The Great Austrian Economists

2 RICHARD CANTILLON1:
THE ORIGIN OF ECONOMIC THEORY MARK THORNTON

MANY CRUCIAL AUSTRIAN insights have been found in the economics of Irish banker Richard Cantillon (16802–1734) and his lone surviving publication, Essai sur la Nature du Commerce en Général.3 It seems clear that Cantillon was an important influence on the development of Austrian economics, and that he can be considered a member of the Austrian School. Carl Menger had a copy of the Essai in his library prior to the publication of The Principles of Economics.

Indeed, the origins of economic theory itself can be traced to Cantillon. William Stanley Jevons, one of the cofounders of the marginalist revolution, and the economist who is generally credited with rediscovering Cantillon, called the Essai “a systematic and connected treatise, going over in a concise manner nearly the whole field of economics. . . . It is thus the first treatise on economics.” He dubbed the work the “Cradle of Political Economy.”4 Joseph Schumpeter, the great historian of economic thought and student of Eugen von Böhm-Bawerk, described the Essai as “the first systematic penetration of the field of economics.”5 In his treatise on the history of economic thought, Murray N. Rothbard named Cantillon “the founding father of modern economics.”6

The key episode in Cantillon’s life was his involvement with John Law and his monetary schemes. Cantillon was opposed to the inflationist theories of Law, but he understood how the schemes worked and what their fatal flaws were. Thus, he was able to create a large fortune from the Mississippi System and South Sea Bubble. In the aftermath of these financial debacles, Cantillon wrote his famous Essai, breaking out of the muddleheaded Mercantilist thinking of his day to make a pathbreaking contribution to our knowledge of method, theory, and policy. Shortly after writing the Essai, Cantillon was murdered under mysterious conditions, and his Essai remained unpublished for more than twenty years.

The Essai is considered influential for the development of both the Physiocrats and the classical economists and Cantillon was one of the very few people mentioned by Adam Smith in the Wealth of Nations. Unfortunately, Smith misrepresented Cantillon’s work. Both Cantillon and his Essai were largely forgotten during the period of classical economics. The true significance of the Essai was gleaned by the French economists A.R.J. Turgot and J.B. Say, who were important precursors to the modern Austrian School.7 Since his rediscovery during the marginalist revolution, a substantial body of literature has grown up in appreciation of Cantillon and a number of mysteries surrounding him and the Essai have been solved. Most importantly, the Scottish philosopher and tax collector Adam Smith should no longer be considered the father of economics. That title now belongs to the Irish entrepreneur and Austrian economist, Richard Cantillon.

CANTILLON AND THE ESSAI

The mystery of Richard Cantillon begins with his birth, which is now placed during the 1680s in southwest Ireland.8 He was born into a family of Catholic landlords who had fought for the Stuart cause, and thus were dispossessed of their lands by Cromwell. His origins in the landed gentry shines through in the Essai where the landlord, the truly independent person in the economy, plays the crucial decisionmaking role in both production and consumption.

The Essai follows a progressive arrangement of ideas appropriate for the elucidation of economic theory (like Menger’s Principles), and also shows many links to Cantillon’s own life. Part one is an analysis of the real economy of the isolated state loosely based on the pre-capitalist economy of his family’s heritage. Here the prince in the capital city rules over the landlords of the cities, market towns, and villages. Landlords collect rents from farmers who in turn hire labor to work the fields. Cantillon acknowledges that the large estates were taken by force, reflecting the fact that his ancestors took ownership of the land from the Irish and that these estates were in turn taken from them by force.9

The second half of part one is where Cantillon becomes the first economist to develop the key Austrian insights concerning the entrepreneur and the role entrepreneurship plays in the economy.10 The entrepreneur is the bearer of risks inflicted by the changes in market demand. This is a direct reflection of Cantillon’s own early career as an assistant to British Paymaster James Brydges during the War of Spanish Succession. There he learned and excelled in the role of accountant and contract negotiator, and learned the basics of banking and international finance. This experience also exposed Cantillon to gross government inefficiency and corruption. His travels through Europe during the War may have sparked his interest and insights into his subjectivist theory that population was based on the decisions of the landlord concerning how resources are used and on differences in cultural choice.

In part two of the Essai, Cantillon laid out his pathbreaking Austrian analysis of the monetary economy, exposing the great error of mercantilism (that money is wealth). This parallels Cantillon’s second career as a Parisian banker that began in the service of his elder cousin’s bank.11 After the War of Spanish Succession, there was a great deal of economic instability, and this made the business of banking particularly dangerous. His cousin eventually had to sign over his bank to Cantillon and declare bankruptcy in 1716. In a lost manuscript, “Observations on the Trade and Luxury of Both Nations,” Cantillon blamed conditions on the opulence and heavy war debts of Britain and France.12

Two historically important people were influential at this stage in Cantillon’s life. Matthew Decker, a director of the East India Company and a prominent banker, was important because he helped Cantillon get established in banking. Another important influence was Lord Bolingbroke, a leader of the Jacobite cause who fled to France and became Cantillon’s friend through the banking business. He introduced Cantillon to many of the leading thinkers of the day, including Montesquieu and Voltaire. Bolingbroke, as a leading opponent of the new financial system, was the important intellectual influence, having solidified Cantillon’s “innate conservatism” on issues like monetary policy and the national debt.13

In part three of the Essai, Cantillon addresses the issues of foreign trade, exchange rates, and the role of banks. Here, Cantillon makes some of his most important contributions to economic understanding. This section is a critique of mercantilist policies and the financial innovations of John Law during the Mississippi System and South Sea Bubble. This is a reflection of the third period in Cantillon’s career, during which he made a fortune by understanding Law’s system and its inevitable consequences.

From 1721 to his death in 1734, Cantillon was embroiled in legal disputes. He was involved with several lawsuits involving his banking business and the South Sea Bubble. He was also accused of attempted murder and was briefly imprisoned twice. The Essai was written at this time and there is good reason to suspect that Cantillon developed economic theory as part of his legal defense against charges of usury.14

THE ORIGINS OF ECONOMIC THEORY

Cantillon was involved in the crucial events of his day, and he knew many great intellectuals of his age, including several important mercantilist writers. He did not completely escape the mercantile mindset and vernacular, but it is truly amazing how cleanly he broke with the past and struck out on his own to produce the first coherent and comprehensive work of economic theory.15

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. Throughout the Essai, Cantillon is concerned with providing a scientific explanation for economic phenomena. His investigations are concerned with establishing cause and effect. Cantillon often expressed the causal relation with the term “natural,” which he used thirty times in the Essai.16

Another hallmark of his Austrian analysis is his intention to limit himself to the positive economics of his subject, an attribute that Hayek considered especially remarkable for a writer of his time.17 In several chapters, Cantillon halts his commentary and declines to offer value judgments concerning the subject matter at hand. For example, Cantillon writes that the issue of whether it is better to have a large but poor population or a small, wealthy population is a question outside of his subject.18 He does likewise concerning the motives of a French Minister who debased the currency.19

Cantillon also employs the method of abstraction or imaginary construction to theorize about the economy. He uses the ceteris paribus assumption, for example, when discussing the productivity of labor. “The more labor is expended on it (land), other things being equal, the more it produces.”20 He uses the theoretical tool of the small isolated state as the modern theorist does to eliminate complicating factors such as monetary disturbances and international trade. More importantly, he used this construction or model to deduce the core Austrian point that production depends on demand, in this case the demand of the landowner of the great estate. Furthermore, as the landlord contracts out the production of his lands to farmers, he creates entrepreneurs, and an economy develops with exchange, prices, money, and competition.21

The role of the entrepreneur is one of Cantillon’s great contributions to economic understanding. He speaks of the entrepreneur in the classic sense of the undertaker of great business adventures, but Cantillon also has a theoretical distinction between those who work for a fixed return or wages and those who face uncertain returns, including farmers,22 independent craftsmen, merchants, and manufacturers. These entrepreneurs purchase inputs at a given price to produce and sell later at an uncertain price.23 In the pursuit of profit, the entrepreneur must bear risks as he faces the pervasive uncertainty of the market.24 For example, the farmer has fixed expenses but:

The price of these products will depend partly on the weather, partly on demand; if corn is abundant relative to consumption it will be dirt cheap, if there is scarcity it will be dear. Who can foresee the number of births and deaths of the people in a State in the course of the year? Who can foresee the increase or reduction of expense that may come about in the families? 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.25

The unsuccessful entrepreneur will live poorly or go bankrupt, while the successful entrepreneur will obtain a profit or advantage and cause entry into the market, “and so it is that the Undertakers of all kinds adjust themselves to risks in a State.”26 The entrepreneur brings prices and production into line with demand; in well organized societies, government officials can even fix prices of basic items without too much complaint.27

Cantillon has a sophisticated understanding of the price system containing most of the elements of modern Austrian analysis. Price is determined by demand and relative scarcity. Demand is a subjective concept based on the “humors” and “fancies” of the people. It is the “consent of the people” along with the relative scarcity of a product that determines the market price, where market price is understood to be the price paid to the seller. Likewise, the market value of metals “varies with their plenty or scarcity, according to the demand.”28

Cantillon makes an important distinction between price and market price, and between value and market value, that has served as a source of confusion concerning the meaning of his economics. Market price and market value are the real prices that occur in the market based on forces of supply and demand. Price and value are separate and distinct concepts from market prices. They are related to Cantillon’s term “intrinsic value,” and are used to describe the opportunity cost of resources used to produce the particular good in question, the specific land and labor that were sacrificed to produce the good.29

The term intrinsic value has been a source of confusion. Commentators have often been led to deride his value theory, consider him an objective value theorist, and to misplace him in the history of economic thought. Cantillon recognized the potential for this confusion:

in this Essai I have always used the term Intrinsic Value to signify the amount of Land and Labor which enter into Production, not having found any term more suitable to express my meaning. I mention this only to avoid misunderstanding.30

What is very clear from a close reading of the Essai is that intrinsic value does not refer to the objective properties of the good (such as the purity of a gold bar), or to some long-run equilibrium value, but rather to the resources sacrificed to produce a particular good. As Hayek observed:

What is most significant about Cantillon’s achievement in the field of value and price theory is his down-playing the quest for rules and formulae that might account for the “normal” relationship between the value or price of various goods, and concentrating instead on the forces and mechanisms that are consistently at work in restoring these normal relationships.31

Most importantly, Cantillon was naming and describing a concept for which a term did not already exist in the Western world, for Cantillon knew many different languages.

Cantillon’s conception of cost as the sacrifice of land and labor foregone is far more advanced than the land theory of cost and value advanced by the Physiocrats, or the labor theory of cost and value advanced by the classical economists. But Cantillon had a far richer understanding of cost than a simple measure of the quantity of land and labor that went into production. Cantillon stressed two important concepts throughout the Essai that provide greater depth to his conception of cost. First, Cantillon viewed all resources as heterogeneous. Each piece of land was of a different quality, and each laborer was also of a different quality. Therefore, while intrinsic value was a measure of cost, it was not possible in fact to simply count the number of hours and acres except in an abstract way or in simple illustrations. In fact, after establishing a preliminary land-and-labor theory of value in part one, he notes at the very beginning of part two that for specific goods in the real economy, it is “impossible to fix their respective intrinsic values.”32

The other concept that he stressed was the alternative use of resources. Land could be used to grow corn or to provide hay for horses. Labor could toil on the farm or be trained in a craft. Cantillon clearly saw that when a landlord chose to own more horses, what he was giving up was the production (and sale) of grain, and that if France wished to import fine lace, then she would have to forego a large amount of wine produced from her vineyards. Cantillon understood the concept of opportunity cost, and his Essai was an attempt to construct the concept to explain economic choice.33 The discovery of opportunity cost by this important precursor of the Austrian School truly marks the origin of economic theory.

Cantillon made pathbreaking contributions to the subjective theory of population. As part of his overall model of the economy, population density and distribution are determined by the tastes of the owners of productive resources. The prince and the landowners can greatly affect population by their consumption choices, thus helping to determine how labor-intensive the land will be used. Culture and religion also play a role in population determination, while technology and resource endowments are important determinants of population density.

Cantillon took a scientific approach to population. He recognized that humans might multiply like “mice in a barn if they have unlimited means of subsistence,” or that population might fall substantially over time.34 Cantillon even recognized that international trade would affect the level and distribution of population, as land-poor countries could export manufactured goods to land-rich countries in return for food, fiber, and raw materials, and thus support a larger population than otherwise. Here, Cantillon is often mistakenly labeled a mercantilist, but Cantillon remains a value-free economist on the subject of population size.35 However, he does offer the prince technical advice of a nationalist nature on how to achieve a greater population, which supposedly is good for national defense. For example, he bemoans the export of large amounts of French wine in order to pay the very high market price of a small amount of lace imported from Brussels.36

Despite this, Cantillon’s analysis is far superior to those he influenced, like Malthus and Smith. They were concerned about population because, in their thinking, economic growth would result in a larger population of miserable people living at the subsistence level. According to Professor Tarascio, “Smith and Malthus do not reflect the spirit of Cantillon’s Essai. Hence the message has been lost to subsequent readers of the later authors.”37 Smith and Malthus extended the idea of the subsistence wage to industrial workers, while Cantillon recognized that there would be a tendency towards higher wages for trained workers or for those in risky occupations.38 In fact, Cantillon generally wrote of a maintenance wage that was not a subsistence wage at all, but rather a wage sufficient to maintain the worker in his current job.39 In his model, economic growth led to higher wages and a better standard of living.

Another area in which Cantillon made an important contribution was spatial economics, a subject that permeated much of the Essai. Cantillon explained the economic geography of a state, the center of which was the capital city where the prince and government resided. Cities are regional centers with large markets and population, surrounded by market towns where the produce of the villages and farms are brought for sale. Cantillon explained that villagers bring their output to market in order to get the best price and to reduce transaction costs. He was masterful in using the role of transportation costs to explain why raw materials were more expensive near the cities, why heavy manufacturing was located near the source of raw materials, and why perishables should be produced near population centers. The role of transportation costs is a central issue in his writing on money and banking because the banker (like Cantillon himself) served as an intermediary to reduce the risk and transportation costs of shipping large amounts of money over great distances. Cantillon was the first economist to apply the principles of spatial economics in a general economic treatise. He “made original and lasting contributions to spatial economics . . . in the nature of first principles readily applicable to the fields of location theory and spatial pricing.”40

Cantillon’s successful career in banking played a major role in his monetary economics, which Hayek considered his greatest achievement.41 Cantillon was a hard-money man who understood that the nature of money as a medium of exchange drove the evolution of money to precious metals, and that princes cannot introduce imaginary money or successfully debase money.42 Central to his Austrian-style analysis was his rejection of the aggregate approach of the naive quantity theory of money in favor of a microeconomic-process approach to the study of the money. He showed that the type of change in the money supply and where it entered the economy were crucial to determining what the effects would be. A big gold discovery would raise the prices of goods demanded by gold mine owners and miners. Any large increase in money will give a new turn to consumption, thus changing relative prices, velocity, and the distribution of income.

New money can also affect the interest rate if the money comes into the hands of lenders. Cantillon rejected the Lockean–mercantilist view that the rate of interest was a purely monetary phenomenon. Like Mises, he found that the interest rate was based on the forces of supply and demand in the market for loanable funds, and that if the new money increased supply it would lower the interest rate.43

Cantillon thoroughly describes the forces that cause changes in interest rates, and shows the interest rate to be a normal and important aspect of the economy. He defends the earning of high rates of interest via comparison to earning profits and rents of even higher rates.44 On the basis of his description of interest rates and what causes rates to be high, Cantillon ridicules the notion that government should regulate interest rates with usury laws.45

Cantillon presented a theory of the business cycle very similar to the Austrian theory when he analyzed changes in the money supply. Increased money supply is the boom phase that kicks off the business cycle. His descriptions of this phase of the cycle are what many commentators have used to label Cantillon a mercantilist, because more money is seen as leading to a higher level of economic activity46 However, problems sooner or later arise. The basic problem revolves around price inflation and the collapse of domestic industry. Cantillon’s Austrian lesson is that mercantilist policy is a shortrun expediency that fails in the long run.

Cantillon was the first to describe the workings of the famous specie-flow price mechanism, a crucial component of the Austrian theory of the business cycle, normally attributed to Hume.47 Here he analyzes changes in the domestic money supply brought about by changes in the balance of payments in a similar fashion to changes in the domestic gold supply described above. He suggests ways in which the prince might try to offset the negative effects of monetary inflation or to forestall them, but theoretically the reversal is inevitable, and Cantillon is not confident in the government’s ability to micromanage the adjustment process.48

In discussing the topics of foreign trade, the balance of payments, and banking, Cantillon clearly shows how countries that develop a skilled workforce in manufacturing, participate in foreign trade, and avoid national banks will prosper. However, his commentary also seems mercantilist when he laments the buying of fancy lace from Brussels as “burdensome and unprofitable to France,” and uses this as an example of how foreign trade can be usefully regulated.49

Although he comes across as supporting mercantilism, it is plausible that the basis for the support of such policy lies in theoretical analysis and his empirical observations of the world economy, not in mercantilism. He showed that manufactured goods are produced by skilled workers who earn higher real wages than unskilled farm workers. By exporting high-valued manufactured goods, average wage rates would be higher, the burden of transportation costs would be lower, and the economy could import either money or a much larger volume of food and raw materials. Cantillon shows that if the money is quickly spent, prices will rise and the positive impact of the money will quickly turn negative. Here he suggests that the foreign money be saved by the prince for purposes of national defense and to account for years of bad harvests. Presumably, the additional cash could be invested in the domestic economy.

Finally, Cantillon showed that monetizing the economy was good, but that you could get too much of a good thing, thus exposing the greatest error of mercantilism. Like modern Austrian economists, Cantillon rejected the mercantilist–monetarist policy goal of forever increasing the money supply. He thought that a set amount of money was sufficient, and that amount need only change as an economy switched from barter to monetary exchange, although there were several factors that would naturally reduce the need for money, such as banking services and an increased velocity of money.

Cantillon showed why bimetallism would create shortages of money, and warned against the use of paper money and national banks.50 He also saw the problems of general banks of a public and private nature such as the South Sea Company, the Bank of England, and the yet-to-exist Federal Reserve System. He closed his Essai with an indictment of John Law and his system, which serves as a warning that continues to be important (and unheeded) to this day:

It is then undoubted that a Bank with the complicity of a Minister is able to raise and support the price of public stock and to lower the rate of interest in the State at the pleasure of this Minister when the steps are taken discreetly, and thus pay off the State debt. But these refinements which open the door to making large fortunes are rarely carried out for the sole advantage of the State, and those who take part in them are generally corrupted. The excess banknotes, made and issued on these occasions, do not upset the circulation, because being used for the buying and selling of stock they do not serve for household expenses and are not changed into silver. But if some panic or unforeseen crisis drove the holders to demand silver from the Bank the bomb would burst and it would be seen that these are dangerous operations.51

No short essay can provide a complete picture of Richard Cantillon and his contributions to economics. For example, he presented a very good theory of prohibition; he had an excellent analysis of government debt; and he provided an interesting and useful perspective on the economics of slavery. Cantillon has been misunderstood as a mercantilist and objective (i.e., intrinsic) value theorist, but in fact he exposed the errors of mercantilism, and clearly understood the concept of opportunity cost, the fundamental principle in economic theory. Cantillon and his Essai are the origins of economic theory and that theory is clearly that of the latter-day Austrian School.52

SELECTED READINGS

Bordo, Michael D. 1983. “Some Aspects of the Monetary Economics of Richard Cantillon.” Journal of Monetary Economics 12, no. 2 (August): 235–58.

Brewer, Anthony. 1992. Richard Cantillon: Pioneer of Economic Theory. London: Routledge.

——. 1988. “Cantillon and the Land Theory of Value.” History of Political Economy 20, no. 1 (Spring): 1–14.

——. 1988. “Cantillon and Mercantilism.” History of Political Economy 20, no. 3 (Fall): 447–60.

Cantillon, Richard. [1755] 1959. Essai sur la Nature du Commerce en Général [and other essays]. Henry Higgs, ed. and trans. London: Frank Cass.

Hayek, FA. [1931] 1991. “Richard Cantillon (c.1680–1734).” Introduction to Richard Cantillon, Essai sur la Nature du Commerce en Général, Grete Heinz, trans. Reprinted in Hayek, Economic History. Vol. 3. The Collected Works of F.A. Hayek. W.W. Bartley, III, and Stephen Kresge, eds. Chicago: University of Chicago Press.

——. [1931] 1985. “Richard Cantillon,” Micheál Ó. Súilleabháin, trans. Journal of Libertarian Studies 7, no. 2 (Fall): 217–48.

Hébert, Robert F.1985. “Was Richard Cantillon an Austrian Economist?” Journal of Libertarian Studies 7, no. 2 (Fall): 269–80.

——. 1981. “Richard Cantillon’s Early Contributions to Spatial Economics.” Economica 48, no. 189 (February): 71–77.

Higgs, Henry. 1892. “Cantillon’s Place in Economics.” Quarterly Journal of Economics 6:436–56.

——. 1891. “Richard Cantillon.” Economic Journal 1:262–91.

Hone, Joseph. 1944. “Richard Cantillon, Economist-Biographical Note.” Economic Journal 54:96–100.

Hülsmann, Jörg Guido. 1997. “Cantillon As A Proto-Austrian: Further Evidence.” Working Paper.

Liggio, Leonard P. 1985. “Richard Cantillon and the French Economists: Distinctive French Contributions to J.B. Say.” Journal of Libertarian Studies 7, no. 2 (Fall): 295–304.

Murphy, Antoin E. 1986. Richard Cantillon: Entrepreneur and Economist. New York: Oxford University Press.

——. 1985. “Richard Cantillon: Banker and Economist.” Journal of Libertarian Studies 7, no. 2 (Fall): 185–216.

——. 1984. “Richard Cantillon: An Irish Banker in Paris.” Hermathena 135:45–74.

O’Mahony, David. 1985. “Richard Cantillon—A Man of His Time: A Comment on Tarascio.” Journal of Libertarian Studies 7, no. 2 (Fall): 259–68.

Prendergast, Renee. 1991. “Cantillon and the Emergence of the Theory of Profit.” History of Political Economy 23 (Fall): 419–29.

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 T. 1985. “The Influence of Cantillon’s Essai on the Methodology of J.B. Say.” Journal of Libertarian Studies 7, no. 2 (Fall): 305–16.

——. 1978. “Comment on the French Liberal School.” Journal of Libertarian Studies 2, no. 3 (Winter): 65–68

Schumpeter, Joseph. [1914] 1991. Epochen der Dogmen-und Methodengeschichte, Grundriz der Sozialökonomik. 1st ed. Tübingen: J.C.B. Mohr. Vol. 1, Pt. 1, P. 143, as quoted in F.A. Hayek (1991). Pp. 258–59.

Spengler, Joseph J. 1954. “Richard Cantillon: First of the Modems I.” Journal of Political Economy 62, no. 4 (August): 281–95.

——. 1954. “Richard Cantillon: First of the Moderns II.” Journal of Political Economy 62, no. 5 (October): 406–24.

Tarascio, Vincent J. 1985. “Cantillon’s Essai: A Current Perspective.” Journal of Libertarian Studies 7, no. 2 (Fall): 249–58.

——. 1981. “Cantillon’s Theory of Population Size and Distribution.” Atlantic Economic Journal 9, no. 2 July): 12–18.

Waddell, D.A.G. 1958. “Charles Davenant (1656–1714): A Biographical Sketch.” Economic History Review 2nd Series, 11, no. 1: 279–88.

 

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The author would like to thank Robert F Hébert, Robert Ekelund, Jeffrey Tucker, and Audrey Davidson for helpful comments and suggestions.

53No known picture of Cantillon exists.

54The date of Cantillon’s birth, like many things about his life, remains a mystery.

55See for example, Robert F Hébert, “Was Richard Cantillon an Austrian Economist?” Journal of Libertarian Studies 7, no. 2 (Fall 1985): 269–80; Murray N. Rothbard, Economic Thought Before Adam Smith, vol. 1, An Austrian Perspective on the History of Economic Thought (Cheltenham, U.K.: Edward Elgar, 1995); Jörg Guido Hülsmann, “Cantillon as a Proto-Austrian: Further Evidence,” working paper, September 1997.

56William Stanley Jevons, “Richard Cantillon and the Nationality of Political Economy,” Contemporary Review (January 1881), reprinted in Essai sur la Nature du Commerce en Général, by Richard Cantillon [and other essays], Henry Higgs, ed. and trans. (London: Frank Cass, [1931] 1959), p. 342, with emphasis in the original. Jevons went on to say that “Richard Cantillon had a sound and pretty complete comprehension of many questions about which pamphleteers are still wrangling and blundering, and perplexing themselves and other people,” and that “the third part especially is almost beyond praise.”

57Schumpeter goes on:

Individual problems are presented in the light of unified explanatory principles and form part of a boldly designed comprehensive analysis. The narrowness of earlier trains of thought is transcended. Primitive mistakes are avoided, those arising from deficient analytic training no less than those for which the influence of philosophy must shoulder the blame.

Joseph Schumpeter, Epochen der Dogmen-und Methodengeschichte, Grundriz der Sozialökonomik, 1st ed. (Tübingen: J.C.B. Mohr, 1914), vol. 1, pt. 1, p. 143, as quoted in F.A. Hayek, [1931] “Richard Cantillon (c.1680–1734),”Introduction to Richard Cantillon, Essai sur la Nature du Commerce en Général, Grete Heinz, trans., reprinted in F.A. Hayek, Economic History, vol. 3, The Collected Works of F.A. Hayek, W.W. Bartley, III, and Stephen Kresge, eds. (Chicago: University of Chicago Press, 1991), p. 258–59.

58Rothbard, Economic Thought Before Adam Smith, chap. 12, pp. 343–62.

59See Anthony Brewer, “Cantillon and the Land Theory of Value,” History of Political Economy 20, no. 1 (Spring 1988): 1–14; Leonard P. Liggio, “Richard Cantillon and the French Economists: Distinctive French Contributions to J.B. Say,” Journal of Libertarian Studies 7, no. 2 (Fall 1985): 295–304; Joseph T. Salerno, “Comment on the French Liberal School,” Journal of Libertarian Studies 2, no. 3 (Winter 1978): 65–68; and idem, “The Influence of Cantillon’s Essai on the Methodology of J.B. Say,” Journal of Libertarian Studies 7, no. 2 (Fall 1985): 305–16.

60Antoin E. Murphy, Richard Cantillon: Entrepreneur and Economist (New York: Oxford University Press, 1986), p. 10. My article relies heavily on this biography.

61The isolated state allows Cantillon to ignore the two great forces that otherwise permeate the Essai. The first force is the economic ebb-and-flow of foreign trade and the balance of payments between nations. The second is the relative military power between nations. Cantillon is concerned with the public good of national defense (the duty of the Prince) throughout the Essai, and his concessions from laissez-faire are made in this light.

62See for example, Rothbard, Economic Thought Before Adam Smith, p. 351; and Hébert, “Was Richard Cantillon an Austrian Economist?” p. 273.

63Cantillon’s secondary business was as a wine merchant, which no doubt sharpened his understanding of entrepreneurship, risk taking, and interest and price formation.

64See Murphy, Richard Cantillon, p. 50. Cantillon thought that the superfluities of life were part of wealth, but he often wrote as if he opposed excessive luxury. In particular, Cantillon opposed the opulence of the King and his court in terms of imported luxury items, which required too great a sacrifice from the provinces in terms of the productive capacity of the land, and thus hurt the peasants and landlords, and weakened the state.

65Ibid., pp. 48–49. Murphy considers Bolingbroke’s strong Aristotelian views on society to be a major influence in chapter 12 of part 1 of Cantillon’s Essai.

66Ibid., p. 247, shows that sections of the Essai are very similar to sections of the legal defense testimony of his lawyers.

67As Hayek observed, “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.” See F.A. Hayek, [1931] “Richard Cantillon,” Micheál Ó. Súilleabháin, trans., Journal of Libertarian Studies 7, no. 2 (Fall 1985): 227. Or, as Anthony Brewer observed, the Essai “was the first systematic treatment of economic principles, of a sort modern economists would recognize” it as “a work of genius.” See Brewer, “Cantillon and the Land Theory of Value,” p. 10.

68Hayek, “Richard Cantillon,” p. 260. Cantillon writes that the natural way to bring about or cause an increase in population is to have employment for the people and to make the land produce the means of their support. See Cantillon, Essai, p. 85.

69Hayek, “Richard Cantillon,” p. 260.

70Cantillon, Essai, p. 85.

71Henry Higgs, “Richard Cantillon,” Economic Journal 1 (1891): 279. Of course, Cantillon uses these limits both to refrain from unnecessary value judgments and to prevent diverting himself from the main objects of his task. For example, in one case, he does make a brief value judgment concerning taxes, but quickly ends the subject as not essential to his purpose. See Cantillon, Essai, p. 159. In reading the Essai, you will find Cantillon making many value-laden statements but many of these can be explained with reference to the theoretical development of the Essai and his previous findings. This is, therefore, a likely source of confusion when interpreting Cantillon’s work.

72Ibid., p. 47. The fact that he used the phrase “all things being equal” in the rather obvious case of more labor resulting in more production is evidence of clear intent.

73Cantillon clarifies this at the end of chapter 14 in the Essai with the statement:

I do not consider here the variation in Market prices which may arise from the good or bad harvest of the year, or the extraordinary consumption which may occur from foreign troops or other accidents, so as not to complicate my subject, considering only a State in its natural and uniform condition, (p. 65)

74See ibid., pp. 48–49.

75Ibid., p. 51.

76Cantillon laid the groundwork for Turgot and the theory of profit. See Renee Prendergast, “Cantillon and the Emergence of the Theory of Profit,” History of Political Economy 23 (Fall 1991): 429.

77Cantillon, Essai, p. 49. His use of the word “naturally” shows that the changes he refers to cause a predictable change in price.

78Ibid., p. 53.

79Ibid., p. 31. When he refers to well-organized societies, Cantillon seems to be referring to an advanced market economy in which monetary exchange and banking services have been long and thoroughly established.

80Ibid., p. 97.

81Hülsmann, “Cantillon as a Proto-Austrian,” p. 3, defends Cantillon by noting he clearly did not think that market prices were determined by cost, in terms of land and labor, and that intrinsic value is merely being used as a measure of the quantity of land and labor. Cantillon thus avoided the errors of later economists who claimed that land and labor were measures of value. His views are similar to Austrian economists who hold that only exchange ratios and market prices permit economic calculation.

82Cantillon, Essai,p. 107.

83Hayek, “Richard Cantillon,” p. 263.

84Cantillon, Essai, p. 115. He does note, however, that a specific intrinsic value is one that does not change.

85This point was first suggested to me by Professor Hébert; see Hébert, “Was Richard Cantillon an Austrian Economist?” p. 272. Spengler also hints at this in Joseph J. Spengler, “Richard Cantillon: First of the Modems II,” Journal of Political Economy 62, no. 5 (October 1954): 407; also see Michael D. Bordo, “Some Aspects of the Monetary Economics of Richard Cantillon,” Journal of Monetary Economics 12, no. 2 (August 1983): 235–58.

86Cantillon, Essai, p.83.

87Brewer, “Cantillon and the Land Theory of Value,” p. 452; and Cantillon, Essai, p. 85.

88What Frenchman wouldn’t be concerned with this issue? Cantillon is clearly not against luxury per se, as he defines wealth as consumption on the first page of the Essai, including the conveniences and superfluities of life. What he is concerned with is production. It is not possible to continue to consume, or to consume greater amounts, without production. According to Cantillon, the comparative greatness of States is their reserve stock, which is savings measured in both money and materials in order to improve the State and to offset bad harvests and wars. For the State, gold is the true reserve stock, because with gold you can even buy the implements of war from your enemy. See Cantillon, Essai, pp. 89, 91.

89Vincent J. Tarascio, “Cantillon’s Theory of Population Size and Distribution,” Atlantic Economic Journal 9, no. 2 (July 1981): 12–18, is perceptive in noticing that Cantillon’s contribution was lost, and that neoclassical economics did not adopt the classical-population theory because real wages were clearly rising for a long time before the origins of neoclassical economics.

90See Cantillon, Essai, pt. 1, chaps. 7 and 8.

91See ibid., pt. 1, chap. 9; esp. Higgs, p. 25.

92Robert F. Hébert, “Richard Cantillon’s Early Contributions to Spatial Economics,” Economica 48, no. 189 (February 1981): 71–77.

93Hayek, Economic History, p. 264.

94See Bordo, “Some Aspects,” p.236; and Cantillon, Essai, pp. 111, 113.

95Likewise, if the money comes into the hands of spenders first, the increased consumption will stimulate investment demand and raise interest rates (as prices rise, the nominal rate will increase as well).

96Remember Cantillon was a banker. When he was charged with usury in the wake of the South Sea Bubble, part of his defense was to defend high interest rates.

97“Nothing is more amusing than the multitude of Laws and Canons made in every age on the subject of the Interest of Money, always by Wiseacres who were hardly acquainted with trade and always without effect.” Cantillon, Essai, p. 211.

98 Anthony Brewer, “Cantillon and Mercantilism,” History of Political Economy 20, no. 3 (Fall 1988): 447–60.

99Hume was published before Cantillon, but we now know that Cantillon wrote before Hume, and that Hume had probably read Cantillon.

100Cantillon, Essai, pp.185, 323.

101Ibid., pp. 231, 233.

102Ibid., p. 319.

103Ibid., p. 323.

104See Hébert, “Was Richard Cantillon an Austrian Economist?” It is worth noting that the historians of economic thought who have hailed Cantillon’s accomplishments have been Austrian economists, such as Hayek and Rothbard, or have been fellow travelers and sympathizers, such as Schumpeter. An interesting fact is that a copy of the Essai can be found in Carl Menger’s library, and also a German language edition (1931) is in Ludwig von Mises’s library. It seems clear that the Austrian School drew much of its inspiration from Cantillon.

• 1Two recent examples are the review article by Israel M. Kirzner, “Entrepreneurial Discovery and the Competitive Market Process: An Austrian Approach,” Journal of Economic Literature 35, no. 1 (March 1997): 60–85; and Sherwin Rosen, “Austrian and Neoclassical Economics: Any Gains From Trade?” Journal of Economic Perspectives 11, no 4. (Fall 1997): 139–52. Both of these journals are publications of the American Economic Association, indicating the degree to which Austrian ideas are at least recognized, if not embraced, by the profession’s mainstream.
• 2See Leland B. Yeager, “Austrian Economics, Neoclassicism, and the Market Test,” Journal of Economic Perspectives 11, no. 4 (Fall 1997): 153–65, for an insightful discussion on the challenges that an alternative to mainstream ideas faces in the academic marketplace.
• 3See Karen I. Vaughn, Austrian Economics in America: The Migration of a Tradition (New York: Cambridge University Press, 1994), for a good discussion of the development of the modern Austrian School. Also see Murray N. Rothbard, “The Present State of Austrian Economics,” Money, Method, and the Austrian School, vol. 1, The Logic of Action (Cheltenham, U.K.: Edward Elgar, 1997).
• 4The first edition of Menger’s Principles of Economics was published in German in 1871. While it was generally recognized as a landmark contribution in economics, an English translation was not published until 1950.
• 5Murray N. Rothbard, in Ludwig von Mises: Scholar, Creator, Hero (Auburn, Ala.: Ludwig von Mises Institute, 1988), p. 13, notes that Mises’s early work on monetary theory, while controversial, was published in the Economic Journal, one of the leading mainstream economic journals of the time.
• 6Paul A. Samuelson, Economics, 9th ed. (New York: McGraw-Hill, 1973), p. 883.
• 7Diego de Covarrubias y Leyva, Omnia Opera (Venice, 1604),vol. 2, chap.4, p.131.
• 8Luis Saravia de la Calle, Instrucción de mercaderes (1544); republished in Colección de Joyas Bibliográficas (Madrid, 1949), p. 53. Saravia’s book addresses the business entrepreneur (in Spanish mercaderes) following a continental Catholic tradition that can be traced back to San Bernardino de Siena (1380–1444). See Rothbard, Economic Thought Before Adam Smith, pp. 81–85.
• 9Juan de Lugo (1583–1660), Disputationes de iustitia et iure (Lyon, 1642), vol. 2, d. 26, s. 4, n. 40, p. 312.
• 10Juan de Salas, Commentarii in secundam secundae D. Thomae de contractibus (Lyon, 1617), vol. 4, no. 6, p. 9.
• 11Jerónimo Castillo de Bovadilla, Práctica para corregidores (Salamanca, 1585), vol. 2, chap. 4, no. 49. See also the important comments on the scholastics and their dynamic concept of competition written by Oreste Popescu, Estudios en la historia del pensamiento económico latinoamericano (Buenos Aires: Plaza and Janés, 1987), pp. 141–59.
• 12Luis de Molina, De iustitia et iure (Cuenca, 1597), vol. 2, disp. 348, no. 4, and La teoría del justo predo, Francisco Gómez Camacho, ed. (Madrid: Editora Nacional, 1981), p. 169. Raymond de Roover, ignoring the work of Castillo de Bovadilla, acknowledges how “Molina even introduces the concept of competition by stating that concurrence or rivalry among buyers will enhance prices.” See his article “Scholastic Economics: Survival and Lasting Influence from the Sixteenth Century to Adam Smith,” Quarterly Journal of Economics 69, no. 2 (May1955): 169.
• 13Included in Covarrubias, Omnia Opera, vol. 1, pp. 669–710.
• 14Carl Menger, Principles of Economics (New York: New York University Press, 1981), p. 317.
• 15Martín Azpilcueta Navarro, Comentario resolutorio de cambios (Madrid: Consejo Superior de Investigaciones Científicas, 1965), pp. 74–75.
• 16See Jesús Huerta de Soto, “New Light on the Prehistory of the Theory of Banking and the School of Salamanca,” Review of Austrian Economics 9, no. 2 (1996): 59–81.
• 17Luis de Molina, Tratado sobre los cambios, Introduction by Francisco Gómez Camacho (Madrid: Instituto de Estudios Fiscales, 1990), p. 146. Also James Pennington’s memo dated February 13, 1826, “On the Private Banking Establishments of the Metropolis,” included as an Appendix in Thomas Tooke, A Letter to Lord Grenville; On the Effects Ascribed to the Resumption of Cash Payments on the Value of the Currency (London: John Murray, 1826).
• 18However, according to Father Bernard W. Dempsey, if the members of this second group of the School of Salamanca had had a detailed theoretical knowledge of the functioning and implications of the economic process to which fractional-reserve banking gives rise, it would have been described as a perverse, vast and illegitimate process of institutional usury, even by Molina, Lessius, and Lugo themselves. See Father Bernard W. Dempsey, Interest and Usury (Washington, D.C.: American Council of Public Affairs, 1943), p. 210.
• 19Quoted in ibid., p. 214, n. 31.
• 20Mariana, Discurso de las enfermedades de la Compañía, pp. 151–55, 216.
• 21See Leland B. Yeager, “Book Review,” Review of Austrian Economics 9, no. 1 (1996): 183, where he says:
• 22Jaime Balmes, “Verdadera idea del valor o reflexiones sobre el origen, naturaleza y variedad de los precios,” en Obras Completas (Madrid: B.A.C., 1949), vol. 5, pp. 615–24. Balmes also described the personality of Juan de Mariana with the following graphic words:
• 23Ibid., p. 51.
• 24Cantillon laid the groundwork for Turgot and the theory of profit. See Renee Prendergast, “Cantillon and the Emergence of the Theory of Profit,” History of Political Economy 23 (Fall 1991): 429.
• 25Cantillon, Essai, p. 49. His use of the word “naturally” shows that the changes he refers to cause a predictable change in price.
• 26Ibid., p. 53.
• 27Ibid., p. 31. When he refers to well-organized societies, Cantillon seems to be referring to an advanced market economy in which monetary exchange and banking services have been long and thoroughly established.
• 28Ibid., p. 97.
• 29Hülsmann, “Cantillon as a Proto-Austrian,” p. 3, defends Cantillon by noting he clearly did not think that market prices were determined by cost, in terms of land and labor, and that intrinsic value is merely being used as a measure of the quantity of land and labor. Cantillon thus avoided the errors of later economists who claimed that land and labor were measures of value. His views are similar to Austrian economists who hold that only exchange ratios and market prices permit economic calculation.
• 30Cantillon, Essai,p. 107.
• 31Hayek, “Richard Cantillon,” p. 263.
• 32Cantillon, Essai, p. 115. He does note, however, that a specific intrinsic value is one that does not change.
• 33This point was first suggested to me by Professor Hébert; see Hébert, “Was Richard Cantillon an Austrian Economist?” p. 272. Spengler also hints at this in Joseph J. Spengler, “Richard Cantillon: First of the Modems II,” Journal of Political Economy 62, no. 5 (October 1954): 407; also see Michael D. Bordo, “Some Aspects of the Monetary Economics of Richard Cantillon,” Journal of Monetary Economics 12, no. 2 (August 1983): 235–58.
• 34Cantillon, Essai, p.83.
• 35Brewer, “Cantillon and the Land Theory of Value,” p. 452; and Cantillon, Essai, p. 85.
• 36What Frenchman wouldn’t be concerned with this issue? Cantillon is clearly not against luxury per se, as he defines wealth as consumption on the first page of the Essai, including the conveniences and superfluities of life. What he is concerned with is production. It is not possible to continue to consume, or to consume greater amounts, without production. According to Cantillon, the comparative greatness of States is their reserve stock, which is savings measured in both money and materials in order to improve the State and to offset bad harvests and wars. For the State, gold is the true reserve stock, because with gold you can even buy the implements of war from your enemy. See Cantillon, Essai, pp. 89, 91.
• 37Vincent J. Tarascio, “Cantillon’s Theory of Population Size and Distribution,” Atlantic Economic Journal 9, no. 2 (July 1981): 12–18, is perceptive in noticing that Cantillon’s contribution was lost, and that neoclassical economics did not adopt the classical-population theory because real wages were clearly rising for a long time before the origins of neoclassical economics.
• 38See Cantillon, Essai, pt. 1, chaps. 7 and 8.
• 39See ibid., pt. 1, chap. 9; esp. Higgs, p. 25.
• 40Robert F. Hébert, “Richard Cantillon’s Early Contributions to Spatial Economics,” Economica 48, no. 189 (February 1981): 71–77.
• 41Hayek, Economic History, p. 264.
• 42See Bordo, “Some Aspects,” p.236; and Cantillon, Essai, pp. 111, 113.
• 43Likewise, if the money comes into the hands of spenders first, the increased consumption will stimulate investment demand and raise interest rates (as prices rise, the nominal rate will increase as well).
• 44Remember Cantillon was a banker. When he was charged with usury in the wake of the South Sea Bubble, part of his defense was to defend high interest rates.
• 45“Nothing is more amusing than the multitude of Laws and Canons made in every age on the subject of the Interest of Money, always by Wiseacres who were hardly acquainted with trade and always without effect.” Cantillon, Essai, p. 211.
• 46Anthony Brewer, “Cantillon and Mercantilism,” History of Political Economy 20, no. 3 (Fall 1988): 447–60.
• 47Hume was published before Cantillon, but we now know that Cantillon wrote before Hume, and that Hume had probably read Cantillon.
• 48Cantillon, Essai, pp.185, 323.
• 49Ibid., pp. 231, 233.
• 50Ibid., p. 319.
• 51Ibid., p. 323.
• 52See Hébert, “Was Richard Cantillon an Austrian Economist?” It is worth noting that the historians of economic thought who have hailed Cantillon’s accomplishments have been Austrian economists, such as Hayek and Rothbard, or have been fellow travelers and sympathizers, such as Schumpeter. An interesting fact is that a copy of the Essai can be found in Carl Menger’s library, and also a German language edition (1931) is in Ludwig von Mises’s library. It seems clear that the Austrian School drew much of its inspiration from Cantillon.
• 53AT THE END of the twentieth century, the Austrian School of economics is exerting a significant influence both on the development of academic economics and on the application of economic theory to public policy. An increasing number of economics professors are sympathetic with the fundamental ideas of Austrian economics, and academic journals are taking more account of the Austrian School. A half century ago, few academic economists would even have been familiar with the Austrian School, except superficially, and among those who were, most would have disagreed with its methods and conclusions. Today, the ideas of Austrian economics are closer to the mainstream of economic thought, not because Austrian economics has changed, but because mainstream economics has moved toward the Austrian point of view. A similar shift has occurred in the public-policy arena. The policy implications of Austrian economics, once rejected as extreme, are now embraced as true. In the process, the Austrian School has become increasingly visible as an intellectual force.
• 54If the ideas of Austrian economics have made such inroads, one might wonder why, in the academic arena, Austrian economics does not play a bigger role. Part of the answer has to do with academic institutions themselves. Most university faculty teach at state institutions, which by itself may bias them toward supporting the state and being suspicious of laissez-faire ideas. Most university faculty have tenure, which slows the turnover of personnel, and perhaps of ideas. Furthermore, academic ideas find their outlets largely in academic journals, and the editorial boards of those journals tend to be controlled by the academic mainstream, further promoting mainstream ideas over alternative schools of thought. Because publication in academic journals is often a prerequisite for promotion and tenure in a university environment, academic survival often pushes young scholars in the direction of the mainstream methods and ideas in their discipline.
• 55Austrian economics has fought an uphill battle for acceptance for several reasons, but at the same time, the Austrian School has been gaining in strength, and is becoming more accepted in academia. A growing number of economics professors align themselves with the Austrian School, and even among those who do not, Austrian ideas are becoming more recognized and respected. Interestingly enough, the late-twentieth-century resurgence of interest in the Austrian School has been concentrated in the United States. This is largely due to Ludwig von Mises’s migration, and his Austrian economics seminar at New York University. One might go so far as to argue that the modern Austrian School would not exist were it not for the influence of Ludwig von Mises on his American students.
• 56Carl Menger is generally regarded as the founder of the Austrian School, but prior to about 1920, Austrian economics was not very different from economics in general. Economic theory had taken a great leap forward in the 1870s when the concept of marginal utility was independently discovered by Léon Walras, William Stanley Jevons, and Carl Menger. Each of these three individuals pushed the concept in different directions, but the integration of the marginal theory of value into economics was a major leap for all of economics. Eugen von Böhm-Bawerk’s capital theory, now seen as Austrian, was viewed more generally as a part of economics when it was published in the 1880s and 1890s, and Ludwig von Mises’s Theory of Money and Credit, published in 1912, established him as a leading authority on monetary economics.
• 57Carl Menger is generally regarded as the founder of the Austrian School, but prior to about 1920, Austrian economics was not very different from economics in general. Economic theory had taken a great leap forward in the 1870s when the concept of marginal utility was independently discovered by Léon Walras, William Stanley Jevons, and Carl Menger. Each of these three individuals pushed the concept in different directions, but the integration of the marginal theory of value into economics was a major leap for all of economics. Eugen von Böhm-Bawerk’s capital theory, now seen as Austrian, was viewed more generally as a part of economics when it was published in the 1880s and 1890s, and Ludwig von Mises’s Theory of Money and Credit, published in 1912, established him as a leading authority on monetary economics.
• 58From its low point in the middle of the twentieth century, Austrian economics has continued to gain visibility both inside academia and out. F.A. Hayek won the Nobel prize in economics in 1974, giving the Austrian School attention and respectability. By then, a small Austrian revival was already underway, led by Kirzner and Rothbard, and Hayek’s Nobel prize gave the revival additional momentum. Still, the Austrian School was branded by being on the losing side of the socialist calculation debate. In 1973, the year Mises died, Paul Samuelson, another Nobel laureate in economics and among the most prominent of mainstream academic economists, argued in his introductory textbook that even though the Soviet Union had roughly half the per capita income of the United States, their superior economic system based on central planning gave them faster growth. Based on this, Samuelson projected that per capita income in the Soviet Union could catch up to that of the United States as early as 1990, and almost surely by 2015. Keep in mind that Samuelson’s projection was in his best-selling introductory college textbook, and was the standard line taught in college classrooms at the time. Clearly, the mainstream had not accepted the ideas of Austrian economics.
• 59We should note how Mariana refers to the fact that the “common estimation” of men is the origin of the value of things, thus following the traditional subjectivist doctrine of the scholastics, which was initially proposed by Diego de Covarrubias y Leyva. Covarrubias (1512–1577), the son of a famous architect, became bishop of the city of Segovia and a minister to King Philip II. In 1554, he set forth better than anyone before the subjectivist theory of value, stating that “the value of an article does not depend on its essential nature but on the subjective estimation of men, even if that estimation is foolish,” illustrating his thesis with the example that “in the Indies wheat is dearer than in Spain because men esteem it more highly, though the nature of the wheat is the same in both places.”
• 60Covarrubias’s subjectivist conception was completed by another of his scholastic contemporaries, Luis Saravia de la Calle, who was the first to demonstrate that prices determine costs, not vice versa. Saravia de la Calle also had the special distinction of writing in Spanish, not in Latin. Its title was Instrucción de mercaderes (Instruction to merchants), and there we can read that “those who measure the just price by the labor, costs and risk incurred by the person who deals in the merchandise are greatly in error. The just price is found not by counting the cost but by common estimation.”
• 61The subjectivist conception initiated by Covarrubias also allowed other Spanish scholastics to get a clear insight of the true nature of market prices, and of the impossibility of attaining an economic equilibrium. Thus, the Jesuit Cardinal Juan de Lugo, wondering what the price of equilibrium was, as early as 1643 reached the conclusion that the equilibrium depended on such a large number of specific circumstances that only God was able to know it (“Pretium iustum mathematicum licet soli Deo notum”). Another Jesuit, Juan de Salas, referring to the possibilities of knowing specific market information, reached the very Hayekian conclusion that it was so complex that “quas exacte comprehendere et ponderare Dei est non hominum” (only God, not men, can understand it exactly).
• 62The subjectivist conception initiated by Covarrubias also allowed other Spanish scholastics to get a clear insight of the true nature of market prices, and of the impossibility of attaining an economic equilibrium. Thus, the Jesuit Cardinal Juan de Lugo, wondering what the price of equilibrium was, as early as 1643 reached the conclusion that the equilibrium depended on such a large number of specific circumstances that only God was able to know it (“Pretium iustum mathematicum licet soli Deo notum”). Another Jesuit, Juan de Salas, referring to the possibilities of knowing specific market information, reached the very Hayekian conclusion that it was so complex that “quas exacte comprehendere et ponderare Dei est non hominum” (only God, not men, can understand it exactly).
• 63Furthermore, the Spanish scholastics were the first ones to introduce the dynamic concept of competition (in Latin concurrentium), which is best understood as a process of rivalry among entrepreneurs. For instance, Jerónimo Castillo de Bovadilla (1547–?) wrote that “prices will go down as a result of the abundance, rivalry (emulación), and competition (concurrencia) among the sellers.”
• 64This same idea is closely followed by Luis de Molina. Covarrubias also anticipated many of the conclusions of Father Mariana in his empirical study on the history of the devaluation of the main coin of that time, the Castilian Maravedí. This study contained a compilation of a large number of statistics on the evolution of prices in the previous century and was published in Latin in his book Veterum collatio numismatum (Compilation on old moneys). This book was highly praised in Italy by Davanzaty and Galiani and was also quoted by Carl Menger in his Principles of Economics.
• 65This same idea is closely followed by Luis de Molina. Covarrubias also anticipated many of the conclusions of Father Mariana in his empirical study on the history of the devaluation of the main coin of that time, the Castilian Maravedí. This study contained a compilation of a large number of statistics on the evolution of prices in the previous century and was published in Latin in his book Veterum collatio numismatum (Compilation on old moneys). This book was highly praised in Italy by Davanzaty and Galiani and was also quoted by Carl Menger in his Principles of Economics.
• 66This same idea is closely followed by Luis de Molina. Covarrubias also anticipated many of the conclusions of Father Mariana in his empirical study on the history of the devaluation of the main coin of that time, the Castilian Maravedí. This study contained a compilation of a large number of statistics on the evolution of prices in the previous century and was published in Latin in his book Veterum collatio numismatum (Compilation on old moneys). This book was highly praised in Italy by Davanzaty and Galiani and was also quoted by Carl Menger in his Principles of Economics.
• 67as can be seen from experience, in France, where there is less money than in Spain, bread, wine, clothing, labor, and work cost much less; and even in Spain, at the time when there was less money, the things which could be sold and the labor and work of men were given for much less than after the Indies were discovered and covered her with gold and silver. The cause of which is that money is worth more where and when it is lacking than where and when it is in abundance.
• 68It is obvious that if Father Mariana had known the economic mechanisms that lead to the credit expansion process generated by banks and the effects of this process, he would have condemned these as robbery. He would have condemned not only the government debasement of coins but also the even more disturbing credit inflation created by banks. However, other Spanish scholastics were able to analyze the credit expansion of banks. Thus, de la Calle was very critical of fractional-reserve banking. He maintained that receiving interest was incompatible with the nature of a demand deposit, and that, in any case, a fee should be paid to the banker for keeping the money under his custody. A similar conclusion is reached by the more famous Navarro.
• 69Molina was sympathetic to fractional-reserve banking and confused the nature of two different contracts, loans and deposits, which Azpilcueta and Saravia de la Calle had clearly differentiated from each other previously. A more relevant aspect is that Molina was the first theorist to discover, in 1597 (therefore much earlier than Pennington in 1826), that bank deposits are part of the monetary supply. He even proposed the name “chirographis pecuniarium” (written money) to refer to the written documents that were accepted in trade as bank money. Our scholastics included, therefore, two incipient schools. The first is a kind of “Currency School,” formed by Saravia de la Calle, Azpilcueta Navarro, and Tomás de Mercado, who were very distrustful of banking activities, for which they implicitly demanded a one-hundred-percent reserve should be held. The second was a kind of “Banking School,” headed by the Jesuits Luis de Molina and Juan de Lugo, who were much more tolerant toward fractional-reserve banking. Both groups were to a certain extent the forerunners of the theoretical developments which were to arise three centuries later in England as a result of the debate between the Currency School and the Banking School.
• 70Molina was sympathetic to fractional-reserve banking and confused the nature of two different contracts, loans and deposits, which Azpilcueta and Saravia de la Calle had clearly differentiated from each other previously. A more relevant aspect is that Molina was the first theorist to discover, in 1597 (therefore much earlier than Pennington in 1826), that bank deposits are part of the monetary supply. He even proposed the name “chirographis pecuniarium” (written money) to refer to the written documents that were accepted in trade as bank money. Our scholastics included, therefore, two incipient schools. The first is a kind of “Currency School,” formed by Saravia de la Calle, Azpilcueta Navarro, and Tomás de Mercado, who were very distrustful of banking activities, for which they implicitly demanded a one-hundred-percent reserve should be held. The second was a kind of “Banking School,” headed by the Jesuits Luis de Molina and Juan de Lugo, who were much more tolerant toward fractional-reserve banking. Both groups were to a certain extent the forerunners of the theoretical developments which were to arise three centuries later in England as a result of the debate between the Currency School and the Banking School.
• 71that future goods are not valued so highly as the same goods available at an immediate moment of time, nor do they allow their owners to achieve the same utility. For this reason, it must be considered that they have a more reduced value in accordance with justice.
• 72Mariana concludes that, when there are many laws, “as not all of them may be kept or known, respect for all of them is lost.”
• 73Indeed, we could say that the greatest merit of Carl Menger was to rediscover and take up this continental Catholic tradition of Spanish scholastic thought that was almost forgotten and cut short as a consequence of the black legend against Spain and the very negative influence on the history of economic thought of Adam Smith and his followers of the British Classical School.
• 74It is not difficult to explain. Being the value of a thing its utility . . . if the number of units of this means increases, the need of any one of them in particular decreases; because being possible to choose among many units, none of them is indispensable. For this reason there is a necessary relation between the increase or decrease in value, and the shortage or abundance of a thing.
• 75The role of the entrepreneur is one of Cantillon’s great contributions to economic understanding. He speaks of the entrepreneur in the classic sense of the undertaker of great business adventures, but Cantillon also has a theoretical distinction between those who work for a fixed return or wages and those who face uncertain returns, including farmers, independent craftsmen, merchants, and manufacturers. These entrepreneurs purchase inputs at a given price to produce and sell later at an uncertain price. In the pursuit of profit, the entrepreneur must bear risks as he faces the pervasive uncertainty of the market. For example, the farmer has fixed expenses but:
• 76The role of the entrepreneur is one of Cantillon’s great contributions to economic understanding. He speaks of the entrepreneur in the classic sense of the undertaker of great business adventures, but Cantillon also has a theoretical distinction between those who work for a fixed return or wages and those who face uncertain returns, including farmers, independent craftsmen, merchants, and manufacturers. These entrepreneurs purchase inputs at a given price to produce and sell later at an uncertain price. In the pursuit of profit, the entrepreneur must bear risks as he faces the pervasive uncertainty of the market. For example, the farmer has fixed expenses but:
• 77The price of these products will depend partly on the weather, partly on demand; if corn is abundant relative to consumption it will be dirt cheap, if there is scarcity it will be dear. Who can foresee the number of births and deaths of the people in a State in the course of the year? Who can foresee the increase or reduction of expense that may come about in the families? 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.
• 78The unsuccessful entrepreneur will live poorly or go bankrupt, while the successful entrepreneur will obtain a profit or advantage and cause entry into the market, “and so it is that the Undertakers of all kinds adjust themselves to risks in a State.” The entrepreneur brings prices and production into line with demand; in well organized societies, government officials can even fix prices of basic items without too much complaint.
• 79The unsuccessful entrepreneur will live poorly or go bankrupt, while the successful entrepreneur will obtain a profit or advantage and cause entry into the market, “and so it is that the Undertakers of all kinds adjust themselves to risks in a State.” The entrepreneur brings prices and production into line with demand; in well organized societies, government officials can even fix prices of basic items without too much complaint.
• 80Cantillon has a sophisticated understanding of the price system containing most of the elements of modern Austrian analysis. Price is determined by demand and relative scarcity. Demand is a subjective concept based on the “humors” and “fancies” of the people. It is the “consent of the people” along with the relative scarcity of a product that determines the market price, where market price is understood to be the price paid to the seller. Likewise, the market value of metals “varies with their plenty or scarcity, according to the demand.”
• 81Cantillon makes an important distinction between price and market price, and between value and market value, that has served as a source of confusion concerning the meaning of his economics. Market price and market value are the real prices that occur in the market based on forces of supply and demand. Price and value are separate and distinct concepts from market prices. They are related to Cantillon’s term “intrinsic value,” and are used to describe the opportunity cost of resources used to produce the particular good in question, the specific land and labor that were sacrificed to produce the good.
• 82in this Essai I have always used the term Intrinsic Value to signify the amount of Land and Labor which enter into Production, not having found any term more suitable to express my meaning. I mention this only to avoid misunderstanding.
• 83What is most significant about Cantillon’s achievement in the field of value and price theory is his down-playing the quest for rules and formulae that might account for the “normal” relationship between the value or price of various goods, and concentrating instead on the forces and mechanisms that are consistently at work in restoring these normal relationships.
• 84Cantillon’s conception of cost as the sacrifice of land and labor foregone is far more advanced than the land theory of cost and value advanced by the Physiocrats, or the labor theory of cost and value advanced by the classical economists. But Cantillon had a far richer understanding of cost than a simple measure of the quantity of land and labor that went into production. Cantillon stressed two important concepts throughout the Essai that provide greater depth to his conception of cost. First, Cantillon viewed all resources as heterogeneous. Each piece of land was of a different quality, and each laborer was also of a different quality. Therefore, while intrinsic value was a measure of cost, it was not possible in fact to simply count the number of hours and acres except in an abstract way or in simple illustrations. In fact, after establishing a preliminary land-and-labor theory of value in part one, he notes at the very beginning of part two that for specific goods in the real economy, it is “impossible to fix their respective intrinsic values.”
• 85The other concept that he stressed was the alternative use of resources. Land could be used to grow corn or to provide hay for horses. Labor could toil on the farm or be trained in a craft. Cantillon clearly saw that when a landlord chose to own more horses, what he was giving up was the production (and sale) of grain, and that if France wished to import fine lace, then she would have to forego a large amount of wine produced from her vineyards. Cantillon understood the concept of opportunity cost, and his Essai was an attempt to construct the concept to explain economic choice. The discovery of opportunity cost by this important precursor of the Austrian School truly marks the origin of economic theory.
• 86Cantillon took a scientific approach to population. He recognized that humans might multiply like “mice in a barn if they have unlimited means of subsistence,” or that population might fall substantially over time. Cantillon even recognized that international trade would affect the level and distribution of population, as land-poor countries could export manufactured goods to land-rich countries in return for food, fiber, and raw materials, and thus support a larger population than otherwise. Here, Cantillon is often mistakenly labeled a mercantilist, but Cantillon remains a value-free economist on the subject of population size. However, he does offer the prince technical advice of a nationalist nature on how to achieve a greater population, which supposedly is good for national defense. For example, he bemoans the export of large amounts of French wine in order to pay the very high market price of a small amount of lace imported from Brussels.
• 87Cantillon took a scientific approach to population. He recognized that humans might multiply like “mice in a barn if they have unlimited means of subsistence,” or that population might fall substantially over time. Cantillon even recognized that international trade would affect the level and distribution of population, as land-poor countries could export manufactured goods to land-rich countries in return for food, fiber, and raw materials, and thus support a larger population than otherwise. Here, Cantillon is often mistakenly labeled a mercantilist, but Cantillon remains a value-free economist on the subject of population size. However, he does offer the prince technical advice of a nationalist nature on how to achieve a greater population, which supposedly is good for national defense. For example, he bemoans the export of large amounts of French wine in order to pay the very high market price of a small amount of lace imported from Brussels.
• 88Cantillon took a scientific approach to population. He recognized that humans might multiply like “mice in a barn if they have unlimited means of subsistence,” or that population might fall substantially over time. Cantillon even recognized that international trade would affect the level and distribution of population, as land-poor countries could export manufactured goods to land-rich countries in return for food, fiber, and raw materials, and thus support a larger population than otherwise. Here, Cantillon is often mistakenly labeled a mercantilist, but Cantillon remains a value-free economist on the subject of population size. However, he does offer the prince technical advice of a nationalist nature on how to achieve a greater population, which supposedly is good for national defense. For example, he bemoans the export of large amounts of French wine in order to pay the very high market price of a small amount of lace imported from Brussels.
• 89Despite this, Cantillon’s analysis is far superior to those he influenced, like Malthus and Smith. They were concerned about population because, in their thinking, economic growth would result in a larger population of miserable people living at the subsistence level. According to Professor Tarascio, “Smith and Malthus do not reflect the spirit of Cantillon’s Essai. Hence the message has been lost to subsequent readers of the later authors.” Smith and Malthus extended the idea of the subsistence wage to industrial workers, while Cantillon recognized that there would be a tendency towards higher wages for trained workers or for those in risky occupations. In fact, Cantillon generally wrote of a maintenance wage that was not a subsistence wage at all, but rather a wage sufficient to maintain the worker in his current job. In his model, economic growth led to higher wages and a better standard of living.
• 90Despite this, Cantillon’s analysis is far superior to those he influenced, like Malthus and Smith. They were concerned about population because, in their thinking, economic growth would result in a larger population of miserable people living at the subsistence level. According to Professor Tarascio, “Smith and Malthus do not reflect the spirit of Cantillon’s Essai. Hence the message has been lost to subsequent readers of the later authors.” Smith and Malthus extended the idea of the subsistence wage to industrial workers, while Cantillon recognized that there would be a tendency towards higher wages for trained workers or for those in risky occupations. In fact, Cantillon generally wrote of a maintenance wage that was not a subsistence wage at all, but rather a wage sufficient to maintain the worker in his current job. In his model, economic growth led to higher wages and a better standard of living.
• 91Despite this, Cantillon’s analysis is far superior to those he influenced, like Malthus and Smith. They were concerned about population because, in their thinking, economic growth would result in a larger population of miserable people living at the subsistence level. According to Professor Tarascio, “Smith and Malthus do not reflect the spirit of Cantillon’s Essai. Hence the message has been lost to subsequent readers of the later authors.” Smith and Malthus extended the idea of the subsistence wage to industrial workers, while Cantillon recognized that there would be a tendency towards higher wages for trained workers or for those in risky occupations. In fact, Cantillon generally wrote of a maintenance wage that was not a subsistence wage at all, but rather a wage sufficient to maintain the worker in his current job. In his model, economic growth led to higher wages and a better standard of living.
• 92Another area in which Cantillon made an important contribution was spatial economics, a subject that permeated much of the Essai. Cantillon explained the economic geography of a state, the center of which was the capital city where the prince and government resided. Cities are regional centers with large markets and population, surrounded by market towns where the produce of the villages and farms are brought for sale. Cantillon explained that villagers bring their output to market in order to get the best price and to reduce transaction costs. He was masterful in using the role of transportation costs to explain why raw materials were more expensive near the cities, why heavy manufacturing was located near the source of raw materials, and why perishables should be produced near population centers. The role of transportation costs is a central issue in his writing on money and banking because the banker (like Cantillon himself) served as an intermediary to reduce the risk and transportation costs of shipping large amounts of money over great distances. Cantillon was the first economist to apply the principles of spatial economics in a general economic treatise. He “made original and lasting contributions to spatial economics . . . in the nature of first principles readily applicable to the fields of location theory and spatial pricing.”
• 93Cantillon’s successful career in banking played a major role in his monetary economics, which Hayek considered his greatest achievement. Cantillon was a hard-money man who understood that the nature of money as a medium of exchange drove the evolution of money to precious metals, and that princes cannot introduce imaginary money or successfully debase money. Central to his Austrian-style analysis was his rejection of the aggregate approach of the naive quantity theory of money in favor of a microeconomic-process approach to the study of the money. He showed that the type of change in the money supply and where it entered the economy were crucial to determining what the effects would be. A big gold discovery would raise the prices of goods demanded by gold mine owners and miners. Any large increase in money will give a new turn to consumption, thus changing relative prices, velocity, and the distribution of income.
• 94Cantillon’s successful career in banking played a major role in his monetary economics, which Hayek considered his greatest achievement. Cantillon was a hard-money man who understood that the nature of money as a medium of exchange drove the evolution of money to precious metals, and that princes cannot introduce imaginary money or successfully debase money. Central to his Austrian-style analysis was his rejection of the aggregate approach of the naive quantity theory of money in favor of a microeconomic-process approach to the study of the money. He showed that the type of change in the money supply and where it entered the economy were crucial to determining what the effects would be. A big gold discovery would raise the prices of goods demanded by gold mine owners and miners. Any large increase in money will give a new turn to consumption, thus changing relative prices, velocity, and the distribution of income.
• 95New money can also affect the interest rate if the money comes into the hands of lenders. Cantillon rejected the Lockean–mercantilist view that the rate of interest was a purely monetary phenomenon. Like Mises, he found that the interest rate was based on the forces of supply and demand in the market for loanable funds, and that if the new money increased supply it would lower the interest rate.
• 96Cantillon thoroughly describes the forces that cause changes in interest rates, and shows the interest rate to be a normal and important aspect of the economy. He defends the earning of high rates of interest via comparison to earning profits and rents of even higher rates. On the basis of his description of interest rates and what causes rates to be high, Cantillon ridicules the notion that government should regulate interest rates with usury laws.
• 97Cantillon thoroughly describes the forces that cause changes in interest rates, and shows the interest rate to be a normal and important aspect of the economy. He defends the earning of high rates of interest via comparison to earning profits and rents of even higher rates. On the basis of his description of interest rates and what causes rates to be high, Cantillon ridicules the notion that government should regulate interest rates with usury laws.
• 98Cantillon presented a theory of the business cycle very similar to the Austrian theory when he analyzed changes in the money supply. Increased money supply is the boom phase that kicks off the business cycle. His descriptions of this phase of the cycle are what many commentators have used to label Cantillon a mercantilist, because more money is seen as leading to a higher level of economic activity However, problems sooner or later arise. The basic problem revolves around price inflation and the collapse of domestic industry. Cantillon’s Austrian lesson is that mercantilist policy is a shortrun expediency that fails in the long run.
• 99Cantillon was the first to describe the workings of the famous specie-flow price mechanism, a crucial component of the Austrian theory of the business cycle, normally attributed to Hume. Here he analyzes changes in the domestic money supply brought about by changes in the balance of payments in a similar fashion to changes in the domestic gold supply described above. He suggests ways in which the prince might try to offset the negative effects of monetary inflation or to forestall them, but theoretically the reversal is inevitable, and Cantillon is not confident in the government’s ability to micromanage the adjustment process.
• 100Cantillon was the first to describe the workings of the famous specie-flow price mechanism, a crucial component of the Austrian theory of the business cycle, normally attributed to Hume. Here he analyzes changes in the domestic money supply brought about by changes in the balance of payments in a similar fashion to changes in the domestic gold supply described above. He suggests ways in which the prince might try to offset the negative effects of monetary inflation or to forestall them, but theoretically the reversal is inevitable, and Cantillon is not confident in the government’s ability to micromanage the adjustment process.
• 101In discussing the topics of foreign trade, the balance of payments, and banking, Cantillon clearly shows how countries that develop a skilled workforce in manufacturing, participate in foreign trade, and avoid national banks will prosper. However, his commentary also seems mercantilist when he laments the buying of fancy lace from Brussels as “burdensome and unprofitable to France,” and uses this as an example of how foreign trade can be usefully regulated.
• 102Cantillon showed why bimetallism would create shortages of money, and warned against the use of paper money and national banks. He also saw the problems of general banks of a public and private nature such as the South Sea Company, the Bank of England, and the yet-to-exist Federal Reserve System. He closed his Essai with an indictment of John Law and his system, which serves as a warning that continues to be important (and unheeded) to this day:
• 103It is then undoubted that a Bank with the complicity of a Minister is able to raise and support the price of public stock and to lower the rate of interest in the State at the pleasure of this Minister when the steps are taken discreetly, and thus pay off the State debt. But these refinements which open the door to making large fortunes are rarely carried out for the sole advantage of the State, and those who take part in them are generally corrupted. The excess banknotes, made and issued on these occasions, do not upset the circulation, because being used for the buying and selling of stock they do not serve for household expenses and are not changed into silver. But if some panic or unforeseen crisis drove the holders to demand silver from the Bank the bomb would burst and it would be seen that these are dangerous operations.
• 104No short essay can provide a complete picture of Richard Cantillon and his contributions to economics. For example, he presented a very good theory of prohibition; he had an excellent analysis of government debt; and he provided an interesting and useful perspective on the economics of slavery. Cantillon has been misunderstood as a mercantilist and objective (i.e., intrinsic) value theorist, but in fact he exposed the errors of mercantilism, and clearly understood the concept of opportunity cost, the fundamental principle in economic theory. Cantillon and his Essai are the origins of economic theory and that theory is clearly that of the latter-day Austrian School.