monroe sums up Cantillon’s position, “the longer the interval between payments, the larger are the sums which have to accumulate in the payers’ hands, and the more money is required in the country.”10

If people save large sums, furthermore, they may have to “keep money locked up for considerable periods.” On the other hand, the development of more efficient clearing systems for debts, as well as of paper money, will economize on cash: “The rapidity of circulation is increased by the practice of offsetting accounts between merchants, and by the use of bankers’ and goldsmiths’ notes, for these men do not keep an equivalent amount of money on hand.” Cantillon summed up his analysis of the interaction of quantity and velocity, “According to the principles we have established the quantity of money circulating in exchange fixes and determines the price of everything in a State taking into account the rapidity or sluggishness of circulation.”

Cantillon also provided a masterful discussion of the relations between gold and silver, and advocated freely fluctuating exchange rates between gold and silver, attacking any attempts, certainly any long-lived attempts, to fix the exchange rate between them. For such a rate is soon bound to vary from the market rate. Thus Cantillon saw the problem in trying to maintain a bimetallic standard with fixed parities between two precious metals.

All in all we can understand Hayek’s enthusiasm when he concludes that Cantillon’s monetary theory “constitutes, without doubt, the supreme achievement of a man who was the greatest pre-classical figure in at least this field and whom the classical writers themselves in many instances not only failed to surpass but even failed to equal.”11

International Monetary Relations

One of the most notable features — and certainly the one drawing the most attention from historians — of Cantillon’s extensive monetary theory was his pioneering analysis of the tendency towards international monetary equilibrium, or the specie-flow-price mechanism that has been generally attributed to the later writings of David Hume.

Cantillon applied his “microanalysis” of changes of the money supply within a country to changes in the distribution of money between countries. For over two centuries, mercantilist writers and statesmen in Europe had advocated an increased supply of specie in a country as a means of building up state power, and they were increasingly clear that, short of having gold or silver mines, a nation could only increase its stock of money by having a favorable balance of trade.

It was clear to the mercantilists that this was not a policy every nation could successfully pursue, for the “favorable” balances of trade of some nations would necessarily have to be offset by the “unfavorable” balances of others. In this disequilibrium situation, it was every nation for itself, as each attempted to benefit at the expense of other nations by restrictionist and warlike policies. But there was a further problem in the background. Because most writers were at least roughly familiar with the “quantity theory,” or supply-demand, analysis of the value of money, an inner contradiction loomed. For if nation A managed to acquire a favorable balance of trade and to accumulate specie, the increase of specie would raise prices in nation A, make the country’s products uncompetitive in the world markets, and bring the favorable balance to an end.

“No one was more lucid about the problem of money and international payments than Cantillon.”

No one was more lucid about the problem of money and international payments than Cantillon. He pointed out that specie can either be acquired within a country by mining ore, or through subsidies, warfare, “invisible” payments, borrowing, or a favorable balance of trade with other countries. But then, in the Cantillon process analysis, either the mine owners or the exporters would spend or lend the money. Part of the expenditure of the new money would surely be spent abroad, and furthermore the increased stock of money would raise prices at home, making domestic goods less competitive. Exports would fall and imports of cheaper foreign products would increase, and gold would flow out of the country, reversing the favorable balance of trade.

In this way, Cantillon worked out an international monetary theory integrated with his domestic analysis, and was one of the first to work out a theory of international monetary equilibrium. For the world market managed to frustrate, at least in the long run, governmental attempts to intervene and secure favorable balances of trade. It should be noted, further, that Cantillon’s analysis contained the basis of both major parts of the equilibrating specie-flow-price mechanism: the expenditure of new monetary cash balances increasing imports; and the increase of domestic prices caused by a higher money supply, the price effect lowering exports and adding to imports.

Richard Cantillon understood the grave inner contradiction of mercantilism: increased specie raising prices and thereby destroying the favorable balance of payments that brought the specie. His unsatisfactory way out was to advise the king to hoard much of the increased stock so as not to drive up prices. This was unsatisfactory because money is meant to be spent eventually, and once spent the dreaded price increase would willy-nilly take place.

Professor Salerno, however, has introduced a cautionary note in the encomiums to Cantillon, pointing out that he has been called only a “semiequilibrium” theorist because he did not portray a satisfactory picture of what the equilibrium state would be like, and he did not think of the world economy as tending firmly towards equilibrium. As a result, Cantillon did not present a theory of the international distribution of gold and silver in equilibrium.12 He thought of the economy instead as engaging in endless cycles of disequilibrium rather than as tending toward equilibrium.

The Self-Regulation of the Market

There is no point wasting time in fruitless speculation on whether or not Richard Cantillon was a “mercantilist.” Writers of the 18th century did not group themselves into such categories. While he inconsistently suggested, in accordance with state-building notions of the age, that the king should amass treasure from a favorable balance of trade, the entire thrust of Cantillon’s work was in a free-trade, laissez-faire direction. For it was clear that mercantilist measures would ultimately be self-defeating.

More important, Cantillon was the first to show in detail that all parts of the market economy fit together in a “natural,” self-regulative, equilibrating pattern, with existing supply and demand determining prices and wages, and ultimately the pattern of production. Consumer values, furthermore, determined demand, with population adjusting to cultural and economic factors. The equilibrators of the economy were the entrepreneurs, who adjust to and cope with the all-pervasive uncertainty of the market. And if the market economy, despite the “chaos” it might seem to superficial observers, is really harmoniously self-regulating, then government intervention as such is either counterproductive or unnecessary.

Particularly instructive is Cantillon’s attitude towards usury laws, that vexed question that had at last brought unwarranted discredit on the entire economic analysis of the Catholic Scholastics. This shrewd merchant and banker saw that particular interest rates on the market are proportionate to the risks of default faced by the creditor. High interest is the result of high risk, not of exploitation or oppression. As Cantillon wrote, “All the Merchants in a State are in the habit of lending merchandise or produce for a time to Retailers, and proportion the rate of their profit or interest to that of their risk.” High rates of interest bring about only a small profit, because of the high proportion of default on risky loans. Cantillon observed too that the later Catholic Scholastics had eventually if reluctantly agreed to allow high rates of interest for risky loans. Furthermore, there should be no imposed maximum on interest, because only the lenders and borrowers can determine their own fears and needs: “for they would be hard put to find any certain limit since the business depends in reality on the fears of the Lenders and the needs of the Borrowers.”

Finally, Cantillon saw that usury laws could only restrict credit and thereby drive up interest rates even further on the inevitable black markets. Hence, usury laws would not lower interest rates but rather raise them: “because the Contracting parties, obedient to the force of competition or the current price settled by the proportion of Lender or Borrowers, will make secret bargains, and this legal constraint will only embarrass trade and raise the rate of interest instead of settling it.”


Richard Cantillon’s pioneering Essai was widely read and highly influential throughout the 18th century. It was widely read, as was the custom of the day, in “underground” manuscript form, by literary, scientific, and intellectual people interested in the advance of thought and in the practical problems of the day. The wide reliance on such manuscripts resulted from the severe French censorship of that period.

The Essai, then, was widely read from its writing in the early 1730s, and still more so after its publication in 1755. It was read eagerly and thoroughly by the first school of economists, the Physiocrats, and by their great associate, or fellow traveler, A.R.J. Turgot. In that cosmopolitan 18th-century society where British and French intellectuals intermingled, the Essai was certainly read and echoed by the eminent Scottish philosopher David Hume. And it has the honor of being one of the very few books cited by Hume’s close friend Adam Smith — a man whose hyperdeveloped sense of his own originality prevented him from citing or recognizing many predecessors.

Cantillon was thus highly influential among Continental and British economists until the publication of the Wealth of Nations in 1776. After the publication of that work, however, the knowledge and influence of Cantillon fell prey to the general post-Smithian custom of ignoring any and every economist preceding Adam Smith. The general 19th-century habit of obliterating knowledge of economists before Adam Smith committed grave injustice against earlier economists and gave rise to the erroneous — and still widely held — illusion that economic science sprang full-blown out of the head of one great man, much as Athena was supposed to have sprung, fully grown and fully armed, from the brow of Zeus.

But the most malignant aspect of this Smith worship is that the lost economists were in many respects far sounder than Adam Smith, and in forgetting them, much of sound economics was lost for at least a century. In many ways, as we shall see, Adam Smith deflected economics, the economics of the Continental tradition beginning with the medieval and later Scholastics and continuing through French and Italian writers of the 18th century, from a correct path, and on to a very different and fallacious one. Smithian “classical economics,” as we have come to call it, was mired in aggregative analysis, cost-of-production theory of value, static equilibrium states, artificial division into “micro-” and “macroeconomics,” and an entire baggage of holistic and static analysis.

The unfortunate erasure of pre-Smithian economics enabled Smithian classical economics to take hold and dominate economic thought for a hundred years. The “marginal revolution” of the 1870s, especially the Austrian theory beginning in that decade, in many ways returned economics to the proper individualistic, microeconomic, and subjective-value pre-Smithian path on the European continent. It is no accident that Cantillon himself was rediscovered in 1881 by the quasi-”Austrian” English marginal revolutionist W. Stanley Jevons, who was commendably eager to rediscover lost economists buried by the dominant Smith-Ricardo orthodoxy.

But economics has unfortunately far from rid itself of the Smith-Ricardo baggage. The current revival of Austrian theory, and the increasing search for a way out of contemporary orthodoxy by many mainstream economists, is an attempt to complete the promise of the badly named “marginal revolution” (really an individualist-subjectivist revolution), and to complete the casting out of the classical British paradigm.

This article is excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith (1995). An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.

  • 1Considerable confusion has been sown in Cantillon studies by the fact that Richard’s cousin, father, great-grandfather, and great-great-grandfather were all named Richard
  • 2To add to the genealogical confusion, Richard’s mother, Bridget, was also a Cantillon, from County Limerick. Richard’s father and his bride Bridget were distant cousins in the Cantillon family. Richard’s grandfather and Bridget’s great-grandfather were both sons of Sir Richard Cantillon I.
  • 3At the height of the bubble, the duchess of Orleans wrote, in wonder, “It is inconceivable what wealth there is in France now. Everybody speaks in millions. I don’t understand it at all, but I see clearly that the god Mammon reigns an absolute monarch in Paris.” Quoted in John Carswell, The Smith Sea Bubble (Stanford: Stanford University Press, 1960), p. 101.
  • 4The Egmont quote is in Antoin E. Murphy, “Richard Cantillon–Banker and Economist,” Journal of Libertarian Studies 7 (Autumn 1985), p. 185.
  • 5F.A. von Hayek, “Introduction to a German translation of Cantillon’s Essai“ (Jena: Gustav Fischer, 1931); from translation of Hayek’s Introduction by Micháel “’Súilleábháin, Journal of Libertarian Studies, 7 (Autumn 1985), p. 227.
  • 6In an Aristotelian flourish, Cantillon declared that land “is the source or matter from which Wealth is extracted,” while “human labor is the form which produces it,” while wealth, however, is not intrinsic in the goods but is “in itself no other than the sustenance, the conveniences, and the comforts of life.”
  • 7In the Essai, a work of only 165 pages, Cantillon makes no less than 110 separate references to the entrepreneur.
  • 8Vickers aptly writes that “In Cantillon, as opposed to other writers of the first half of the [18th] century, the move in theory and in explanation toward a dynamic as opposed to a definitional and static description of monetary affairs took on a microscopic, microeconomic form. His economic analysis always started from individual economic magnitude and quantities.” And again: “Market prices, money prices, and levels of activity and employment were not to be regarded as homogeneous variables. The Essai is interested in the structure of market prices, the structure of market supply conditions, and the structure of activity in the economy.” Douglas Vickers, Studies in the Theory of Money 1690–1776 (Philadelphia: Chilton Co., 1959), pp. 187–8.
  • 9See the citations and discussion in Chi-Yuen Wu, An Outline of International Price Theories (London: George Routledge & Sons, 1939), pp. 66–7.
  • 10Arthur Eli Monroe, Monetary Theory before Adam Smith (1923, repr. Gloucester, Mass.: Peter Smith, 1965), pp. 255–6.
  • 11Hayek, op. cit., note 5, p. 226.
  • 12Salerno points out that at least in this respect Cantillon’s treatment was inferior to the neglected pamphlet by an unknown English author, Isaac Gervaise, The System or Theory of the Trade of the World (1720). Gervaise worked out the process of equilibration and, believing as he did in a firm trend toward an equilibrium position, he was the first to point out that in such equilibrium the precious metals would be distributed in accordance with the international demand for them. That demand would be embodied in the productive activities of each particular nation. Gervaise’s pamphlet remained unread until resurrected by Professor Jacob Viner in the mid-20th century. Isaac Gervaise, The System or Theory of the Trade of the World, ed. J.M. Letiche (Baltimore: Johns Hopkins University Press, 1954). Gervaise, however, was inferior to Cantillon, presenting an aggregative, macroeconomic approach instead of the latter’s pioneering microeconomic process analysis.
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