Richard Cantillon: Pioneer of Economic Theory

systems dept

Richard Cantillon

Richard Cantillon

Pioneer of Economic Theory

Anthony Brewer

London and New York

First published 1992by Routledge11 New Fetter Lane, London EC4P 4EE Simultaneously published in the USA and Canadaby Routledgea division of Routledge, Chapman and Hall, Inc.29 West 35th Street, New York, NY 10001 1992 Anthony Brewer Routledge is an imprint of the Taylor & Francis Group This edition published in the Taylor & Francis e-Library, 2003. 1992 Anthony Brewer

All rights reserved. No part of this book may be reprintedor reproduced or utilized in any form or by any electronic,mechanical, or other means, now known or hereafterinvented, including photocopying and recording, or in anyinformation storage or retrieval system, without permissionin writing from the publishers. British Library Cataloguing in Publication DataBrewer, Anthony, 1942

Richard Cantillon: pioneer of economic theory.I. Title330.092

ISBN 0-203-41731-3 Master e-book ISBN

ISBN 0-203-72555-7 (Adobe eReader Format)ISBN 0-415-07577-7 (Print Edition)

Library of Congress Cataloging-in-Publication DataBrewer, Anthony, 1942

Richard Cantillon: pioneer of economic theory/Anthony Brewer.p. cm.

Includes bibliographical references (p. ) and index.ISBN 0-415-07577-71. Cantillon, Richard, d. 1734. 2. EconomistsFranceBiography.

I. Title.HB105.C3B74 1992330'.092dc20[B] 9136458

CIP

To Janet, Robert, and David

vii

Contents

Preface ix

1. Introduction 11.1 Cantillons life 11.2 The Essai sur la nature du commerce en gnral 91.3 Outline of the book 13

Part I: Cantillons Economics

2. The Economic and Social Framework 192.1 Human society 192.2 Villages and cities 222.3 The system as a whole 242.4 The location of activities 292.5 The economics of Arcadia 32

3. Population 363.1 Births, deaths, and marriages 373.2 Population and land 383.3 The occupational structure 413.4 Population and policy 423.5 The theory of population in context 46

4. Incomes 494.1 Entrepreneurs and hired men 504.2 Wages 524.3 Profits and interest 54

5. The Land Theory of Value 615.1 Market prices 625.2 Intrinsic value 635.3 The par between land and labour 655.4 Heterogeneous land 68Appendix: a formal model of land values 70

6. Money, Prices, and the Trade Balance 756.1 The circulation of money 766.2 The velocity of circulation 806.3 Money and the price level 83

viii

CONTENTS

6.4 Balance of payments adjustment 846.5 Money and interest rates 916.6 Augmentation and diminution 92Appendix: the value of monetary metals 95

7. Banking and Exchange Rates 987.1 Transfers of money 987.2 Exchange rates and the trade balance 1007.3 Fractional reserve banking 1027.4 National banks 103

8. Trade and Trade Policy 1058.1 The case for the market 1068.2 Trade policy and population 1088.3 Policy and the trade balance 1138.4 Cantillon and mercantilism 118

Part II: Cantillons Place in the History of Economics

9. Cantillon and his Predecessors 1239.1 Petty 1259.2 Locke 1379.3 Law 1469.4 Cantillon and his predecessors 157

10. Cantillon and his Successors 15810.1 Quesnay and the Physiocrats 15910.2 Steuart 17510.3 Classical economics 183

11. Conclusion 195

Bibliography 197

Index 205

ix

Preface

I first read Cantillons Essai sur la nature du commerce en gnralout of dutyI was trying to cover some of the background toclassical economics, and Cantillon was on the list ofpredecessors of Adam Smith. Within a few pages Irecognized a real theorist, of a really quite modern kind.Cantillon used simplifying assumptions to get to the heart ofa problem, as modern theorists do. He explicitly refused todiscuss what the aims of policy should be, and confinedhimself to analysing how any given aims should be secured;in other words, he was doing what would now be calledpositive economics, without using the term. Above all, he hada clear vision of the economy as an interrelated system and astrikingly consistent analysis of how the system worked. Ithought then, and I still think now, that Cantillon has beenseriously underrated by the majority of historians ofeconomics. In the eighteenth century, only Turgot was hisequal as a theorist. (Adam Smith had more influence, ofcourse, but that is a different issue.)

This book is a study of Cantillon as an economic theorist. Itwould, of course, be possible to write about him from variousdifferent anglesto say more about the context, or aboutpolicy issues, and so on. In my view, it is his achievement as atheorist that marks him out as a significant figure in thehistory of economics, so I shall concentrate on his theory. Tounderstand his work, however, it is necessary to know just alittle about the world he was writing about, just as it helps toknow a little about (say) the GATT or the IMF when readingmodern work on international economics. I will therefore tryto provide a bare minimum of background. What I will not dois to patronize Cantillon by judging him by some imaginaryeighteenth century standards. He deserves to be judged bythe same standards of rigour and coherence as any modernwriter.

A study of Cantillons economics is necessarily a study ofhis only surviving work, the Essai sur la nature du commerce engnral. For brevity, I refer to it as the Essai throughout. It isnot clear whether it was originally written in French orEnglish, but the surviving text is in French. The standardtranslation, by Higgs, is based on an eighteenth century

x

PREFACE

version of parts of the Essai published by one MalachiPostlethwayt. I have modernized spelling and punctuationsince we have to use a translation, it might as well be atranslation into modern English. I have also used the wordentrepreneur, where it appears in the French, rather than theeighteenth century, but now archaic, English translationundertaker.

Parts of the book are based on papers I have alreadypublished in History of Political Economy: Cantillon and theland theory of value (1988), Cantillon and mercantilism(1988), and Petty and Cantillon (1992).

I would like to thank Mark Blaug for helpful comments,Rene Prendergast for changing my mind on Cantillonsprofit theory, Alan Jarvis and Helen Gray of Routledge foreditorial advice and encouragement, and Janet Brewer forhelp and support throughout. The errors are mine.

1

1

Introduction

Richard Cantillon was a key figure in the early developmentof economics. He was one of the first to see the economy as asingle interconnected system and to try to explain how itworked, and the first to present a coherent theory of pricesand income distribution. He made major contributions tomonetary theory and to the theory of balance of paymentsadjustment. The Physiocrats, writing only a few years afterthe (delayed) publication of Cantillons one surviving work,the Essai sur la nature du commerce en gnral, took many oftheir ideas very directly from it. Adam Smith probably learntfrom Cantillons Essai, as well as from the Physiocrats. Thereis thus a direct line of intellectual descent from CantillonsEssai to Smiths Inquiry into the Nature and Causes of the Wealthof Nations, and to modern economics.

1.1 CANTILLONS LIFE

Cantillons Essai sur la nature du commerce en gnral (1755,referred to below as Essai) was not published until manyyears after his death, and it soon sank back into obscurity.Cantillon was, in any case, a rather secretive man, and littlewas known about him. The Essai was not rediscovered untilthe late nineteenth century, when its importance slowly cameto be recognized through Jevons article of 1881, Higgstranslation and biographical essay of 1931, and Spenglersarticle of 1954. Various bits of biographical information aboutCantillon were unearthed, over the years, by historians ofeconomics, but it was not until the excellent biography byMurphy was published in 1986 that a reasonably roundedpicture of this enigmatic figure emerged. Some gaps remain;

2

RICHARD CANTILLON: PIONEER OF ECONOMIC THEORY

we still do not know for sure exactly when or where Cantillonwas born, and Murphy casts some doubt on the generallyaccepted account of his death.1

Cantillon came from an Anglo-Norman family, longestablished as landlords in Kerry, in the west of Ireland. Theylost their lands after the Cromwellian invasion of Ireland inthe 1650s, but may have returned as tenant farmers in the1670s. Ironically, Cantillons most important predecessor asan economist, William Petty, was attached to the British armyand was responsible for surveying confiscated lands,including, presumably, those confiscated from the Cantillons.

Murphy (1986) thinks that Cantillon was probably born inthe 1680s, at Ballyronan in County Kerry, Ireland; Walsh(1987) says that he was born in 1697 (which is hard to squarewith the fact that he was in a position of responsibility in1711). The name Richard seems to have been popular in thefamilyseveral Richard Cantillons appear in the story. I shallrefer to the economist as Cantillon, tout court, to distinguishhim from others. He was certainly in France by 1708, when hetook French nationality. If he did this on reaching his majorityat the age of 21, he must have been born in 1687. It was saidthat he never wore shoes before he came to Paris (Murphy,1986:26), so he was presumably not well off, though he hadvaluable banking connections in London and Paris throughrelatives.

In 1711 he was working for the British government as clerkto the assistant Paymaster General in Spain, channellingpayments to British prisoners of war. This early venture is anexample of the international scope of Cantillons career; forthe remainder of his life he moved between Europeancapitals, particularly London and Paris, as his businessinterests dictated. In the climactic year of 1720, for example,he was in London, Paris, and Amsterdam within a period of amonth, at a time when travelling between these cities musthave been considerably more difficult and more timeconsuming than travelling between (say) London, Tokyo, andNew York in modern times.

In Cantillons day, the Atlantic seaboard of Europe wasemerging as the heart of an extensive trading system that

1 The account of Cantillons life presented in this section depends very heavily onMurphys work; where no reference is given for any particular point, Murphy isthe source.

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INTRODUCTION

stretched (literally) around the world. London, Paris, andAmsterdam were the most important centres of trade andfinance. The main opportunities to make really substantialprofits were to be found in international trade and finance,and in operations involving government debt, because mosteveryday production and trade was carried out locally, on avery small scale. Precisely because long distance trade wasstill very costly and risky, it required substantial capital andpromised large gains.

There was intense rivalry between the Netherlands,France, and Britain. Of these, the Netherlands was, of course,the smallest and poorest in resources, but it had dominatedthe trade of the region in the seventeenth century, and wasstill, perhaps, the most prosperous and most technicallyadvanced. Cantillon thought its day was done; a smallcountry can only succeed by accidents, so no minister canrestore the republics of Venice and Holland to the brilliantsituation from which they have fallen (Essai: 195).

France had the largest population and the largest landarea, but was hampered by relatively archaic institutions.Frances size was not an unmixed blessing; Braudel(1990:4589) says that France was doomed by its sheer size.Land transport was slow and costly, so economic advancewas heavily concentrated in areas with good access to the sea,which ruled out a lot of France.

London, the third of the great cities of Western Europe, wasdisplacing Amsterdam as the worlds entrept, the centre ofshipping and trade. Britain, with greater resources than theNetherlands, better ports than France, and a social systemwhich encouraged enterprise, was emerging as the new hubof the European economy. France, however, was still the mostimportant military power. Louis XIVs attempt to dominateWestern Europe led to a series of wars, and hence toopportunities for alert financiers. It also left the major statesof Western Europe heavily burdened with debt and open toinnovative attempts to manage the debt more effectively andto reduce the burden of interest payments.

Cantillon acted as agent in Spain for James Brydges,Paymaster General, who profited from the war on a massivescale, became successively Earl of Carnarvon and Duke ofChandos, and ended up as one of the most wealthy andpowerful men in England. As his trusted agent, and soon hisfriend, Cantillon made important contacts. Not much later,

4


when he was back in Paris, he took the self-exiledBolingbroke, chief minister of England until his fall and flight,into his house; a striking measure of how far he had come in avery few years.

Returning to Paris in 1714, Cantillon was associated withthe banking business of a relative (also called RichardCantillon, but distinguished by his French title, the ChevalierCantillon) and in 1716 he got backing from Brydges, now Earlof Carnarvon, and bought his relative out. The business hadalready come close to failure, and the Chevalier wentbankrupt soon after, though Cantillon paid off all his debtswithin a year. At the time of the takeover, the bank cannothave been worth much, since the price put on it was trivial, soCantillon started his career as a banker with very little but hiswits. He soon built the business up, using his Londoncontacts, contacts in Holland found for him by Carnarvon,and contacts with Irish merchants in Bordeaux and Nantes.Cantillons connections in Bordeaux must also have beenhelpful in the wine trade, another side to his business.

Banking then was, of course, very different from bankingnow: a private banker like Cantillon did not take depositsfrom the general public, as retail banks do now. A major partof his business was the transfer of money from one place toanother. Banks still do this, of course, but it has become aroutine activity. In the early eighteenth century, physicallyshifting money from one place to another was very expensiveand risky. As Cantillon explained in the Essai, the alternativewas to find offsetting payments due in the two centresinvolved, so someone in London who needed to make apayment in Paris could pay a London banker, and have themoney paid out in Paris, while a payment from Paris toLondon was cancelled off against it. The key to this businesswas (and is) for a banker to have branches in different centresor, more usually, correspondents in other centres. Even so,there were considerable risks, because of the time it took toget messages from one place to another, but the returns werecorrespondingly high. Success depended on contacts (withother bankers and with potential clients), and on skill.Cantillon had both, after his experience as Brydges agent inSpain.

Banking was a very international business; moneytransfers within a single country were important but,relatively speaking, international transfers, and the financing

5

INTRODUCTION

of international trade, were much more important than theyare now. Cantillons business was international from the start,because his comparative advantage was in his excellentconnections in London and Paris.

The next phase in his life was tied up with theextraordinary career of John Law. Law was a Scot, from afamily of goldsmiths and bankers in Edinburgh. His fatherdied while he was still young, leaving him a moderate sum ofmoney which he proceeded to squander in London. He killeda man in a duel, and had to flee from England in 1695,wandering around Europe for much of the rest of his life. Heseems to have supported himself mainly as a professionalgambler. He developed a set of ideas about economic policy,set out in a short book, Money and Trade Considered (1705), andin a series of proposals addressed to various Europeanleaders (collected in Law, 1934).1

After a long series of rebuffs, Law finally won theconfidence of the French Regent.2 His basic idea was thatresources were underutilized because of a lack of circulatingmoney. In itself, this was not a new idea; merchants had beencomplaining of scarcity of money for centuries, rather asfarmers are never satisfied with the weather. The school ofwriters now called mercantilists, who dominated debate onthe subject, had generally aimed to alleviate the (alleged)scarcity by ensuring a positive balance of payments, andhence an inflow of (metallic) money from abroad.

Law wanted to short-circuit this process by establishingsome sort of national bank, and issuing notes. Even this wasnot wholly new. What was new was that Law establishedhimself, by degrees, as the chief minister of France, and setabout carrying out his scheme. A substantial part ofCantillons Essai was devoted to showing why schemes likeLaws could not work (see chapters 6 and 7 below); thedetails of the scheme are not relevant here; what matters isthat it gave Cantillon his chance to make a great deal ofmoney.

Law was able to set up a General Bank in 1716, but foundthat the French state was burdened with massive debts, and

1 The best source for the fascinating story of Laws life is Hyde (1969); also Bordo(1987), Deane (1989:3948), and Murphy (1991). On Law and Cantillon, seeMurphy (1984,1986).2 Louis XIV had died, leaving a child as king.

6


therefore massive interest payments, as a result of LouisXIVs wars. This overhang of debt obstructed his plans toraise money for his bank. His next move was to copy theSouth Sea Company in England (which had been in existencefor some years, in a fairly undramatic way). His company,which went under several names but was generally called theMississippi Company, offered to take over government debt,at a reduced interest rate, in return for monopoly privileges inFrances American territories, which stretched up theMississippi river, but were almost completely undeveloped.To start with, shares were issued in exchange for governmentsecurities; later they were sold direct to the public, on easyterms, with a relatively small initial payment to encouragedemand. In the early stages, individuals were willing to buythe shares because of exaggerated expectations of gain fromthe companys concessions in the French colonies.

A classic speculative boom soon developed, with peoplewilling to pay unrealistically high prices for the shares, on theexpectation of still further price increases. The shares, with anominal value of 500 livres tournois (l.t), were initially soldfor an effective price of about 150 l.t. and ultimately reached ahigh of about 10,000. Those who bought early made colossalgains, as France was gripped by speculative fever. Law wasable to maintain the boom for a time by manipulatingmonetary policy through his control of French governmentpolicy and through his bank, which had become, effectively, acentral bank.

Cantillon was closely involved with these events. He wasintroduced to Law at an early stage, and was soon acting asbanker and agent for Law in the latters private dealings. Hewent into partnership with Law to buy land in the Mississippiregion, and to send an expedition out to settle it (this venturecame to nothing in the end). Most important, he boughtshares early and sold at a large profit, thinking that thescheme was unsound and was bound to fail. Law thoughthighly of Cantillon to start with, then turned against him, andat one point threatened to imprison him. When Laws planswere going sour, he asked Cantillon to return as his deputy(and thus, effectively, as deputy prime minister of France) butthe writing was on the wall, and Cantillon had no wish to beinvolved. Whether he ever had any faith in Laws scheme isdoubtful, but he recognized an opportunity when he saw one.

The fortune that Cantillon made in the first phases of the

7

INTRODUCTION

Mississippi Company boom was only the beginning. Theshares of the South Sea Company in England started to rise,as the speculative fever spread from Paris, and as the SouthSea Company started to copy some of Laws methods. Soon, aspeculative boom was raging in London, and Cantillon tookadvantage of it, as he had in Paris.

A third opportunity presented itself when Law, in effect,tried to raise the international value of the French livre, whileat the same time trying to hold interest rates down. In theearly eighteenth century, coins were of gold or silver, andoften circulated outside their country of origin. Both Franceand England had a money of account, used for fixing pricesand debts, which was not an actual coin: in England thepound sterling, in France the livre tournois. It was thuspossible to change the value of coins in terms of the money ofaccount. The notes issued by Laws bank, and the shares ofhis company, were denominated in livres tournois. Heplanned to devalue coins, and hence to raise the value of thelivre tournois in terms of metal and of other currencies, aspart of his plan to demonetize metals and go over to a whollynote based money. The idea was that people would choose tohold notes when they knew that specie was going to losevalue.

Many believed Law could do it. Cantillon did not. Hespeculated against Law, by lending livres in Paris to be repaidin London in sterling. Cantillons judgement was right, andhe made another large profit, at least on paper, but he was leftwith the problem of collecting his debts from people who hadlost a lot of money, and who blamed him for it. He was alsoassessed for a very large sum in tax in France, where thecollapse of Laws schemes was followed by heavyretrospective taxes on those thought to have gainedexcessively. Even so, he was now a very rich and well knownman, who mixed in the highest circles.

In the last decade of his life he was enmeshed in lawsuits,principally with Lady Mary Herbert, her lover, Joseph Gage,and their families and associates. They had borrowed fromCantillon to buy Mississippi stock, when it was riding high,(or, in the case of several relatives, had guaranteed the debts ofothers of the clan) and had lost heavily when the price fell. Theynow hoped to recoup their losses by claiming that Cantillonhad defrauded them. The principal allegation was that he hadtaken Mississippi stock as collateral, had sold it when the price

8


was high, and then demanded more collateral as the price fell.In effect, they accused him of having used their shares to shortthe market. Cantillon was even arrested and imprisoned(though only for a few hours), on criminal charges of havingstolen the disputed shares. Murphy has examined the evidence,and finds Cantillon probably not guilty of the charges.

As the affair dragged on it became ever more bizarre, withaccusations and counter-accusations of murder plots,involving a weird gallery of characters (including a spy and abigamistCantillons life was nothing if not colourful). Therewas also a separate (and less frenzied) series of disputesinvolving Cantillon and Law, who was back in England in theearly 1720s, almost penniless, after a spell in exile in Venice.(Law left London in 1725, and died in Venice in 1729.)

In 1734, Cantillons house in London was burnt to theground, and a body, which was assumed to be his, was foundin the ashes. Exactly what happened that night remains amystery. First reports suggested a simple accident; Cantillonhad been reading in bed, and had set fire to it. Doubts soonarose about this account, and several of Cantillons servantswere tried for murder, accused of having killed him and thenransacked the house and set fire to it to cover up the crime.Different witnesses at the trial told wildly conflicting stories,and the accused were acquitted. Suspicion remained about acook, one Joseph Denier, who had been dismissed ten daysbefore the fire after working for Cantillon for eleven years; hefled the country and could not be brought to trial.

Murphy discusses a further possibility, that the fire mayhave been deliberately set by Cantillon himself, and that thebody, which was never positively identified, was not that ofCantillon. (Bodies, it seems, were not hard to get hold of fordissection.) On this hypothesis, Cantillon staged his owndeath in order to escape the lawsuits in which he wasembroiled. The main evidence for this story is that amysterious person, the Chevalier de Louvigny, turned up inthe Dutch colony of Surinam immediately after Cantillonsapparent death, carrying a number of documents relating toCantillon, as well as a considerable quantity of money andvaluables. This individual was pursued but not apprehended;he abandoned the documents, which is how they wereidentified. He must presumably have been either themurderer or Cantillon himself. If the murderer, why would hecarry these valueless but incriminating papers?

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INTRODUCTION

Murphy points out that there are discrepancies in thehypothesis that Cantillon was murdered: why, for example,did he withdraw a huge quantity of money on the day beforehis apparent death (allegedly 10,000, more money than evenquite prosperous people would handle in a lifetime)? Onthe other hand, given that he did, might this not be the motivefor murder? There is little hope that the truth will ever beknown.

1.2 THE ESSAI SUR LA NATURE DU COMMERCE ENGNRAL

Dramatic though Cantillons life was, he is remembered nowas an economist, the author of the Essai sur la nature ducommerce en gnral. There is evidence, both from hiscorrespondence and from reports at the time of his death, thathe wrote much more, starting as early as 1718 (see Murphy,1986:50), but only the Essai seems to have survived the fire inhis house on the night of his death (though there is always achance that more might turn up, preserved in an obscurearchive somewhere, since Cantillon certainly sent copies ofsome of his writings to friends; that is how the Essai wasrescued). What survives is a version in French, whichcirculated in manuscript in France for many years before itwas finally published in 1755. Internal evidence suggests thatit was composed around 1730 (Murphy, 1986:246).

Which language it was originally written in is unclear; thepublished version was described as a translation from theEnglish, but that proves nothing, because it was common toclaim that a book had been published abroad, in order toevade the French censorship system.1 Even if it was originallywritten in English, the translation could well have been doneby Cantillon himself. There was originally a supplement,containing empirical data and numerical calculations, whichCantillon referred to frequently in the text of the Essai, but it isnow lost.

1 One Malachi Postlethwayt quoted extensively from the Essai (withoutacknowledgment) in a number of works (1749, 1751, 1755, 1757), some of whichwere published, in English, before the publication of the Essai in France. Heclearly had access to a copy which has since been lost, possibly an Englishoriginal written by Cantillon. There is no way of knowing.

10


In any case, the Essai is a work of genius, and it wasundoubtedly written by Cantillon. His style is so simple andclear that it does not matter much whether the text thatsurvives is a translation or the original; the authors intentioncomes across unmistakably in virtually every passage.

The subject of the book is economics. There was nogenerally accepted name for the subject at the time:commerce or trade was the best word available, so an essayon trade in general was an essay on economic principles.The Essai deals with the topics which you would expect to bediscussed in any modern textbook of economics: production,the allocation of resources between different uses, thegeneration and distribution of incomes, the location ofdifferent economic activities, the role of money, the effects ofchanges in the money stock and in monetary institutions,foreign trade, the balance of payments, and so on. It was thefirst systematic treatment of economic principles of a sort amodern economist would recognize.

It is primarily a work of theory. Cantillon was careful to setout his argument in general terms, without relying on specificcases, events, or countries, except as illustrations. Where heneeded them to make the point, he constructed even moreabstract and simplified models to focus on a particularproblem; some of the key arguments of part one arepresented in a model of a single isolated estate, treated as if itwere a self-sufficient economy.

Even the more applied material of parts two and three isset out in general terms; there are some fairly longdiscussions of specific cases (augmentations and diminutionsof the French currency, shortages of silver currency in Britain,when the ratio of the gold and silver prices got out of linewith the free market ratio, and so on), but they serve to showthat Cantillons more general theory can be adapted to dealwith these special cases. In his own words: I confine myselfalways to the simple views of commerce lest I shouldcomplicate my subject, which is too much encumbered by themultiplicity of facts which relate to it (Essai: 265).

The Essai is divided into three parts, the first dealing with aclosed and essentially non-monetary economy, the secondwith the determinants of price levels and competitiveness inan open, monetary economy, and the third with moretechnical aspects of monetary policy, with exchange rates,banking, and the like. (This last part, obviously, deals with

11

INTRODUCTION

issues raised by Laws system, though Law is not mentionedby name anywhere in the Essai.) In short, Cantillon startedwith a simplified, and thus unrealistic, model, and addedcomplications one at a time, just as a modern theorist would.

Cantillons basic model, set out in part one of the Essai, isunique, in that he treated land as the only genuinely scarceresource. Population adjusts to the demand for labour, sounlimited amounts of labour are available (given time) at realwages governed by social custom. Labour can be treated as ifit were a produced intermediate good. To put it very simply:labour is always available, so long as enough land is allocatedto growing the necessary food, and to providing the othernecessities of life.

Cantillon recognized that his model, with land as the onlyscarce resource, implies a land theory of value; the cost ofanything can be reduced to the land needed, directly andindirectly, to produce it, including the land needed to supportthe labour force. Cantillon did recognize the need for capitalinvestment in production, but he did not treat capital scarcityas a constraint on total output. In effect, he (implicitly)assumed that enough saving would always be forthcomingwhen there is a demand for the product. As a result, it is nosurprise to find that he had no real theory of profit; this isperhaps the main weakness in his theory.

No other significant economist has ever constructed amodel quite like this. Before Cantillons time, most economicwriting concentrated on trade or on monetary issues, with novery clear idea of how the economy as a whole worked. Themain exception was William Petty, who is frequently said tobe Cantillons main intellectual ancestor. Petty, however,argued that land was abundant and labour scarce, a viewdiametrically opposed to Cantillons (and one which makes itvery difficult to see how land could command a rent, as Pettyknew it did). Cantillons immediate successors, thePhysiocrats, took over much of his analytical apparatus,while arguing that agriculture in France (the only case theywere interested in) was producing well below its truepotential. Capital investment was needed to raise agriculturaloutput, and increased demand and higher prices wereneeded to induce investment. They did, it is true, retainCantillons view that the surplus over labour costs accrues tothe landlord as rent, but this is inconsistent with theirtreatment of capital, not land, as scarce. Among these early

12


pioneers of economic theory, only Cantillon had a consistentmodel linking resource supplies, value, and distribution.

The second part of the Essai is about money. Cantilloninsisted that money had to have intrinsic value. He tookover the quantity theory of money, which he found in Locke,and developed it. His main contribution was to insist that anincrease in the money supply could only affect prices throughits effect on the demand for goods, an effect which would befelt differently, at least to start with, depending on the waythe extra money reached the economy. In particular, printingextra banknotes would lead either to the bank failing, or to anartificial boom vulnerable to a sudden loss of confidence. Thiswas clearly intended as a criticism of Laws system and Lawstheories.

On the other hand, a balance of trade surplus would bringin extra money, drive up prices, and eventually reverse itself.This is the specie-flow mechanism, which Cantillon was oneof the first to recognize. He thought, however, that priceincreases would take quite a long time to come through,because the money would enter the system as extra profits inthe hands of merchants and export producers, who werelikely to hoard the money initially, to invest later. Since priceswould be slow to rise, the process could last some time. Evenwhen prices had increased, Cantillon held that a countrycould sustain a high price level with balanced trade for someconsiderable time, provided it was based on real competitivestrength in manufacturing, since competing manufactures inlow cost centres would take a long time to become wellenough established to be an effective threat.

This was one component of his mercantilist attitude toeconomic policy. Mercantilism is not easy to define, andsome have denied that such a thing ever existed. There can beno doubt, however, that the great majority of writers on tradein the seventeenth and early eighteenth centuries, especiallyin Britain, were anxious to maintain a positive balance oftrade in order to increase the money stock, or the stock ofprecious metals, and that they sought to do so by promotingexports, and discouraging imports, of manufactures. It isconvenient to have a term, mercantilism, to describe thiscommon view.

Cantillon accepted mercantilist policy prescriptions, butnot because of any naive identification of money with wealth.He thought that a relatively high price level could be

13

INTRODUCTION

maintained for a considerable length of time, during whichthe terms of trade would be favourable. He particularlystressed the benefits in terms of power and military strength;with a high price level, it would be possible to raise moremoney in taxes, and hence to maintain larger armies(recruited, presumably, where wages and prices were lower).He also argued that a state which exported manufactures,and used the proceeds to import food and raw materials,would be able to maintain a larger population than itsterritory would otherwise support, with gains in political andmilitary power.

The final part of the Essai starts with a very importantchapter, on foreign trade, but the rest of part three dealsmainly with relatively technical matters of banking practice,along with a fairly thorough discussion of exchange marketsand exchange rates. The chapters on banking are clearlydesigned, at least in part, to refute Laws policies and thetheories they were based on.

1.3 OUTLINE OF THE BOOK

This study of Cantillons economics is divided into two parts.In part I, I set out Cantillons theory, with only a minimum ofreferences to his predecessors and successors. In part II, I sethis work in the context of the history of economic ideas fromthe late seventeenth to the late eighteenth centuries, fromPetty to Adam Smith. I have adopted this plan because I wantto emphasize the internal coherence of Cantillons theory,which is best done by examining it in its own right, withoutdigressions to discuss whether particular parts of it camefrom Petty, or from some other source, and without giving itmarks out of ten for anticipating, or failing to anticipate, laterdevelopments.

Land and land ownership play a central role in Cantillonseconomics. In chapter 2, I describe Cantillons picture of theeconomic system. Significantly, his chapter titled of humansocieties is devoted to arguing that the ownership of land isbound to be unequal, creating two primary classes, thelandowners and the rest. The people who cultivate the landlive in villages distributed over the face of the land, butlandowners live in cities, or at least spend a large part of theirincomes there. The flow of payments between city and

14


country was the key to Cantillons treatment of thecirculation of money.

The size of the population, dealt with in chapter 3, dependson the number of people the land can support, and on theway the land is used. If there are many horses, for example,land must be used to feed horses rather than people, and thepopulation must be below its theoretical maximum. (Almost)everyone wants to marry, and have children, but they will notdo so unless they can afford to bring up their children in whatthey regard as a suitable style. Incomes, therefore, aredetermined by social custom, not by the bare physicalrequirements of subsistence, as in later versions of theotherwise similar Malthusian account of population.

Chapter 4 deals with incomes. The general level of wages isgoverned by social custom, which controls the birth rate, andthus the supply of labour (in the very long run). Wagedifferentials must compensate for differences in risk, trainingcosts, and the like, because of mobility of labour betweenoccupations. The surplus over the cost of production ofagricultural goods, including labour costs at sociallydetermined levels, accrues to landlords as rent. The finalsection of chapter 4 examines Cantillons rather puzzlingtreatment of profit and interest.

Chapter 5 covers Cantillons account of the determinantsof market prices, his explanation of the adjustment of currentmarket prices towards intrinsic values, and his land theoryof value. With land as the only scarce resource, the prices ofgoods depend on the amount of land needed to producethem, including the land needed to support the labour force.

In parts two and three of the Essai, Cantillon introducedmoney into the story. Chapter 6 deals with his account of thecirculation of money, of the determinants of the velocity ofcirculation, and of the effects of monetary changes on theprice level. Money, in his time, was based on gold and silver(mainly silver). Broadly speaking, Europe could only obtainthese metals by importing them from the Americas orelsewhere. Monetary theory and the theory of the balance ofpayments were thus inextricably linked; Cantillon madesubstantial contributions to the theory of balance ofpayments adjustment, the specie-flow mechanism, and to thetheory of money and prices. The last two sections of chapter6, together with chapter 7, summarize Cantillons analysis ofsome more technical monetary issuesaugmentation and

15

INTRODUCTION

diminution of the currency, exchange rates and transfers ofmoney, banks and banking, and so on. Many of them areconnected with the lessons of Laws system.

Chapter 8, the final chapter of part I, examines Cantillonstreatment of international trade and trade policy. There is, onthe face of it, a paradox here, in that Cantillon was clearly adirect ancestor of the Physiocrats, of Adam Smith, and ofclassical economics, in matters of economic theory, but hispolicy views were very much in the mercantilist tradition ofhis contemporaries, which Smith and his followers rejected asno more than error and special pleading. I shall argue thatthere is no conflict between Cantillons basic theory and hispolicy views. He reached different conclusions from those ofthe classical economists because his assumptions, both aboutthe facts of the case and about the aims of policy, weredifferent from theirs.

In part II of this book, I set Cantillon in the context of thehistory of economic theories from the late seventeenth to thelate eighteenth century. Chapter 9 deals with hispredecessors. Cantillon has often been linked with Petty, aspart of the main line of descent which led to classicaleconomics. Marx, for example, described Petty as the firstclassical economist. I shall argue that Cantillon took verylittle from Petty, and that he completely remade the little thathe did take. Pettys system (in so far as his work is coherentenough to be called a system) was quite different fromCantillons, because Petty explicitly and repeatedly insistedthat land was not scarce, while for Cantillon land scarcity wasfundamental. Locke probably taught Cantillon rather morethan Petty did, at least in monetary economics, though againCantillon went far beyond his mentor. Law is also worthconsidering, not because Cantillon took much from him(what they shared mainly derived from Locke), but becauseseveral sections of Cantillons Essai may have been intendedas implicit criticisms of Law.

Finally, in chapter 10, I examine Cantillons legacy to hisimmediate successors. The most immediate and mostimportant links connect Cantillon with Quesnay and hisfollowers, the Physiocrats, who developed their theory inthe decade or so after the eventual publication of the Essai,and who undoubtedly based much of their analysis on whatthey learned from Cantillon. Their work has been the subjectof a great deal of research and debate, but it remains rather

16


difficult to interpret, probably because of its internalcontradictions and inconsistencies. In brief, Quesnay notedthat French agriculture was far less productive thanagriculture in England, but he took most of the tools ofanalysis which he used to discuss this problem fromCantillon, who had assumed that the land was fully used. Thetwo best known elements of Quesnays economicstheTableau Economique, and the idea that only agriculture is trulyproductivewere both based very closely on Cantillonstheory, though it is unlikely that Cantillon would haveapproved of the uses Quesnay made of them.

James Steuart was also (almost certainly) influenced byCantillon, though he may not have played much of a part intransmitting Cantillons ideas to later generations ofeconomists, because his work was so completely eclipsed byAdam Smiths Wealth of Nations, and because he used only themost superficial features of Cantillons theory. Like thePhysiocrats, he thought that the land was underused, so hisbasic framework was very different from Cantillons. Themain feature of his Inquiry into the Principles of PoliticalOeconomy was his lack of faith in the market mechanism, andhis insistence that the economy had to be actively managedby a statesman. Cantillon did support a variety ofinterventionist policies, which may have misled Steuart intothinking that they were on the same side, but Cantillonunderstood the strengths of the market very well, and wascareful to argue, in each case, that intervention was neededbecause there was some policy objective at stake thatindividual consumers could not be expected to take accountof, such as military strength.

Cantillons influence on Turgot and Smith, the founders ofthe classical tradition in economics, was less direct than hisinfluence on Quesnay and Steuart, but I will argue that he didhave a significant effect on their thinking, either directly orthrough the Physiocrats. Smith, of course, was a major influenceon almost every serious writer on economic issues for ageneration or twoit was primarily through his influence onSmith that Cantillons ideas, stripped of their most distinctivefeatures, became part of the mainstream of economics.

Part I

Cantillons Economics

19

2

The Economic and SocialFramework

It is easy, at a first reading, to dismiss the opening pages ofthe Essai as mere throat-clearing by Cantillon: a rather tritedefinition of wealth, a couple of pages of rather odd remarkson the history of land ownership, and a few apparentlyirrelevant and descriptive chapters (only a page or twoeach) on villages, towns, and the like. On a second readingtheir purpose is clear: they set out a vision of what aneconomy is like, in almost the simplest possible terms (thereis an even simpler model later: the whole economy reduced toa single isolated estate). Everything that follows is based onthis simple, apparently naive, beginning.

2.1 HUMAN SOCIETY

The first chapter of the Essai, only a third of a page long andtitled On Wealth, is straightforward enough. The firstparagraph introduces the theme.

The land is the source or matter from whence all wealth isproduced. The labour of man is the form which producesit: and wealth itself is nothing but the maintenance,conveniencies, and superfluities of life. (Essai: 3)

Cantillons definition of wealth as the maintenance,conveniencies, and superfluities of life is enough to acquithim of the charge Adam Smith levelled against themercantilists, of confusing money, or precious metals, withwealth. This is important, because Cantillon recommended

20


policies which are now thought of as mercantilist; Cantillonsmercantilism will be discussed in chapter 8.

That the land is the source of wealth, and labour producesit, was almost a clich at the time. Compare, for example,Petty: Labour is the father and active principle of wealth, aslands are the mother (Petty, 1662:68). Significantly though,Cantillon gave land the pride of place, in the very firstsentence. Unlike modern economists, Cantillon did notequate land with natural resources in general; Rivers andSeas are mentioned separately. But these Seas and Riversbelong to the adjacent lands or are common to all (Essai: 3);the important thing about land, as Cantillon saw it, is that itcan be owned by someone. The second chapter of the Essaideals with the ownership of land, before labour comes intothe picture. The following few chapters, on villages, towns,and so on, deal with the way people get their living, directlyor indirectly, from the land, and with the geographicalpattern of settlement.

Taken as a whole, the first six chapters show how land andlabour are brought together, with land, and the owners ofland, firmly at the centre. There is no mention of capital as afactor in the production of wealth, alongside labour and land.Cantillon did not wholly overlook the need for investment,but he did not see it as a problem. His most direct successors,the Physiocrats, thought in terms of an economy whichperformed well below potential, because of a lack of capitalinvestment. Cantillon did not.

The key to Cantillons vision of the economic system is tobe found in the second chapter of the Essai, Of HumanSocieties. Few modern readers would expect to find achapter with such a title devoted almost entirely to the issueof land ownership, but for Cantillon, land ownership was thebasis of society. Someone has to own the land: If however wesuppose that the land belongs to no one in particular, it is noteasy to conceive how a society of men can be formed there(Essai: 7).

He took full, transferable, private ownership of land forgranted; indeed, he could not conceive of a human societywithout it. There is no hint here of any notion of feudalownership (despite a passing reference to the origins of landownership in France, which he saw as the result of conquest,followed by redistribution of the land by a conqueringprincepresumably the king of the Frankswho divided it

21

THE ECONOMIC AND SOCIAL FRAMEWORK

between his officers). Feudal ownership was not transferable,was tied to military duties, and so on. In a feudal system,peasants were tied to the land, but had rights to it, and therelation between landowner and tenant (lord and serf) wasgoverned by an intricate set of laws and customs, defining therights and duties of both parties. It is true that the feudalsuperior, in practice, had most of the rights, and was wellplaced to enforce them, but feudal ownership was still verydifferent from the unfettered ownership Cantillon took forgranted. In Cantillons account, the landowner is free to dowhatever he wants with his land.1

Note also that Cantillon did not claim any particular morallegitimacy for the ownership of land: It does not appear thatprovidence has given the right of the possession of land toone man preferably to another: the most ancient titles arefounded on violence and conquest (Essai: 31). His ownfamily, after all, had acquired their lands in the Normanconquest of Ireland, and had lost them to the soldiers of theinvading Cromwellian army.

The main point of the chapter was to argue that in whatway soever a society of men is formed the ownership of theland they inhabit will necessarily belong to a small numberamong them. (Essai: 3)

The population is necessarily divided into landowners andnon-landowners. Since ownership is normally based onconquest, it usually starts off very unequal. Even ifownership were equally distributed, it would soon becomeunequal, because some have more children to divide theirinheritance between, while some are lazy, prodigal orsickly (Essai: 5), and are compelled to sell out to the frugaland industrious. The owner of an estate will employ upon itthe labour of those who having no land of their own arecompelled to offer him their labour in order to live(Essai: 5).

The chapter on land ownership (On Human Society) also,

1 In fact, there were significant relics of feudalism in France, and a few even inEngland, in Cantillons time. Here, as elsewhere, he simplified. In particular, theFrench cultivator was subject to a bewildering series of exactions: rent, taxes,tithes, seigneurial dues, and so on (Goubert, 1973). To treat all of these as rent,accruing to the landowner, was a significant act of abstraction.

22


very briefly, covers income distribution and resourceallocation, introducing themes which will be dealt with atgreater length later:

each owner will manage the land himself or let it to one ormore farmers:it is essential that the farmers andlabourers should have a living whether they cultivate theland for the owner or for a farmer. The overplus of the landis at the disposition of the owner. As to the use to whichthe land should be put, the first necessity is to employ partof it for the maintenance and food of those who work uponit and make it productive: the rest depends principallyupon the humour and fashion of living of the prince, thelords and the ownerif they delight in horses, pasture isneeded, and so on. (Essai: 7)

The basic theme emerges very clearly here. The land is thestarting point. The owners of the land control its use. Part ofthe produce of the land is needed to support those who workto produce it, but Cantillon assumed that there was no realchoice over the composition of this part of output. The rest ofoutput is the overplus or, in language which has becomepopular since, the surplus, and is available to the landlord inwhatever form takes his fancy. The tastes of the landlordgovern the composition of the disposable part of output, andthus the allocation of land between different uses, theemployment of labour, and so on.

2.2 VILLAGES AND CITIES

The basic unit in Cantillons society is a village. Labourers areneeded to cultivate the land, and they must live close to theirwork, so there must be villages dispersed over the land, forthe farmers and farm workers to live in, together with theartisans (farriers, wheelwrights, and the like) who serve theirimmediate practical needs. The size of each village dependson the number of workers needed to work the territory (Essai:9), plus the artisans needed to provide for them. If thelandlords choose to live on or near their lands (instead ofliving in some distant city), they add to local demand, andthus to local population, since they employ servants andtradesmen. Note the implicit assumption that the land is fully

23


used, which is reinforced only a few pages further on: if thevillage continue in the same situation as regardsemployment, and derives its living from cultivating the sameportion of land, it will not increase in population in athousand years (Essai: 23). At least as far as agriculture isconcerned, Cantillons model was basically static.

Market towns exist because there are economies of scale inbuying and selling. If buyers and sellers are concentrated in asingle place, both sides can compare prices and qualities ofgoods on sale, which they could not if merchants wentaround scattered villages. Market towns, then, exist to servethe villages of a given territory, just as the villages exist towork a specific area of land. They are also the natural placefor more specialized crafts which serve a wider area than asingle village. Towns are the next step in a hierarchy ofsettlements, based on the villages, and hence on the area andcharacteristics of the land. Fertile areas are more denselypopulated, with more and larger villages, more trade, andlarger market towns, because there is more business totransact, while less fertile areas are less densely populated.

Cities have a different role in Cantillons (idealized) world.While towns are part of the working part of the system,meeting the functional needs of cultivation and of thecultivators, cities are part of the luxury sector (though theydo not produce luxuries alone). Cities are where landlordsspend their rents, gathering together to enjoy agreeablesociety (Essai: 15). Landlords spending supports a greatvariety of servants, artisans and traders (bakers, butchers,brewers, wine merchants, manufacturers of all kinds; Essai:15), and they, in turn, spend their incomes (in part) on eachothers products and services. In reality, of course, cities wereoften centres of foreign trade and of export manufacture, aswell, but Cantillon ruled that out so as not to complicate oursubject (Essai: 17). Cities are not tied directly to the land inthe way that villages and market towns are; they can be fixedin some pleasant spot (Essai: 15), but they still owe theirliving to the land, and their size depends on the rents that arespent there, and thus on the surplus produced by the landsowned by the landlords who live in the city.

Capital cities, centres of spending by the king or prince, hiscourtiers, government functionaries, and so on, depend onthe surplus of the lands of the kingdom, just as other cities do,but on a larger scale. Should the king move his capital, the

24


new capital will become great at the expense of the city it hasdisplaced (Essai: 17). Cantillons example was St Petersburg,though he could equally have pointed to the example ofVersailles, which was established in a spot the king thoughtpleasant. The palace of Versailles, together with all itsassociated buildings, grew until they housed some 20,000people, the size of a very respectable city at the time, eventhough the main functions of government were still carriedout in Paris. To picture Cantillons world, remember thatmarket towns of the time might have no more than a fewhundred inhabitants, and many cities were not much larger.

The population of each village depends on the labourneeded, directly and indirectly, to cultivate the land.Similarly, the populations of towns and cities depend on theopportunities for employment, and these opportunitiesderive ultimately from the revenues produced in agriculture.Each trade proportions itself to the demand for it:

It often happens that labourers and handicraftsmen havenot enough employment when there are too many of themto share the business. It happens also that they aredeprived of work by accidents and by variations indemand, or that they are overburdened with workaccording to circumstances. Be that as it may, when theyhave no work they quit the villages, towns or cities wherethey live in such numbers that those who remain arealways proportioned to the employment which suffices tomaintain them; when there is a continuous increase ofwork there is gain to be made and enough others arrive toshare in it. (Essai: 25)

Total population, too, adjusts to the demand for labour;Cantillons population theory will be discussed fully inchapter 3.

2.3 THE SYSTEM AS A WHOLE

At two crucial points in his analysis, Cantillon used anexample of a single, self-sufficient estate, to allow him todescribe a complete economy in the simplest possible terms.It appears first in his discussion of the par between labourand land, the basis of his land theory of value (discussed in

25


chapter 5 below). It reappears in his discussion of theallocation of land between different uses, which is designedto show that the market reflects landowners preferences, justas if they controlled the use of land directly. The analysis ofthe isolated estate (Cantillons equivalent of RobinsonCrusoe) provides the clearest statement of how he sawresources being allocated between different uses. It is adevelopment of the argument sketched very briefly in thechapter On Human Societies, which has been discussedalready.

If the owner of a large estate (which I wish to consider hereas if there were no other in the world) has it cultivatedhimself he will follow his fancy in the use to which he willput it. (1) He will necessarily use part of it for corn to feedthe labourers, mechanics and overseers who work for him,another part to feed the cattle, sheep and other animalsnecessary for their clothing and food or other commoditiesaccording to the way in which he wishes to maintain them.(2) He will turn part of the land into parks, gardens, fruittrees or vines as he feels inclined and into meadows for thehorses he will use for his pleasure, etc. (Essai: 59)

This compelling image of a life of rustic simplicity is the keyto Cantillons vision of how all economies, however complex,have to work. If consumers want, say, wine, then land has tobe allocated to growing the grapes, and people have to tendthe vines, make the wine, and so on; they in turn have to befed, clothed, and provided with all they need. That much istrue in a complex market economy or on an isolated estate,but on the estate the highly visible hand of the landownerdoes the allocating. The idea may have been suggested toCantillon by thinking about the problems of building up anestate in undeveloped colonial territories. After all, he was aninvestor in a projected development in the territories of theMississippi Company. The plan was, of course, to producegoods for export, to earn money and make profits to sendback to France, but the estate still had to rely on its ownresources to a very considerable extent. Cantillon spokecasually of slavery and of the employment of free men, asalternative forms of labour, as they were in the Americas atthat time. Alternatively, he may have got the idea byobserving the relatively self-sufficient life of some of the large

26


estates in Europe at the time. Later in the eighteenth century,for example, on the Esterhazy estate, the owner did not haveto go out to listen to music because he had his own orchestraand his own resident conductor and composer, a man calledHaydn.

In a market system, of course, it is not so easy to see thelink between consumers fancy and its consequences for theallocation of resources.1 Cantillons next step was to invite thereader to imagine a decentralization of decision making onhis imaginary isolated estate. The owner could decide to rentthe land to those who had previously been employed asoverseers, and leave them to manage the process ofproduction, thus allowing him to avoid so much care andtrouble. Prices could be set at a level which would allow eachindividual the same living standard as before, while thelandowner would only have to collect the rent and buy thethings he wants in the market. The overseers now becomeindependent entrepreneurs.2

If the landlord consumes the same things as before (hisfancy has not changed), and if all the entrepreneurs andwage workers have the same living standards as they didwhen they were directly employed by the owner, thenoutputs, employment, and land use must be the same asbefore. The market can thus duplicate the results ofcentralized decision making, save the owner the trouble oforganizing everything and at the same time provide bettermotivation for the now independent producers. This claimmattered to Cantillon in two ways. First, it shows that there isno need for centralized control: it provides a case for laissez-faire. He did not stress this point, presumably because hethought that there was a case for fairly detailed governmentintervention in an open economy (his mercantilist case forstate intervention in foreign trade will be discussed in chapter8). Second, he claimed, it shows that the market duplicatesthe results of control by the landowner, so supporting his claimthat it is the choices of landowners that govern the allocationof resources.

If there is excess supply of any good, its price falls,resources shift out of producing it, and so on. Prices adjust

1 Fancy is Cantillons word for what would now be called preferences.2 Entrepreneur is rendered as undertaker in Higgs English translation,following the usage of the early eighteenth century. Since entrepreneur is theterm now generally used in economics, I shall use it in preference to undertaker.

27


until they cover costs and yield a normal income to theproducer.1 In equilibrium, the result will be the same as itwould have been if the landlord set the prices, or if he hadcontrolled the whole estate himself. By extension, in a fullblown market economy, with many landlords, the choicesthey make collectively, by deciding how to spend their rents,govern the allocation of resources.

Can this argument be sustained? Cantillon presented itvery plausibly, but he fell far short of providing a formalproof (cf. Bowley, 1973). It is clear that additionalassumptions are needed, assumptions that Cantillonevidently took for granted (it is hard to think that he was notaware of them, or at least that he would not have recognizedthem if they had been put to him). First, the market can onlyprovide different rewards to different people if they carry outdifferent jobs. It cannot give a higher reward to a faithful oldretainer, and less to one who had offended the landowner, asa landlord who kept direct control could. Second, the patternof relative rewards for different tasks can no longer be set bythe landlord. Wage determination will be discussed in thenext section; suffice it to say here that Cantillon seems to haveassumed a level of wages in absolute terms, and a pattern ofrelative wages, determined partly by real economic factors(training costs, and the like) and partly by social convention.His argument, at least in its simple form, rests on theassumption that landowners who control their estatesdirectly would choose a level and pattern of rewards identicalto that set by the market.

In order to sustain his claim that:

the fancies, the fashions and the modes of living of theprince, and especially of the landowners, determine theuse to which land is put in a state and cause the variationsin the market prices of all things (Essai: 59; chapter title),

he also needed to assume either that the consumptionpatterns of non-landlords were fixed in some way, leaving noscope for effective choices by anyone other than thelandlords, or that the choices made by non-landlords weregoverned by the landlords choices.

The consumption patterns of the mass of the population

1 Cantillons price theory will be discussed more fully in chapter 4.

28


could be taken as given, governed by the same socialconventions which determine wage levels: Labourers andmechanics who live from day to day change their mode ofliving only from necessity (Essai: 63). This cannot be a matterof physical necessity, of wages reduced to such a level thatthere is only one set of purchases that allows a baresubsistence, since Cantillon recognized that wages differedgreatly between different areas: wages in parts of Englandwere vastly higher than those in southern France (Essai: 379). If, however, it represents a minimum that is sociallyacceptable, it is reasonable to think of the composition ofspending as fixed by convention.

However, Cantillon faced a major problem in dealing withthe consumption of better-off farmers, merchants, and so on,as he himself recognized. These people clearly had enoughincome to follow their own fancies. His response was fairlyweak: they take as their model the lords and owners of theland (Essai: 63), and imitate them, so the choices of thelandlords still dominate through emulation. This is clearly arather weak spot in Cantillons case. It is part of a widerproblem for Cantillons land-centred economics: thetreatment of capital and profit. To allow capital and profit anindependent role alongside land and rent would haveundermined his whole theoretical framework, and he was notprepared to take such a drastic step.1

Cantillons model of the isolated estate as a representationof the system as a whole has been interpreted in a number ofdifferent ways. From one point of view, perhaps the mostimportant feature of the analysis is the way the marketresponds to consumers demands (though only the landlordsare in a position to exercise any real choice). Cantillon was thefirst to state the doctrine of consumer sovereignty (Bowman,1951:4).

A complementary view is that of Walsh and Gram(1980:212) and Walsh (1987:319), who call Cantillonsisolated estate a planned economy; on this view, Cantillonsargument that the market yields the same results as directcontrol by the owner, parallels modern discussions of thechoice between central planning and the market.

Tribe (1978), by contrast, has claimed that there was no

1 The treatment of capital and profit will be discussed further in the nextchapter.

29


such thing as economics in the seventeenth and earlyeighteenth centuries. One of the main justifications he offersfor this extraordinary assertion is that the writers of thisperiod conceived of the state as a royal household (Tribe,1978:81). Cantillons account of an isolated estate seems, onthe face of it, to be a striking confirmation of this argument.1Indeed, Cantillons discussion of economic policy often fitsTribes description rather well, because it was implicitlydirected to a prince or ruler, who might be expected to thinkof the state as if it were his private property. What matters,however, is that Cantillon had a consistent and sophisticatedmodel of the workings of a market economy, and that he hadgood theoretical reasons for using the isolated estate as astarting point. In his model, land was the only scarceresource, so ownership of the land inevitably had a specialrole.

2.4 THE LOCATION OF ACTIVITIES

Cantillons analysis of the isolated estate served as an imageof the system as a whole; a market system is a single estatewrit large. His discussion of villages and towns in the earlychapters of the Essai, however, points to one differencebetween a single estate and a full scale economy; the largersystem is spread out over more space. There is a furtherdevelopment of this theme in a much later section of the Essai,dealing with differences in relative prices and in price levelsin different regions, and with the location of economicactivities (Essai: 14959). This part of Cantillons argumentwas postponed to part two of the Essai because it is cast interms of money price levelsmoney only comes into thestory in part twobut the argument really depends ontransport costs, not on money prices, and it seems morelogical to deal with it here. It is worth remarking, incidentally,that locational issues have been underplayed by manyeconomists, though Smiths discussion of rents in urbanfringe areas is an honourable exception. Cantillons treatmentof the economics of location, brief though it was, could havebeen a valuable start if it had been followed up by his

1 Though one could ask what is wrong with treating the state in this way; it wasin many ways an appropriate image of the world as it was at the time.

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successors. Instead, location became a German speciality(Blaug, 1979), owing little to Cantillon.1

Villages and market towns are necessarily dispersed overthe land. Landlords, on the other hand, often live in citiesrather than on their estates, especially in the capital city, and asubstantial urban population exists to supply them with thethings they need. Cities make their living mainly fromlandlords spending, and only to a lesser extent by producingmanufactured goods for sale to the rural sector. Cantillonchose to focus on the relation between the capital city and thecountryside, effectively ignoring lesser cities in this part of hisstory.2 Foreign trade can also be ignored at this stage in theargument.

Transport was costly in the early eighteenth century. Forexample, Cantillon reported that the carriage of wine fromBurgundy to Paris often costs more than the wine itself costsin Burgundy (Essai: 75). Food prices must therefore be higherin the capital than they are in the country, to cover transportcosts, while the prices of urban goods must be higher in thecountry. Transport of food and raw materials was typicallymuch more expensive, per unit of value, than transport ofmanufactured goods (manufactured goods, after all, are rawmaterials with value added to them by manufacture).

In Cantillons picture, there was a flow of rents and taxesfrom all regions of the countryside to the capital, and acorresponding flow of food and raw materials to support theurban population and to provide materials for urbanmanufactures. There had to be a corresponding gradient offood prices across the whole country, with prices lower inplaces further from the capital. There might, one could argue,be a similar, but inverted, gradient of manufactured goodsprices, but it would be less pronounced, and might bealtogether absent or reversed if country areas drew theirmanufactures from nearby cities where food prices, and thusmoney wages, were lower.

The point is that there is a one way flow of goods from thecountry to the capital, corresponding to payments of taxesand rents by country people. Landowners from remote areasfind that their rents, in money terms, are lower than those of

1 See Hebert (1981) on Cantillons contribution to spatial economics.2 In both England and France at the time, the capital was very much larger thanany other city (as it still is).

31


better placed estates. If they choose to live at the capital, theyhave to pay the high prices found in the capital when theyspend their relatively low rent incomes. The surplus of theirestates, in real terms, may be as large as any if measured onthe spot, but it is eaten up by transport costs in the process oftransferring it to the capital. Remoteness must, of course, bemeasured in terms of transport costs, not linear distances;access to the sea or to river transport would reduce transportcosts dramatically, but in regions with no good access towater transport, it is astonishing how scarce money is there(Essai: 157).

Since transport costs differ for different goods, there willnot be a single price gradient, but a different gradient foreach good; higher transport costs per unit of distance,relative to the unit value of the product at its point of origin,mean a steeper gradient of prices. Relative prices ofagricultural products will therefore vary systematically withdistance from the capital. Incentives to use the land fordifferent products will vary with relative prices, so land usewill depend systematically on distance from the capital, themarket prices of the capital serving as a standard for thefarmers to employ the land for such or such a purpose(Essai: 155). Goods with high transport costs will beproduced near the capital (where proximity is measured interms of transport costsnear means physically close tothe capital, or close to ports from which products can beshipped to the capital). It is easy to see here the germ of vonThunens later (and presumably independent) model of theconcentric rings of activity surrounding a city (cf. Hebert,1981).

One immediate policy conclusion that Cantillon deducedfrom this analysis was that manufactures should be set up inremote areas, since production costs will be low (wages arelow where food prices are low), and transport costs arerelatively low for (some) manufactures (Essai: 155). This isclearly a direct application of the argument about the locationof agricultural activities summarized abovesincemanufactured goods have relatively low transport costs perunit of value, they should be produced far from the capital.

It is, however, interesting to ask why Cantillon should haveshown such an evident lack of faith in the effectiveness of themarket. Why should the market not ensure that manufacturesare located in the least cost locations? (Cantillon had no such

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doubts in the case of agriculture.) New manufactures, he said,need encouragement and capital and:

When these manufactures are set up perfection is not atonce attained. If some other province have them better orcheaper or owing to the vicinity of the capital or theconvenience of a sea or river communication have theirtransport considerably facilitated, the manufactures inquestion will have no success. (Essai: 155)

He repeatedly stressed the difficulties of setting up newmanufacturesthis barrier to locational mobility ofmanufacturing activities played a key role in some of hisarguments about economic policy (see chapter 8). Briefly, itseems that he thought of skills as difficult to transfer, as theyundoubtedly were at the time, so an infant industry1 takes along time to become established.

2.5 THE ECONOMICS OF ARCADIA

It is rather odd that a banker and financier, who spent his life,and made his fortune, in the constantly changing, intenselyurban, and international world of the financial markets,should present such an Arcadian vision,2 a picture of anessentially unchanging world dominated by the land (and thelandowners). Murphy has suggested that Cantillonsapparently backward looking view of the world may havebeen influenced by nostalgia for the life of his Anglo-Irishland owning ancestors or, perhaps, by discussions with theconservative statesman and theorist Bolingbroke, who sharedhis house in Paris for a time (Murphy, 1986:489, 2534). It isalso worth pointing out that Cantillon made and preservedhis money mainly by taking a very sceptical attitude to Lawsfinancial schemes. His conviction that monetary events couldhave few real long term effects served him well.

Was the world of the early eighteenth century really likeCantillons model? Agriculture was certainly by far thelargest sector of the economy, in both Britain and France.

1 Cantillon did not use this term, but it is clearly what he meant.2 According to Brewers Dictionary of Phrase and Fable, Arcadia was a byword forpastoral simplicity and rustic bliss.

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Indeed, the odd thing is that Cantillons estimates of the sizeof the agricultural and non-agricultural sectors seem, ifanything, to understate the predominance of agriculture inthe economy, as judged by the best modern estimates. At onepoint (Essai: 87), he referred to a long calculation worked outin the supplement showing that 25 adults could produceenough to support 100 people. If 50 per cent of the populationwere available for work, this would mean another 25 wouldbe free to engage in non-subsistence activities, as producersof luxuries, soldiers, or anything else. If agriculture isassumed to produce mainly non-luxuries, and if it accountsfor only a part (perhaps by far the largest part) of the half ofthe labour force engaged in producing necessaries, this makesagricultural workers something like half the labour force.

At another point he wrote: It is generally calculated thatone half the inhabitants of a kingdom subsist and make theirabode in cities, and the other half live in the country (Essai:45). This serves as the basis for an account of flows of goodsand payments between city and country, very similar in itsimplications to the calculation referred to above.1

Most modern commentators estimate the urban fraction ofthe population in Cantillons time as far less than a half. Forexample, Bairoch estimates that the urban population wasonly 12 per cent of the total in Europe in 1800, with figures fordifferent countries ranging from 9 per cent for Germany to 37per cent for the untypical case of the Netherlands (Bairoch,1985; cf. Braudel, 1990:41518, 445, 447).

It might just be possible to rescue Cantillons estimates(though it seems unlikely), for example by assuming that hewas counting all non-agricultural activities as (notionally)urban, and that he drew the boundary between agricultureand the rest of the economy rather narrowly. Many non-agricultural activities like building, making and repairingfarm implements, making simple cloth and clothing, and thelike, were carried out in close association with agriculture,and are doubtless included in many estimates of the size ofthe agricultural sector. In any case, it is clear that he cannot beaccused of overstating the relative scale of agriculture. The

1 Cantillons account of flows of payments between town and country wasdeveloped further in the course of his analysis of the circulation of money and ofthe velocity of circulation, which will be discussed in chapter 6.

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distinctive feature of his model is not the relative quantitativescale attributed to agriculture, but the analytical role ascribedto it.

A second distinctive feature of Cantillons model is thedominant role of landowners. In the (purely hypothetical)story of the isolated estate, the landowner is dominant simplybecause he is the absolute ruler (like the absolute monarch ofa seventeenth or eighteenth century state). In the morerealistic model of a market system, which Cantillondeveloped from the simple story of the isolated estate, thepreferences of landowners govern the allocation of resourcesbecause they are the only ones with enough income to haveany real scope for choice. Cantillon knew that that was notquite true, but claimed that those non-landowners withenough disposable income to spend significant amounts onluxuries followed the pattern of spending set by thelandowners.

It was certainly true, at the time, that most of the richestpeople were landowners. During the eighteenth century, atleast in Britain, ownership of the land became more, not less,concentrated, and the great land owning familiesconsolidated their social and political dominance (cf. Stoneand Stone, 1986). This process was well under way duringCantillons lifetime, and was described, in outline, in chapter2 of the Essai, in which he argued that land ownership wouldinevitably be concentrated in the hands of a minority. Greatfortunes could be made in trade and financeas Cantillonsown career showsbut they were the exception, not the rule(and the main opportunities for gain in trade and financewere to be found in the money markets and in internationaltrade, which were ruled out by assumption in the first part ofthe Essai, dealing with a closed economy). Manufacturingwas still mostly carried out in small establishments, whichoffered few opportunities for large entrepreneurial gains.

Analytically, the centrality of land and land ownershiprests on the implicit assumption that land is the only trulyscarce resource, because labour and capital are in elasticsupply in the long run. If land is the only scarce resource,then the surplus must accrue to the owners of land. Theelastic supply of labour to the system as a whole depends onCantillons population theory, which will be discussed in thenext chapter. Cantillons systematic neglect of capital hasbeen noted already, and will be discussed further in chapter 4.

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Briefly: he did recognize that individual entrepreneurs had tohave access to enough funds to finance their activities, and heexplained interest rates in terms of the potential returns toinvestment. At the same time he implicitly assumed thatcapital would always be forthcoming to carry out all theactivities for which there was enough demand. This may nothave been an unreasonable assumption at the time, given thestill very slow progress of technical change. It is, at least,arguable that capital was being accumulated fast enough tokeep pace with the (limited) new investment opportunitiescreated by technical change.

Cantillon, of course, spent most of his life in France. Thelast work of the great French historian Fernand Braudel(1990) is a magisterial work of synthesis, dealing with thehistory of population and production in France. It is strikinghow much Braudels account has in common withCantillons. According to Braudel, French population hadbeen roughly constant for many centuries up to Cantillonstime (with a collapse in the fourteenth century and a recoveryfrom 1450 to 1600), and it remained constant because Francesimply could not support a larger population. He citedSpooners (1972) estimate that French GNP was stationaryduring the first half of the eighteenth century, and describedFrance as a peasant economy (up to the twentieth century),with patterns of rural settlement and rural life that changedonly very slowly over the centuries. This, and much more inBraudels account, matches Cantillons story strikingly well;Cantillons approach seems to have been quite appropriate tothe French economy of the time.

It is, however, much harder to defend Cantillons model asa representation of England in the early eighteenth century.One can, of course, find elements of rural life in England thatwere relatively constant, but new methods of cultivation, andcontinued investment in agricultural improvements, led torelatively rapid changes in British agriculture. Cantillon was,of course, careful not to limit his model to any particularplace or time. His examples were drawn both from Englandand from France.

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3

Population

Two opposed views of population dominated the literature inthe seventeenth and early eighteenth centuries. William Petty,who was one of the founders of modern demography, as wellas an important pioneer of economics, was perhaps the mostconvincing supporter of the populationist view. He claimedthat there was plenty of underused land in both England andFrance (Petty, 1690:285), and that there were also manyopportunities to employ additional workers outsideagriculture. He even advocated shifting most of thepopulation of Ireland to Britain, in order to increase thepopulation of Britain (Petty, 1690:285ff and 1687, passim). Anincrease in population would, he claimed, allow an increasein both output and tax revenue.

Cantillon took the opposite view. Men multiply like micein a barn if they have unlimited means of subsistence (Essai:83). Population always expands to take up the economicopportunities open to it, but if there are no newopportunities, population cannot increase. If, for example, avillage continues to work the same lands in the same way,and if its circumstances remain the same, it will not increasein population in a thousand years (Essai: 23). The same is trueof a whole economy. A larger population would indeed be agood thing, but population can only increase if there is anincrease in the demand for labour.1

The notion of an endogenous population, governed by theavailability of food, was not new: there is little point in

1 Cantillon is sometimes counted as a populationist, like Petty, because hethought of population increase as a desirable aim of policy, but for himpopulation increase was a result of other economic changes, not a cause ofeconomic growth in its own right.

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POPULATION

tracing it back to its origins, since it must be about as old asdiscussion of population itself (cf. Spiegel, 1983:2778;Spengler, 1942). Cantillons importance is that he made it acornerstone of his economic analysis. Even his best knownphrase, men multiply like mice in a barn (Essai: 83), was notoriginal; it was said in Languedoc in the mid sixteenthcentury that people are multiplying like mice in a barn(Braudel, 1990:171, citing Ladurie, 1966).

Cantillons Malthusian analysis (set out, of course, manydecades before Malthus) was adopted by almost alleconomists for more than a century after his death. Unlikemost of his successors, he stressed economic influences onmarriage rates and birth rates, rather than on death rates. Asa result, his theory was more flexible than most other versionsof Malthusian population theory, and did not require wagesto be reduced to the bare physiological minimum ofsubsistence. Like many other writers, Cantillon recognized aconventional element to wages, but his theory, unlike most,could incorporate them in a natural fashion.

3.1 BIRTHS, DEATHS, AND MARRIAGES

Cantillon based his theory of population on simple premises.He argued that

most men desire nothing better than to marry if they areset in a position to keep their families in the same style asthey are content to live themselves. (Essai: 77)

He then adduced evidence to show that actual birth rateswere far below the biological maximum. Since a singlegeneration suffices to push the increase of population as faras the produce of land will supply means of subsistence(Essai: 81), he concluded that population growth must beconstrained by economic circumstances.

Most people want to marry and to have children, but not ifthis would reduce them (and their children) to poverty, or to alevel of living that they would consider unacceptable. Thenobility are used to living well, so younger sons, who do notstand to inherit the family estate, become priests or soldiersand remain celibate (perhaps Cantillon should have said donot acknowledge their children), but they will seldom be

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found unwilling to marry if they are offered heiresses (Essai:79). In all classes, people will marry, but they would considerit an injustice to their children to allow them to fall into alower class than themselves. If incomes are high enough tosupport a family at an acceptable living standard, a singleman could live well, since Cantillon thought that a family costtwice as much to support as a single man. Some men chooseto remain single for this reason, but most do not.

There must be some constraint to population growth, heargued, since four out of six fertile women who could havechildren in any given year, do not. Population growth is farbelow what would be biologically possible, because manywomen do not marry (either because they choose not to orbecause they cannot find anyone to marry), and unmarriedwomen take care not to give birth without a husband (Essai: 81;cf. Braudel, 1990:195, on illegitimacy rates and contraceptiveuse in seventeenth and eighteenth century France). A few menrefrain from marriage because they prefer the easy life of a singleman, or for other personal reasons, but they are a minority (Essai:79); the dominant factors governing the overall rate ofpopulation growth are economic.

Cantillons argument does not imply that the mass of thepeople are reduced to the verge of starvation, even in badyears, since the population can be restrai

Richard Cantillon: Pioneer of Economic Theory

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