Richard Cantillon: An Essay on Economic Theory

An Essay on Economic Theory was first published in 1755. Cantillon described how the world actually works. When a government prints new money, does it distribute evenly among its citizens? Definitely not! This is called Cantillon effect.

The book can be found at

An Essay on Economic Theory (mises.org)

https://cdn.mises.org/An%20Essay%20on%20Economic%20Theory_2.pdf

The audiobook can be found at

https://www.youtube.com/watch?v=sTLfmSKNeGw

Part 1, Chapter 15, Abstract: Population is based on the tastes and choices of property owners. Early versions of the Malthusian approach to population growth—that it follows some mathematical formula—are criticized. This chapter also shows that the opulence and lavish spending of the prince and absentee landlords living far from their lands was responsible for the poverty and declining population of France, which ultimately led to the French Revolution. (P 85)

The convents of mendicant friars are much more pernicious to a state than those of the closed orders. The closed orders usually do no more harm than to occupy estates which might serve to supply the state with officers and judges, while the mendicants, who are themselves without useful employment, often interrupt and hinder the labor of other people. They take from poor people in charity the subsistence which ought to fortify them for their labor. They cause them to lose much time in useless conversation, not to speak of those who involve themselves in families and those who are malicious. Experience shows that the countries which have embraced Protestantism, and have neither monks nor mendicants, have become visibly more powerful. (P 101)

Comment: This is a discussion on charity. They take from poor people in charity the subsistence which ought to fortify them for their labor.

Part 2, Chapter Seven: More on the Increase and Decrease in the Quantity of Money in a State 

 Abstract: When there is an increase in the quantity of money, prices will increase depending on how the new money holders decide to spend their money. The price changes will also be affected by such things as regulations on trade and the perishability of the products that are traded. In other words the simple quantity theory of money is naïve in proposing that a doubling of the quantity of money would double all prices equally. Changes in the quantity of money will change relative prices and have real effects on the economy, a phenomenon now known as the Cantillon Effect. (P 155)

Part 3, Chapter 7, Abstract: National Banks are of little utility and can be the source of economic chaos. The increase in the supply of money that they provide is relatively small and offers the same disadvantages as increases in real money. They are therefore unnecessary and potentially very harmful. (P 233)

It is then evident that a bank, with the complicity of a public administrator, is able to raise and support the price of public stock, and to lower the rate of interest in the state at the pleasure of this administrator. When the steps are taken discreetly, it can pay off the state’s debt. But these refinements, which open the door to making large fortunes, are rarely carried out for the sole advantage of the state, and those who take part in them are generally corrupted. The excess banknotes, made and issued on these occasions, do not upset the circulation because they are used for the buying and selling of stock. They are not used for household expenses and are not exchanged into silver. But if some panic or unforeseen crisis drove note holders to demand silver from the bank, the bomb would burst and it would be seen that these are dangerous operations. (P 243)

Comment: This is almost identical to today, except the last one and half sentences. Without hard metal to back currency, the powerful can loot the working class to the last drop of blood.

This book contains several passages about China. These passages give a glimpse of old China in Cantillon's day. They are copied below.

There is no country where population is carried to a greater height than in China. The common people are supported by rice and rice water; they work almost naked and in the southern provinces, they have three plentiful harvests of rice each year, thanks to the great care they give to agriculture. The land is never fallow and yields more than a hundredfold every year.40Thosewhowear clothes generally have cotton clothing,which needs so little land for its production that an acre of land, it seems, is capable of producing a quantity of clothing sufficient for 500 adults. The Chinese, by the principles of their religion, are obliged to marry, and raise as many children as their means of subsistence will afford. They look upon it as a crime to use land for pleasure gardens or parks, cheating the public of food. They transport travelers in sedan chairs, and save the work of horses upon all tasks which men can perform. Their number is incredible, according to the descriptions of China’s visitors, however, they are forced to let many of their children die in the cradle when they are unable to support them, keeping only the number they can feed. By hard and persistent labor, they draw from the rivers an extraordinary quantity of fish, and from the land, all that is possible. Nevertheless, when bad years come, they die of hunger by the thousands in spite of the care of the emperor, who stores rice for such contingencies. Numerous then as the people of China are, they are necessarily proportioned to their means of living and do not exceed the number the country can support, according to their standard of living; and on this level, a single acre of land will support many of them.(P 86)

It is the general opinion in England that a farmer must make three rents. The first is the principal and true rent that he pays to the property owner, which is assumed to be equal in value to one-third of the farm’s output. A second rent goes for his maintenance and that of the men and horses he employs to operate the farm, and a third rent that he keeps for making the business profitable. The same idea generally is the norm in other countries of Europe, though in some states, like Milan, the farmer gives up half the product instead of a third. It is also true that many landlords in all countries try to lease their farms at the highest price they can; but when it is above onethird of the product, the farmers generally are very poor. I do not doubt that the Chinese landowner extracts from his farmer more than threefourths of the product of the land. However, when a farmer has some capital to carry on the management of this farm, the owner who leases him the farm for one-third of the 123 124 An Essay on Economic Theory product will be sure of payment and will be better off by such a deal than if he leases his land at a higher rate to a poor farmer and faces the risk of losing all his rental income. The larger the farm, the better off the farmer will be. This is seen in England where farmers are generally more prosperous than in other countries where farms are small. (P 124)

In the first place, given that the price of land and labor are calculated in terms of money, the state where money is most abundant will give up less land and labor than it receives in all areas of trade. Thus the state in question sometimes receives the product of two acres of land in exchange for that of one acre, and the work of two men forthat of only one. It is because of this abundance of money in circulation in London that the work of one English embroiderer costs more than that of 10 Chinese embroiderers, though the Chinese embroider much better and turn out more work in a day. In Europe, people are amazed that these people can live by working so cheap and that the wonderful fabrics they send us cost so little. (P 162)

If entrepreneurs in a state could not make a profit on the money or goods that they borrow, the use of interest would probably be less frequent than it is. Only extravagant people and spendthrifts would contract for loans. But accustomed as everyone is to depend on entrepreneurs, there is a constant source for loans and consequently for interest. Entrepreneurs are the ones who cultivate the land and supply bread, meat, clothes, etc., to all the inhabitants of a city. Those who work on wages for these entrepreneurs, also seek to set themselves up as entrepreneurs, in emulation of each other. The multitude of entrepreneurs is much greater among the Chinese as they have a lively spirit, a genius for enterprise, and a determination to achieve their goals. There are among them many entrepreneurs whose work here is done by people on fixed wages. They even supply meals for laborersin the fields. It is perhapsthislarge number ofsmall entrepreneurs and others, from the various classes, who earn a living from consumption without injuring the consumer, that keeps the rate of interest for the highest classes at 30 percent, while it hardly exceeds 5 percent in Europe. At Athens, in Solon’stime, interest was at 18 percent. In the Roman Republic, it was most commonly 12 percent, but has also been known to be 48, 20, 8, 6, and its lowest was 4 percent. It was never so low in the free market as toward the end of the Republic and under Augustus after the conquest of Egypt. The Emperor Antoninus and Alexander Severus only reduced interest to 4 percent by lending public money on the mortgage of land. (P 175)