WAS RICHARD CANTILLON A MERCANTILIST?

Abstract

There are puzzling features in Cantillon's Essai and puzzles in what has been written about him. Also puzzling is the fact that these puzzles have not been thought important enough to study if indeed they have been thought about at all. May not one then ask if Cantillon ought to be read again and if what has been written about him should be re-examined? … I suggest, the effort is called for …What he said in praise of the market is difficult to reconcile with what he said in praise of departing from it. The difficulty is usually gotten over by making little of his exceptions to it and attributing them to his not having entirely liberated himself from mercantilism. But that will not do—the exceptions are important.

William D. Grampp (1992, pp. 64, 73)

Acknowledgments

The author would like to thank Robert Ekelund, Guido Hülsmann, Audrey Kline, Joseph Salerno, Chantal Saucier, Jeffrey Tucker, Paul Wicks, and the two anonymous referees of this journal for their assistance and useful comments and suggestions. All errors remain the responsibility of the author.

Notes

¹Emphasis added. Higgs does go on to note that Cantillon latter redeems himself against the charge of believing that wealth was necessarily based on population.

²Ekelund and Hébert (1975) also treat Cantillon as a transitional figure in the history of economic thought, but one rather distinct from the mercantilists and physiocrats.

³Schumpeter (1954) and Murphy (1986) also seem to avoid any hard classification of Cantillon into a particular school of thought.

⁴The most basic and arguably the least important criterion of mercantilism is the historic period when it occurred. Heckscher dated the final end of mercantilism during the late eighteenth century. However, this dating really marked the final death of the institutions of “classical” mercantilism. In the battle of ideas, mercantilism was beginning to falter more than a century earlier. John Locke wrote during the late seventeenth century, a period considered to be the late mercantile era. In the first quarter of the eighteenth century John Law's writings and the Mississippi Bubble marked the last great hurrah of mercantilism and saw the emergence of anti-mercantilists writers as an opposing intellectual force. In the limit, the end of mercantilism comes with the founding of the Physiocrats in 1756. Cantillon's Essai was written around 1730 and circulated in manuscript form within intellectual circles until it was published in 1755. By all these parameters, Cantillon and the Essai appear between the great age of mercantilism and the beginning of anti-mercantilism.

⁵Vaughn has noted that the “nontheoretical approach to economics can be considered a defining characteristic of mercantilism” (1980, p. 48). In fact she bases her entire claim that Locke was not a mercantilist on the fact that he was a “systematizer.” It is very easy for one adversary to claim to have a theory, while their opponent has none, but it is now a nearly universal claim that the mercantilists were not organized around common principles or theories as economists understand those terms today. Of course to categorize economists into two mutually exclusive groups—theoretical and non-theoretical—is ridiculous as the mercantilists had their theories and Cantillon was empirically oriented. However, there can be little doubt that Cantillon was a theorist and that he was perhaps the first scientific model builder. As Schumpeter concluded:

 We have had ample opportunity to observe how difficult a task conceptualization is in the early states of analytic effort, chiefly because the scientific fraternity takes time to learn, by a process of trial and error, what is and what is not important in an ‘explanation’ of the phenomena envisaged. In economics, particularly, there are many inhibitions to overcome before the nature of the analyst's task can be clearly understood. But model building, that is, conscious attempts at systematization of concepts and relations, is more difficult still and characterizes a later stage of scientific endeavor. In economics, efforts of this kind date, substantially, from Cantillon (1954, p. 562).

In fact, a good case can be made that Cantillon was the father of economic theory and method and was clearly not a mercantilist on this count.

⁶See Krueger and Sonnenschein (1967) on the gains from trade that result from favorable terms of trade.

⁷Page references to quotes from Cantillon's Essai are given from all three of the most widely available sources of the Essai in the following order: the Higgs edited (1755a/1959) English edition, the Higgs edited (1755a) French edition (page numbers to the original French edition of 1755), and the Brewer edited (1755b/2001) English edition.

⁸However, he (191/253–4/79) also wrote that if the state borrows the same money from abroad it only provides “present advantages, but the end of them is always burdensome and harmful.” He went on to point out that state borrowing often leads to national bankruptcy and that foreigners often want their money back just when the state needs the money the most, at the outbreak of a war.

⁹In contrast, David Hume argued that a large public treasury might also be a source of war, especially in extreme cases of royal saving.

¹⁰Money held in the public treasury would place no upward pressure on prices. If deposited in banks the money would serve to reduce interest rates and reduce the need for tax revenues, and based on my understanding on his writings, Cantillon would probably have approved of all of these results.

¹¹As quoted in Sée (1935, pp. 93–96).

¹²He opened the chapter with the following account:

 It is a common idea, received of all those who have written on trade, that the increased quantity of currency in a state brings down the price of interest there, because when money is plentiful it is more easy to find some to borrow. This idea is not always true or accurate. For proof it needs only to be recalled that in 1720, nearly all the money in England was brought to London and over and above this the number of notes put out accelerated the movement of money extraordinarily. Yet this abundance of money and currency instead of lowering the current rate of interest which was before at 5 per cent and under, served only to increase the rate which was carried up to 50 and 60 per cent. It is easy to account for this increased rate of interest by the principles and the causes of interest laid down in the previous chapter (214–14/282–85/87).

Related to the famous “Cantillon Effects,” he then explained in precise terms what would cause an increase in the money supply to lead to lower rates or possibly to higher rates. Cantillon effects are the real structural changes and wealth effects that occur in an economy as the result of changes in the money supply and interest rates and are also referred to as injection effects or first-round effects:

 If the abundance of money in the state comes from the hands of moneylenders it will doubtless bring down the current rate of interest by increasing the number of money lenders: but if it comes from the intervention of spenders it will have just the opposite effect and will raise the rate of interest by increasing the number of Undertakers who will have employment from this increased expense, and will need to borrow to equip their business in all classes of interest (215/284/87–8).

He then used this discussion as a platform to launch another attack on the extravagance of the nobility and their wars, which were economically destructive to France. See Thornton (2005 and 2006) for illustrations of Cantillon's effects.

¹³Higgs (pp. 383–85).

¹⁴See for example Wennerlind (2000).

¹⁵See Higgs (1952, pp. 5–11) for a short description of the French economy at the end of the seventeenth century.

¹⁶Cantillon attempted to calculate a measure of opportunity cost in terms of land and labor.

¹⁷Although he made no direct connection between his “infinite inductions” and their underlying cause, Cantillon began his next chapter “Of the Exchanges and their nature” with the impact of transport charges on trade. He went on to explain the role of money and merchant banking and the costs of transporting money and its function in intra-national trade. Transport costs can prevent international trade from occurring or diminish its magnitude. Reductions in transport cost can increase the flow of international and intra-national trade. For these reasons, transport costs have been modeled by Haberler (1936, pp. 171–73) along the lines of an export tariff. The burden of the transport costs are expected to be shared by both importing and exporting countries, but the relative burden of transport costs could be expected to fall more heavily on the country that exports the bulkier, heavier products, under certain conditions. In particular the cost of transporting exported grain and raw materials from France could have placed a relatively heavy burden on the French economy and a relatively light burden on the imports of manufactured goods into France. Under these conditions, Cantillon was correct to suggest that the gains from trade are enhanced by high-value exports with low shipping charges and relatively diminished with low-value exports and high shipping charges.

¹⁸Ekelund and Tollison (1981, p. 80).

¹⁹See Thornton (2007), which shows that Cantillon discovered the concept of opportunity cost.

²⁰Most importantly, Cantillon well understood that the high transport costs on the export of raw materials greatly diminished the return on such transactions, but fell lightly on the export of manufactured goods and luxuries.

²¹Most French people—and certainly Cantillon—would have known of the mercantilist textile policies. Heckscher estimated that 16,000 people were put to death while Cole argued that most sanctions were monetary (Ekelund and Tollison, 1981, p. 94). Not knowing about such policies would be the equivalent of living in the US and not knowing about the war on drugs.

²²Higgs translated Cantillon's “il faut y décréditer toutes les Manufactures Etrangeres, & y donner beaucoup d'emploi aux Habitans” as “It is needful to discourage all foreign manufacturers and to give plenty of employment to the inhabitants.” Out of context, this is a classic mercantilist statement and Higgs must have been expecting such statements from a writer from the mercantilist period. In context, however, it does not make sense. In addition, Cantillon has already shown in chapter nine that the king cannot create jobs via subsidized training, and here, he specifically writes that producing quality products that are valued locally is the manner by which export-related manufacturing jobs are created for the inhabitants.

²³See part two, chapter ten of the Essai.

²⁴ Dictionnaire de L' Académie francaise, 1st Edition (1694, p. 388).

²⁵ Dictionnaire de L' Académie francaise, 4th Edition (1762, p. 388).

²⁶See for example Breyer and MacAvoy (1987) and compare with Boyer (1987).

²⁷Grampp (1981) shows that the Essai was more a book about economic policy than economic theory.

²⁸See Ekelund and Tollison (1981) on the severity of French mercantilism and brutality of penalties for violating economic policies.

²⁹Also see Ekelund and Tollison (1981, pp. 127–30).

³⁰Cantillon's Essai was eventually published in 1755 after French censorship laws had been relaxed and even then it was published anonymously and under the name of a defunct publisher. See Murphy (1986, pp. 299–306).