Richard Cantillon

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Richard Cantillon (1680 – May, 1734) was an important figure in the Physiocrat school of economics, initially a successful financier who made his fortune through speculation. He then turned to theoretical studies of economics, his only work being published posthumously, after he was murdered. Cantillon's Essai contains pioneering analyses of wages, prices, currency circulation, the role of entrepreneurs in the economy, and many other economic concepts. Several of his ideas were adopted, and adapted, not only by his own Physiocrat school, but also by Adam Smith and the classical school as well as influencing the members of the Austrian school.


The re-issuing of Cantillon's work at the beginning of the twenty-first century has brought the ideas of this brilliant thinker into the public arena in their original form, with his original vision and insights, many of which were obscured by later theorists, but which offer the possibility of deeper understanding of a stable economic foundation that can support all members of society.


Richard Cantillon's exact date of birth is not known, but it was probably between 1680 and 1690, in County Kerry, Ireland. He was the son of an Irish nobleman. He may have been a descendant of the Stuarts, and his family was quite involved with the Jacobite movement that sought to restore the Stuarts to the British throne.

Given this, it is not surprising that Cantillon had strong connections with France, and spent most of his adult life there. In 1722, he married Mary Anne Mahony, daughter of Daniel Mahony, a rich merchant of Paris.

Cantillon was a brilliant financier, who made a huge fortune in a short period of time by lending money to speculators, and speculating himself on the pound-livre (British-French currency) exchange rate. The key episode in Cantillon's life was his involvement with John Law and his monetary schemes. Cantillon was opposed to the Law's inflationist theories, 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 Scheme and South Sea Bubble. In the aftermath of these financial debacles, Cantillon wrote his famous Essai, breaking out of the muddled Mercantilist thinking of his day to make a groundbreaking contribution to the knowledge of method, theory, and policy in economics.

He was mysteriously murdered (and his house burned down) in London, during the night of May 13 to 14, 1734.


As a precursor of Austrian economic theory, Cantillon was the first economist to develop insights into the role entrepreneurship plays in the economy. His scientific approach was that of the logical-deductive theorizing that is characteristic of the Austrian School and the marginal revolution, and his theory of prices has similarities to the Austrian subjective theory of value. All of Cantillon's theoretical work is found in his single piece, his Essai sur la Nature du Commerce en Général, which survived the fire when he was murdered, and which was published posthumously in 1755, by the Marquis de Mirabeau.

Cantillon's major analytical contributions can be classified into three areas: Classical monetary theory, Land theory of value, and The "Three Rents".

Classical monetary theory

Cantillon developed a theory of commodity money that was correct in nearly all respects.

Central to his Austrian-style analysis was his rejection of the aggregate approach of the quantity theory of money in favor of a microeconomic-process approach. He showed that the type of change in the money supply and where it entered the economy were crucial in determining what the effects would be. For example, a major 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 of money (rate at which each unit of money is spent), and the distribution of income.

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 activity. However, Cantillon was aware that problems arise sooner or later. The basic problem revolves around price inflation and the collapse of domestic industry. Cantillon's Austrian lesson is that mercantilist policy is a short term 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 (Essai, p. 185, 323).

His brightest achievement in monetary theory was his discussion of the dynamic effect of an increase of the quantity of money on the economy—the effect on relative prices, expenditures, and interest rates. For example, the discovery of a new mine lowers the cost of producing money. Miners gain, and they increase the demand for goods. Manufacturing output rises, putting upward pressure on the demand for food. Food prices increase, providing the incentive to produce more. People on fixed income lose. As the process works its way through the economy, prices rise in general, and a trade deficit ensues.

Finally, Cantillon showed that monetizing the economy was good, but that one might have 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 (Essai p. 319).

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 payoff 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 (Essai p. 323).

Land theory of value

Cantillon argued that the market price of a commodity fluctuates around its intrinsic value, which is given by the cost of production. Cost is composed of land, labor, capital goods, and raw materials. Capital goods and raw materials can be resolved into land and labor.

Cantillon had a sophisticated understanding of the price system, containing most of the elements of the 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, which 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" (Essai, p. 97).

Cantillon made 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. According to Cantillon, 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 and market value. They are related to Cantillon's term "intrinsic value," and are used to describe the opportunity cost of resources used to produce the particular commodity in question, the specific land and labor that were sacrificed to produce that item. He explains:

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 (Essai p.107).

Thus, for Cantillon, the only prime costs are those of land and labor. He envisioned human reproduction as an "industry" transforming input into labor. This led him to formulate a population theory similar in most respects to the famous theory stated by Malthus.

However, 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 of his Essai, he notes, at the very beginning of the second part, that for specific goods in the real economy, it is "impossible to fix their respective intrinsic values." (Essai p.115)

Cantillon's discovery of "opportunity cost" truly marked the origin of economic theory:

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 (Hebert 1985, p. 272).

Finally, Cantillon made another pioneering contribution 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 use of the land will be.

The "Three Rents"

Most importantly for the growth of economics, Cantillon developed a model of the flow of goods and money between sectors of the economy. Although Cantillon's analysis comes across as supporting mercantilism, it is plausible that the basis for the support of such policy lies in his theoretical analysis and empirical observations of the world economy, not in mercantilism.

Cantillon modeled a closed economy with two productive sectors: agriculture and manufacturing. The model contained three social classes: landowners, entrepreneurs (in agriculture and manufacturing), and hired workers. 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 showed that if the money is quickly spent, prices will rise and the positive impact of the money will quickly turn negative. Here he suggested that the foreign money be saved by the prince for purposes of national defense, and for protection against years of bad harvests. Presumably, the additional cash could be invested in the domestic economy.

Cantillon then traced the flow between the social classes as agricultural and manufactured goods are produced. Although Cantillon developed his model verbally, it can be presented in the form of an input-output table or a circular flow diagram. His work was a precursor to national income accounting, input-output analysis, and, more directly, to the work of the first physiocrat, François Quesnay, who developed Cantillon's circular flow model into an elaborate Tableau Économique.


Since the market prices of goods fluctuate around the intrinsic values determined by costs, market transactions carry an element of uncertainty. The role of bearing risk is the economic function of the entrepreneur. Not until Jean-Baptiste Say was entrepreneurship to be studied as extensively as by Cantillon.

The core point (for Cantillon as well as the Austrian School) is 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 (Essai p. 65). The entrepreneur thus determines resource allocation in the economy, at considerable personal risk.

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 (Essai, pp. 31).

Cantillon noted that 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 (Essai p. 53).

Subsistence Wage

The subsistence wage depends on conventional living standards and social conditions. In fact, Cantillon generally wrote of a maintenance wage, that it was not a subsistence wage at all, but rather a wage sufficient to maintain the worker in his current job (Essai vol. 1 Ch. 9). In his model, economic growth led to higher wages and a better standard of living. Adam Smith and Thomas Robert 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 (Essai vol. 1, Ch. 7, 8).

Cantillon's analysis of this situation is superior to those he influenced, such as 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. "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" (Tarascio 1981).


Although Cantillon acquired a great fortune, he was little recognized for his theoretical works during his lifetime, since his masterpiece, Essai sur la Nature du Commerce en Général was published posthumously. Nevertheless, it shows that Cantillon possessed a first-rate analytical mind. "As a theorist he is indeed one of the shining stars of the classical galaxy" and "the combination of early financial success with analytical superiority makes him the Ricardo of eighteenth-century economics" (Niehans 1990).

According to Nobel laureate Friedrich Hayek, "W. S. Jevons, who rediscovered the Essai [during the marginalist revolution and due to the fact that it is one of the few works quoted by Adam Smith], was scarcely exaggerating when he entitled it the 'Cradle of Political Economy'." Joseph Schumpeter, the great historian of economic thought and student of Eugen von Bohm-Bawerk, described the Essai as "the first systematic penetration of the field of economics." (Schumpeter 1914). In his treatise on the history of economic thought, Murray N. Rothbard (1995) named Cantillon "the founding father of modern economics."

An interesting fact is that a copy of the Essai can be found in Carl Menger's library (before his publication of The Principles of Economics, and also a German language edition (1931) is in Ludwig von Mises's library. These facts, plus the similarities in approach, indicate that the Austrian School drew much of its inspiration from Cantillon.

Thus, although little is known about Cantillon, except that he was an Irishman who lived most of his life in France where he had a successful banking career, his work in economics left an indelible mark in that field. The release, in 2001, of a new edition of Cantillon's classic work has introduced this prophetic thinker to a new generation of readers.


  • Cantillon, Richard. 1959. Essay on the Nature of Trade in General.
  • Cantillon, Richard. [1732] 2001. Essay on the Nature of Commerce in General. Transaction Publishers. ISBN 0765804999
  • Hebert, Robert F. 1985. "Was Richard Cantillon an Austrian Economist?" in Journal of Libertarian Studies. 7, no. 2, Fall 1985, pp. 269-80.
  • Jevons, W. Stanley. 1905 (original 1881). "Richard Cantillon and the Nationality of Political Economy" in Contemporary Review. 39, January 1881, reprinted in The Principles of Economics. A Fragment of a Treatise on the Industrial Mechanism of Society and other Papers. London.
  • Niehans, Jürg. 1990. A History of Economic Theory. The Johns Hopkins U. Press.
  • Rothbard, Murray N. 1995. Economic Thought Before Adam Smith. Brookfield VT. chap. 12, pp. 343-62.
  • Schumpeter, Joseph. 1914. Epochen der Dogmen-und Methodengeschichte, Grundriz der Sozialokonomik. Chicago: University of Chicago Press, 1991.
  • Tarascio, Vincent J. 1981. "Cantillon's Theory of Population Size and Distribution" in Atlantic Economic Journal. 9, no. 2 (July 1981), pp.12-18.

External links

All links retrieved April 3, 2013.


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