WEBVTT NOTE 12. The Founding Father of Modern Economics: Richard Cantillon 1 00:00:00.000 --> 00:00:10.000 Chapter 12, The Founding Father of Modern Economics, Richard Cantillon 2 00:00:10.000 --> 00:00:23.000 Most people, economists and laymen alike, think that economists sprang full-blown, so to speak, from the head of Adam Smith in the late 18th century. 3 00:00:23.000 --> 00:00:41.000 What has become known as the first or classical period of modern economic thought then developed, out of Smith, through David Ricardo, including an aggregative approach and a cost of production or even a labor theory of value? 4 00:00:41.000 --> 00:01:00.000 We now know, however, that this account is flatly incorrect, for modern economic thought, that is, analysis centering on explaining the market economy, developed a half-century before Smith's wealth of nations, not in Britain, but in France. 5 00:01:00.000 --> 00:01:22.000 More significantly, the French writers, despite their diversity, must be set down not as pre-Ricardian, but as proto-Austrian, that is, forerunners of the individualistic, micro, deductive and subjective value approach that originated in Vienna in the 1870s. 6 00:01:23.000 --> 00:01:27.000 1. Catiole the Man 7 00:01:27.000 --> 00:01:48.000 The honor of being called the father of modern economics belongs then not to its usual recipient, Adam Smith, but to a gallicized Irish merchant, banker and adventurer who wrote the first treatise on economics more than four decades before the publication of The Wealth of Nations. 8 00:01:48.000 --> 00:02:00.000 Richard Cantillon, circa early 1680s to 1734, is one of the most fascinating characters in the history of social or economic thought. 9 00:02:00.000 --> 00:02:06.000 Little is known about Cantillon's life despite the fact that he died a multimillionaire, 10 00:02:06.000 --> 00:02:15.000 but the best modern researches show that he was born in Ireland in County Kerry of a family of Irish-landed gentry 11 00:02:15.000 --> 00:02:21.160 who had been dispossessed by the depredations of the English Puritan invader Oliver Cromwell. 12 00:02:22.360 --> 00:02:29.080 Cantillon's first cousin, once removed, also named Richard, emigrated to Paris to become a 13 00:02:29.080 --> 00:02:35.720 successful banker, thereby perpetuating the tradition, born in the 16th century, of 14 00:02:35.720 --> 00:02:43.320 religio-political exiles from Britain emigrating to France. The Cantillon's were part of the 15 00:02:43.320 --> 00:02:49.520 The Catholic Emigration, centering by the end of the 17th century around the Stuart Pretender 16 00:02:49.520 --> 00:02:52.960 to the throne of Great Britain. 17 00:02:52.960 --> 00:02:59.320 Richard Cantillon joined the emigration to Paris in 1714, quickly becoming the chief 18 00:02:59.320 --> 00:03:03.320 assistant to his cousin at the latter's bank. 19 00:03:03.320 --> 00:03:09.200 Moreover, Richard's mother's uncle, Sir Daniel Arthur, was a prominent banker in London and 20 00:03:09.200 --> 00:03:16.000 and Paris, and Arthur had named Richard's cousin as the Paris correspondent of his London-based 21 00:03:16.000 --> 00:03:17.280 bank. 22 00:03:17.280 --> 00:03:24.480 In two years, Catillon was in a position to buy his cousin's ownership of the bank. 23 00:03:24.480 --> 00:03:29.520 Richard Catillon was now in the important position of banker for the Stuart Court in 24 00:03:29.520 --> 00:03:37.160 exile as well as for the bulk of the British and Irish emigres in Paris, but his most important 25 00:03:37.160 --> 00:03:44.440 Koo came from his association with the Scottish adventurer and arch-inflationist John Law, 26 00:03:44.440 --> 00:03:53.800 1671-1729, who had captured the imagination and the greed of the regent of France. 27 00:03:53.800 --> 00:04:02.440 The death of the aged Louis XIV in 1715 had inaugurated a looser and more optimistic regime, 28 00:04:02.440 --> 00:04:07.440 The control of which had been seized by the regent, the duke of Orléans. 29 00:04:07.440 --> 00:04:17.440 John Law persuaded the regent that France could find permanent prosperity and need have no further worries about the public debt. 30 00:04:17.440 --> 00:04:27.440 The French government need only finance heavy deficits by a massive infusion of the relatively new device of government paper money. 31 00:04:27.440 --> 00:04:34.480 Becoming the leading financier of the French government, and even controller general of the finances of France, 32 00:04:34.480 --> 00:04:45.280 Law set loose a rampant inflation that generated the wildly speculative Mississippi Bubble, 1717-1720. 33 00:04:45.280 --> 00:04:53.360 The bubble created instant millionaires before it collapsed, leaving John Law in poverty and disgrace. 34 00:04:53.360 --> 00:04:59.160 Indeed, the very word millionaire was coined during the heady years of the Mississippi 35 00:04:59.160 --> 00:05:01.100 bubble. 36 00:05:01.100 --> 00:05:06.980 But when the dust had settled, the shrewd Richard Cantillon emerged after being a top 37 00:05:06.980 --> 00:05:13.140 partner in John Law's Mississippi speculations as a multimillionaire. 38 00:05:13.140 --> 00:05:19.100 Legend has it that at the beginning of his meteoric career running French finances, John 39 00:05:19.100 --> 00:05:24.500 One law had come to Catillon and warned him that if we were in England we would have to 40 00:05:24.500 --> 00:05:30.180 strike a deal and settle matters, but as we are in France I can send you this evening 41 00:05:30.180 --> 00:05:37.220 to the Bastille if you do not give me your word to leave the kingdom within 24 hours. 42 00:05:37.220 --> 00:05:43.780 To which Catillon is supposed to have replied, Hold on, I will not go and I will make your 43 00:05:43.780 --> 00:05:46.180 system succeed. 44 00:05:46.180 --> 00:05:53.540 In any case, we know that Law, Cantillon and the English speculator Joseph Edward Beau Gage 45 00:05:53.540 --> 00:06:01.180 formed a private company in November 1718. Gage was so wealthy from paper speculation 46 00:06:01.180 --> 00:06:07.380 in Law's government-sponsored paper-issue bank, the Mississippi Company, that he seriously 47 00:06:07.380 --> 00:06:15.180 attempted in this period to purchase the Kingdom of Poland from its king, Augustus. 48 00:06:15.180 --> 00:06:22.260 As the Mississippi bubble careened onward, Catillon, an astute analyst of monetary affairs, 49 00:06:22.260 --> 00:06:28.100 saw deeply that the bubble was bound to burst soon, and he took steps to make millions out 50 00:06:28.100 --> 00:06:32.220 of the foolishness of his partners and clients. 51 00:06:32.220 --> 00:06:38.420 Lending money to Gage and others with which to buy inflated Mississippi Company shares, 52 00:06:38.420 --> 00:06:45.140 Catillon quietly sold all of his own shares, as well as the inflated shares that his borrowers 53 00:06:45.140 --> 00:07:08.100 After Gage and the other Cantillon clients went broke in the 1720 crash, Cantillon pursued 54 00:07:08.100 --> 00:07:13.620 them to repay his loans, for which they had been happy to pay a rate of interest up to 55 00:07:13.620 --> 00:07:27.700 Richard Catillon returned to Paris, a multimillionaire, albeit unpopular with his former associates 56 00:07:27.700 --> 00:07:29.700 and debtors. 57 00:07:29.700 --> 00:07:37.020 Soon he married Mary Anne, daughter of the late Count Daniel O'Mahony, an Irish general. 58 00:07:37.020 --> 00:07:42.940 His mother-in-law, Charlotte Bulkley, was the sister-in-law of James Fitz-James, the 59 00:07:42.940 --> 00:07:49.940 The Duke of Berwick, Marshal of France, and the natural son of the English King James II. 60 00:07:49.940 --> 00:07:54.940 He was, therefore, the Stuart Pretender, James III. 61 00:07:54.940 --> 00:08:02.940 Catillon thus married into an Irish military family, closely connected with the Stuarts and with the French court. 62 00:08:02.940 --> 00:08:09.940 At some time during the early 1730s, probably around 1730, 63 00:08:09.940 --> 00:08:16.640 This successful banker and speculator wrote his great work in French, the Essai sur la 64 00:08:16.640 --> 00:08:21.020 nature du commerce en general. 65 00:08:21.020 --> 00:08:25.940 In the fashion of the day, the result of the censorship of that era, this treatise was 66 00:08:25.940 --> 00:08:32.740 not published, but circulated widely in manuscript, in literary and intellectual circles, until 67 00:08:32.740 --> 00:08:38.980 it was finally published two decades later, in 1755. 68 00:08:38.980 --> 00:08:44.820 Richard Catillon's exit from this life was as mysterious and adventurous as his overall 69 00:08:44.820 --> 00:08:46.300 career. 70 00:08:46.300 --> 00:08:52.700 In May 1734, while living in London in one of his many houses in the leading cities of 71 00:08:52.700 --> 00:08:58.460 Europe, Catillon died in a fire that burned his house to the ground. 72 00:08:58.460 --> 00:09:04.380 It was subsequently found that he was murdered inside the house, the fire being presumably 73 00:09:04.380 --> 00:09:07.140 set to cover the murder. 74 00:09:07.140 --> 00:09:13.060 Three of his servants were tried for his murder and found not guilty, while his French cook, 75 00:09:13.060 --> 00:09:18.580 who had been dismissed three weeks earlier, fled overseas with a considerable amount of 76 00:09:18.580 --> 00:09:20.280 valuables. 77 00:09:20.280 --> 00:09:23.020 The runaway cook was never found. 78 00:09:23.020 --> 00:09:29.260 Earl Egmont, whose brother lived next door to Catillon, wrote in his diary that Catillon 79 00:09:29.260 --> 00:09:36.780 was a debauched man and his servants of bad reputation, and so ended, under highly mysterious 80 00:09:36.780 --> 00:09:43.580 Circumstances, the only leading economist in history who lost his life as a victim of murder. 81 00:09:46.060 --> 00:09:55.420 2. Methodology. Richard Catillon's essay has been justly called by W. Stanley Jevons 82 00:09:55.420 --> 00:10:02.060 the first treatise on economics, and the historian of economic thought, Charles Gide, 83 00:10:02.060 --> 00:10:07.820 referred to it as the first systematic treatment of political economy. 84 00:10:07.820 --> 00:10:13.420 The best overall assessment is that of F. A. Hayek, the Austrian economist who has done 85 00:10:13.420 --> 00:10:16.780 important work in the history of thought. 86 00:10:16.780 --> 00:10:22.340 This gifted independent observer, enjoying an unsurpassed vantage point in the midst 87 00:10:22.340 --> 00:10:28.580 of the action, coordinated what he saw with the eyes of the born theoretician and was 88 00:10:28.580 --> 00:10:35.500 was the first person who succeeded in penetrating and presenting to us almost the entire field, 89 00:10:35.500 --> 00:10:38.980 which we now call economics. 90 00:10:38.980 --> 00:10:44.340 The scholastics had written general treatises on almost all of human knowledge, in which 91 00:10:44.340 --> 00:10:50.660 discussions of economics or the market played a subordinate part, and in the mercantilist 92 00:10:50.660 --> 00:10:57.940 era the mercantilists and their critics delivered at best intelligent aperçus on particular 93 00:10:57.940 --> 00:11:02.860 Economic, usually economic policy, topics. 94 00:11:02.860 --> 00:11:09.900 But Richard Catillon was the first theorist to demarcate an independent area of investigation, 95 00:11:09.900 --> 00:11:16.300 economics, and to write a general treatise on all its aspects. 96 00:11:16.300 --> 00:11:21.860 One reason that Catillon was the first of the moderns is that he emancipated economic 97 00:11:21.860 --> 00:11:28.420 economic analysis from its previous intertwining with ethical and political concerns. 98 00:11:28.420 --> 00:11:34.660 The mercantilists, dominant in economic thought for the preceding century or two, were special 99 00:11:34.660 --> 00:11:41.220 pleaders whose titbits of analysis were pressed into the service of political ends, either 100 00:11:41.220 --> 00:11:47.780 in subsidizing particular interests or in building up the power of the state. 101 00:11:47.780 --> 00:11:54.020 The Medieval and Renaissance scholastics, while incomparably more thoughtful and systematic, 102 00:11:54.020 --> 00:11:59.900 had embedded their economic analysis in a moral and theological framework. 103 00:11:59.900 --> 00:12:06.300 To break out of the mercantilist morass, it was necessary to step aside, to focus on the 104 00:12:06.300 --> 00:12:13.660 economic features of human action and to analyze them, abstracting them from other concerns, 105 00:12:13.660 --> 00:12:15.940 however important. 106 00:12:15.940 --> 00:12:23.180 Separating out economic analysis from ethics, politics, or even concrete economic data did 107 00:12:23.180 --> 00:12:29.300 not mean that these matters were unimportant or should never be brought back in, for it 108 00:12:29.300 --> 00:12:35.780 was impossible to decide the ethics of economic life, or what government should or should 109 00:12:35.780 --> 00:12:42.320 not do, without finding out how the market worked, or what the effect of interventions 110 00:12:42.320 --> 00:12:43.700 might be. 111 00:12:43.700 --> 00:12:53.700 Catillon, presumably, at least dimly, saw the need for this at least temporary emancipation of economic analysis. 112 00:12:53.700 --> 00:13:12.700 Furthermore, Catillon was one of the first to use such unique tools of economic abstraction as what Ludwig von Mises would later identify as the indispensable method of economic reasoning, the geduncan experiment, or thought experiment. 113 00:13:12.700 --> 00:13:19.620 Human life is not a laboratory where all variables can be kept fixed by the experimenter, who 114 00:13:19.620 --> 00:13:24.180 can then vary one in order to determine its effects. 115 00:13:24.180 --> 00:13:32.560 In human life, all factors, including human action, are variable and nothing remains constant. 116 00:13:32.560 --> 00:13:39.340 But the theorist can analyze cause and effect relations by substituting mental abstractions 117 00:13:39.340 --> 00:13:42.120 for laboratory experiment. 118 00:13:42.120 --> 00:13:49.120 We can hold variables fixed mentally, the method of assuming all other things equal, 119 00:13:49.120 --> 00:13:54.640 and then reason out the effects of allowing one variable to change. 120 00:13:54.640 --> 00:14:00.640 By starting with simple models and introducing successive complications as the simpler ones 121 00:14:00.640 --> 00:14:08.040 are analyzed, the economist can at last discover the nature and operations of the market economy 122 00:14:08.040 --> 00:14:09.720 in the real world. 123 00:14:09.720 --> 00:14:17.200 Thus, the economist can validly conclude from his analysis that all other things equal, 124 00:14:17.200 --> 00:14:22.880 Ceteris Paribus, and increase in demand will raise price. 125 00:14:22.880 --> 00:14:29.360 In the 1690s, as we have seen in Chapter 9, a leader of the emergent classical liberal 126 00:14:29.360 --> 00:14:36.440 opposition to the statism and mercantilism of Louis XIV, the provincial judge, the Sûre 127 00:14:36.440 --> 00:14:44.880 de Bois-Gilbert had introduced into economics the method of abstraction and successive approximations, 128 00:14:44.880 --> 00:14:50.680 beginning with the simplest model and proceeding in increasing complexity. 129 00:14:50.680 --> 00:14:57.040 In illustrating the nature and advantages of specialization and trade, Bois-Gilbert 130 00:14:57.040 --> 00:15:04.320 had begun with the simplest hypothetical exchange, two workers, one producing wool, the other 131 00:15:04.320 --> 00:15:12.400 Tweet, and then extended his analysis to a small town and, finally, to the entire world. 132 00:15:12.400 --> 00:15:20.040 Richard Catillon greatly developed this systematic method of abstractions and successive approximations. 133 00:15:20.040 --> 00:15:24.160 He liberally used the Ceteris Paribus method. 134 00:15:24.160 --> 00:15:29.400 Through this analytic method he uncovered natural cause and effect relations in the 135 00:15:29.400 --> 00:15:31.580 market economy. 136 00:15:31.580 --> 00:15:37.800 The France of Cantillon's day was a country of great landed feudal estates, the result 137 00:15:37.800 --> 00:15:41.300 of the conquests of previous centuries. 138 00:15:41.300 --> 00:15:47.780 And so, Cantillon brilliantly began the economic analysis in his essay with the assumption 139 00:15:47.780 --> 00:15:53.140 that the whole world consists of one giant estate. 140 00:15:53.140 --> 00:16:00.080 In that admittedly unrealistic but illuminating construct, all production is dependent on 141 00:16:00.080 --> 00:16:07.560 and the wishes, the desires of the monopoly owner, who simply tells everyone what to do. 142 00:16:07.560 --> 00:16:15.740 Put another way, production depends on demand, except that here there is in effect one demander, 143 00:16:15.740 --> 00:16:18.640 the monopoly landowner. 144 00:16:18.640 --> 00:16:23.920 Catillon then makes one simple realistic change in his model. 145 00:16:23.920 --> 00:16:29.960 The landowner has farmed out the land to various producers of all kinds. 146 00:16:29.960 --> 00:16:37.200 But as soon as that happens, the economy cannot continue with one man giving orders. 147 00:16:37.200 --> 00:16:43.440 For its continued operation, the individual producers must exchange their products, and 148 00:16:43.440 --> 00:16:50.080 a free market economy comes into being, with its attendant competition, trade and price 149 00:16:50.080 --> 00:16:51.080 system. 150 00:16:51.080 --> 00:16:58.400 Furthermore, money arises out of this exchange as a commodity serving as a much-needed medium 151 00:16:58.400 --> 00:17:01.640 of Exchange and Measure of Values 152 00:17:01.640 --> 00:17:05.920 3. 153 00:17:05.920 --> 00:17:06.920 VALUE AND PRICE 154 00:17:06.920 --> 00:17:15.400 Catillon engaged in the first sophisticated modern analysis of market pricing, showing 155 00:17:15.400 --> 00:17:22.080 in detail how demand interacts with existing stock to form prices. 156 00:17:22.080 --> 00:17:29.440 In contrast to the later Smith-Ricardo classicists and foreshadowing the Austrians, Cantillon 157 00:17:29.440 --> 00:17:35.920 was largely interested in price formation in the real world, that is, actual market 158 00:17:35.920 --> 00:17:42.040 prices, rather than in the chimera of long-run normal pricing. 159 00:17:42.040 --> 00:17:48.840 In an important recent interchange on Cantillon, Professor Vincent Tarascio interprets him 160 00:17:48.840 --> 00:18:15.360 This was the Smith-Ricardo theory of equilibrium pricing, which has been basically expanded 161 00:18:15.360 --> 00:18:20.400 into Walrassian General Equilibrium Theory. 162 00:18:20.400 --> 00:18:27.120 But while there are passages in Cantillon justifying this approach, and the term intrinsic 163 00:18:27.120 --> 00:18:34.300 value is certainly an unfortunate one, Professor David O. Mahoney, in a perceptive comment 164 00:18:34.300 --> 00:18:41.000 on the Tarascio article, points out that Cantillon's approach was in reality pre-Austrian. 165 00:18:41.000 --> 00:18:48.400 First, O. Mahoney shows that Cantillon's market price analysis was the Austrian one 166 00:18:48.400 --> 00:18:56.400 of a given existing stock of a good evaluated and demanded by consumers. 167 00:18:56.400 --> 00:19:02.480 Quoting from Cantillon, it is clear that the quantity of product or of merchandise offered 168 00:19:02.480 --> 00:19:10.120 for sale in proportion to the demand or number of buyers is the basis on which is fixed or 169 00:19:10.120 --> 00:19:24.120 Demand, in turn, is subjective, dependent on humours, fancies, mode of living, etc. 170 00:19:24.120 --> 00:19:30.720 These subjective valuations are what impart value to the products offered for sale. 171 00:19:30.720 --> 00:19:39.240 It is the consent of mankind, says Cantillon, which gives value to lace, linen, fine cloths, 172 00:19:39.240 --> 00:19:41.680 Power and Other Metals. 173 00:19:41.680 --> 00:19:47.340 For Cartillon, actual market prices are determined by demand. 174 00:19:47.340 --> 00:19:54.200 It often happens that many things which actually have this intrinsic value are not sold in 175 00:19:54.200 --> 00:19:56.840 the market at that value. 176 00:19:56.840 --> 00:20:02.560 That will depend on the humours and fancies of men and on their consumption. 177 00:20:02.560 --> 00:20:15.560 Thus the value of products is imparted by consumer valuation, a crucial Proto-Austrian insight derived from medieval and late Spanish scholastics. 178 00:20:15.560 --> 00:20:31.560 For centuries, in fact, the scholastic and post-scholastic position had been that the value of goods is determined by utility and scarcity, by subjective valuation of a given supply. 179 00:20:31.560 --> 00:20:37.880 The more utility, the higher the value, and the more abundant the supply, the lower the 180 00:20:37.880 --> 00:20:43.000 value and price of any good on the market. 181 00:20:43.000 --> 00:20:49.760 Catillon's is a sophisticated and elaborated development of the scholastic approach. 182 00:20:49.760 --> 00:20:55.960 While Catillon considers the intrinsic value of a thing, the measure of the land and labor 183 00:20:55.960 --> 00:21:16.400 Going into detail on intrinsic value, Catillon refers to the hypothetical case of an American 184 00:21:16.400 --> 00:21:23.240 who travels to Europe to sell beaver skins for hats, but is then rightly astonished to 185 00:21:23.240 --> 00:21:29.200 to learn that woolen hats are as serviceable as those made of beaver, and that all the 186 00:21:29.200 --> 00:21:35.740 difference which causes so long a sea journey is in the fancy of those who think beaver 187 00:21:35.740 --> 00:21:40.960 hats lighter and more agreeable to the eye and the touch. 188 00:21:40.960 --> 00:21:47.720 In short, the entire cost of production, all the labor and effort that went into the production 189 00:21:47.720 --> 00:21:55.000 Production and transport of beaver skins means nothing unless the product satisfies the consumer 190 00:21:55.000 --> 00:22:01.680 enough to pay for the costs and to enable the product to compete with another commodity 191 00:22:01.680 --> 00:22:04.640 made more cheaply at home. 192 00:22:04.640 --> 00:22:11.160 It is consumer demand that determines sales as well as price. 193 00:22:11.160 --> 00:22:19.180 Omohony goes on to point out that Kantian's monopoly estate model clearly shows that demand, 194 00:22:19.180 --> 00:22:26.740 in this case that of the world monopoly landowner, and not cost of production determines price. 195 00:22:26.740 --> 00:22:33.960 Kantian, then, did not foreshadow the classical equilibrium theory that cost of production 196 00:22:33.960 --> 00:22:40.480 Constitution constituted the long run and, presumably therefore, the most important determinant 197 00:22:40.480 --> 00:22:42.680 of market price. 198 00:22:42.680 --> 00:22:49.680 On the contrary, for Cartillon, cost of production had a very different function, deciding whether 199 00:22:49.680 --> 00:22:56.580 a business could make profits or else have to suffer losses and go out of business. 200 00:22:56.580 --> 00:23:02.460 If consumer value and therefore the selling price of a product is high enough to more 201 00:23:02.460 --> 00:23:09.580 More than cover costs, the firm makes a profit. If not high enough, it suffers losses and 202 00:23:09.580 --> 00:23:15.860 eventually has to go out of business. This is an important part of the Austrian view 203 00:23:15.860 --> 00:23:23.740 of the role of costs. Thus Catillon discusses costs and prices in the manufacture of Brussels 204 00:23:23.740 --> 00:23:31.300 lace. If the price which the ladies pay for the lace does not cover all the costs and 205 00:23:31.300 --> 00:23:37.220 and Profits, there will be no encouragement for this manufacture, and the undertaker will 206 00:23:37.220 --> 00:23:41.540 cease to carry it on or become bankrupt. 207 00:23:41.540 --> 00:23:48.420 But as we have supposed this manufacture is continued, it is necessary that all costs 208 00:23:48.420 --> 00:23:53.380 be covered by the prices paid by the ladies of Paris. 209 00:23:53.380 --> 00:24:00.540 Hence the movement toward long-run equilibrium is not a process of adjusting market prices 210 00:24:00.540 --> 00:24:08.220 to Intrinsic Long-Run Costs of Production, but one of laborers and entrepreneurs moving 211 00:24:08.220 --> 00:24:15.380 in and out of various lines of production until costs of production and selling prices 212 00:24:15.380 --> 00:24:17.340 are equal. 213 00:24:17.340 --> 00:24:24.140 As O'Mahoney well puts it, for Catillon, then, it is not so much that intrinsic values 214 00:24:24.140 --> 00:24:46.140 In other words, it is the prices offered that determine what production costs can be incurred, 215 00:24:46.140 --> 00:24:52.060 not that production costs determine what the prices must be. 216 00:24:52.060 --> 00:24:58.580 Of course, there is a big gap, both in Cantillon's approach and that of the later Smith-Ricardo 217 00:24:58.580 --> 00:25:04.740 classicists, as well as of the modern Ricardian neo-classicists. 218 00:25:04.740 --> 00:25:08.420 Where do the costs of production come from? 219 00:25:08.420 --> 00:25:15.200 In contrast to the Cantillon and classical approach, they are neither intrinsic nor mandated 220 00:25:15.200 --> 00:25:20.780 from some mysterious force outside the economic system. 221 00:25:20.780 --> 00:25:27.340 Prices of production, as it took the Austrians to finally point out, are themselves determined 222 00:25:27.340 --> 00:25:33.660 by the expected consumer demand for goods and services. 223 00:25:33.660 --> 00:25:36.860 4. 224 00:25:36.860 --> 00:25:43.380 Uncertainty and the Entrepreneur One of Cartillon's remarkable contributions 225 00:25:43.380 --> 00:25:50.540 to economic thought is that he was the first to stress and analyze the entrepreneur. 226 00:25:50.540 --> 00:25:57.140 To this real-world merchant, banker and speculator, it would have been inconceivable to fall into 227 00:25:57.140 --> 00:26:04.400 the Ricardian, Walrassian and neo-classical trap of assuming that the market is characterized 228 00:26:04.400 --> 00:26:09.440 by perfect knowledge and a static world of certainty. 229 00:26:09.440 --> 00:26:15.400 The real-world marketplace is permeated by uncertainty, and it is the function of the 230 00:26:15.400 --> 00:26:28.400 The businessman, the undertaker, the entrepreneur, to meet and bear that uncertainty by investing, paying expenses, and then hoping for a profitable return. 231 00:26:28.400 --> 00:26:38.400 Profits, then, are a reward for successful forecasting, for successful uncertainty-bearing in the process of production. 232 00:26:38.400 --> 00:26:54.900 The crucial Smithian, Ricardian and Walrassian classical and neo-classical assumption that the economy is perpetually in a state of long-run equilibrium, fatally rules out the real world of uncertainty. 233 00:26:54.900 --> 00:27:05.900 Instead, it focuses on a never-never land of no change, and hence of perfect certainty and perfect knowledge of present and future. 234 00:27:05.900 --> 00:27:13.740 Thus, Catillon divides producers in the market economy into two classes, hired people who 235 00:27:13.740 --> 00:27:23.220 receive fixed wages or fixed land rents, and entrepreneurs with non-fixed, uncertain returns. 236 00:27:23.220 --> 00:27:29.420 The farmer-entrepreneur bears the risk of fixed costs of production and of uncertain 237 00:27:29.420 --> 00:27:39.420 and Selling Prices, while the merchant or manufacturer pays similar fixed costs and relies on an uncertain return. 238 00:27:39.420 --> 00:27:53.420 Except for those who only sell their own labor, business entrepreneurs must lay out monies which, after they have done so, are fixed or given from their point of view. 239 00:27:53.420 --> 00:27:59.820 Since sales and selling prices are uncertain and not fixed, their business income becomes 240 00:27:59.820 --> 00:28:03.060 an uncertain residual. 241 00:28:03.060 --> 00:28:10.420 Catillon also sees that the pervasive uncertainty borne by the entrepreneurs is partly the consequence 242 00:28:10.420 --> 00:28:13.300 of a decentralized market. 243 00:28:13.300 --> 00:28:20.660 In a world of one monopoly owner, the owner himself decides upon prices and production, 244 00:28:20.660 --> 00:28:24.260 And there is little entrepreneurial uncertainty. 245 00:28:24.260 --> 00:28:31.300 But in the real world, the decentralized entrepreneurs face a great deal of uncertainty and must 246 00:28:31.300 --> 00:28:33.380 bear its risks. 247 00:28:33.380 --> 00:28:39.540 For Catillon, competition and entrepreneurship go hand in hand. 248 00:28:39.540 --> 00:28:45.860 As in the case of Frank Knight and the modern Austrians, Catillon's theory of entrepreneurship 249 00:28:45.860 --> 00:28:53.620 focuses on his function, his role as uncertainty-bearer in the market, rather than, as in the case 250 00:28:53.620 --> 00:28:57.940 of Joseph Schumpeter, on facets of his personality. 251 00:28:57.940 --> 00:29:05.640 Catillon's concept also anticipates von Mises and the modern Austrians in another respect. 252 00:29:05.640 --> 00:29:13.540 His entrepreneur performs not a disruptive, as in Schumpeter, but an equilibrating function. 253 00:29:13.540 --> 00:29:20.260 That is, by successfully forecasting and investing resources in the future, the entrepreneur 254 00:29:20.260 --> 00:29:26.780 helps adjust and balance supply and demand in the various markets. 255 00:29:26.780 --> 00:29:33.380 Professor Tarascio points out that Catillon's pioneering insight into the pervasive uncertainty 256 00:29:33.380 --> 00:29:40.420 of the market was largely forgotten, and before long dropped out of economic thought until 257 00:29:40.420 --> 00:29:46.780 People independently resurrected in the 20th century by night and by such modern Austrians 258 00:29:46.780 --> 00:29:50.780 as Ludwig von Mises and F. A. Hayek. 259 00:29:50.780 --> 00:29:57.740 But as Professor O. Mahoney wryly comments, to acknowledge his, Kantian's, recognition 260 00:29:57.740 --> 00:30:04.640 of uncertainty when we look at him as Professor Tarascio does from a current perspective, 261 00:30:04.640 --> 00:30:11.920 is thus more of a reflection on many modern economists whose capacity to ignore uncertainty 262 00:30:11.920 --> 00:30:18.760 is nothing short of bizarre than a tribute to Catillon's prescience. 263 00:30:18.760 --> 00:30:24.000 Bizarre it may well be, but there is a method to the madness. 264 00:30:24.000 --> 00:30:30.800 For as Professor O'Mahony himself understands full well, modern economics is a set of formal 265 00:30:30.800 --> 00:30:36.800 Formal Models and Equations purporting to fully determine human behaviour, at least 266 00:30:36.800 --> 00:30:39.160 in the economic realm. 267 00:30:39.160 --> 00:30:47.280 And there is no way that uncertainty can be compressed into determinate mathematical models. 268 00:30:47.280 --> 00:30:54.620 As O'Mahoney puts it, one might ask if entrepreneurial activity can in the nature of things be made 269 00:30:54.620 --> 00:30:59.660 the subject of formal representations or models at all. 270 00:30:59.660 --> 00:31:05.740 If they could, would there be any room for uncertainty in the true sense of the term, 271 00:31:05.740 --> 00:31:10.940 and therefore any room for entrepreneurship itself? 272 00:31:10.940 --> 00:31:17.200 Economic theory, in short, must choose between formally elegant but false and distorting 273 00:31:17.200 --> 00:31:25.660 mathematical models and the literary analysis of real human life itself. 274 00:31:25.660 --> 00:31:31.660 5. Population Theory 275 00:31:31.660 --> 00:31:38.780 Richard Catillon's theory of wages is dependent on population in a way that was copied almost 276 00:31:38.780 --> 00:31:45.580 word-for-word by Adam Smith in The Wealth of Nations, which in turn inspired Malthus' 277 00:31:45.580 --> 00:31:53.460 famous anti-populationist hysteria. Catillon's long-run wage theory depends on the supply 278 00:31:53.460 --> 00:32:00.220 of Labor, which in turn depends on levels and growth of population. 279 00:32:00.220 --> 00:32:06.300 In contrast to the later Malthus, however, Cantillon engaged in a sophisticated analysis 280 00:32:06.300 --> 00:32:10.420 of the determinants of population growth. 281 00:32:10.420 --> 00:32:16.980 Natural resources, cultural factors, and the state of technology, he diagnosed as particularly 282 00:32:16.980 --> 00:32:18.700 important. 283 00:32:18.700 --> 00:32:25.020 He saw prophetically that the colonization of North America would not be a simple displacement 284 00:32:25.020 --> 00:32:32.700 of one people by another, but that new agricultural technology would support a far larger population 285 00:32:32.700 --> 00:32:35.340 per acre of land. 286 00:32:35.340 --> 00:32:42.460 Hence the extent to which existing resources, land and labor can be utilized depends on 287 00:32:42.460 --> 00:32:45.700 the existing state of technology. 288 00:32:45.700 --> 00:32:53.060 This pre-colonial North America was not over-populated by Indians, as some had believed. 289 00:32:53.060 --> 00:33:01.560 Instead, the Indian population level had adjusted to the given resources and technology available. 290 00:33:01.560 --> 00:33:07.780 In short, Catillon foreshadowed the modern theory of optimum population, in which the 291 00:33:07.780 --> 00:33:14.260 size of population tends to adjust to the most productive level given the resources 292 00:33:14.260 --> 00:33:18.000 Tools and Technology Available. 293 00:33:18.000 --> 00:33:24.740 While Catillon described a pre-Malthusian alleged tendency of human beings to multiply 294 00:33:24.740 --> 00:33:31.980 like rats in a barn, without limit, he also recognized that religious and cultural values 295 00:33:31.980 --> 00:33:35.380 can modify such tendencies. 296 00:33:35.380 --> 00:33:41.200 An increase in the demand for agricultural products that are land-intensive would tend 297 00:33:41.200 --> 00:33:47.680 to reduce the demand for agricultural labor, and eventually cause a fall in the supply 298 00:33:47.680 --> 00:33:52.320 of such labor, and hence of the population as a whole. 299 00:33:52.320 --> 00:33:58.360 Catillon, it must be remembered, was writing in an age when the overwhelming bulk of the 300 00:33:58.360 --> 00:34:02.240 population was engaged in agriculture. 301 00:34:02.240 --> 00:34:07.800 An increase in the demand for labor-intensive farm products, on the other hand, would bring 302 00:34:07.800 --> 00:34:14.440 Talking about an increase in the demand for labor, and hence of the population. 303 00:34:14.440 --> 00:34:21.560 Living once again in a country and an era of large feudal landed estates, Catillon observed 304 00:34:21.560 --> 00:34:27.220 that it was the tastes of the proprietary classes that determined the consumer tastes 305 00:34:27.220 --> 00:34:32.980 and values of society, and hence the demand for products. 306 00:34:32.980 --> 00:34:40.220 It should be noted that in an unusually sophisticated way, Catillon pointed out that it was outside 307 00:34:40.220 --> 00:34:47.220 the scope of economic analysis to decide whether it is better to have a large population of 308 00:34:47.220 --> 00:34:54.860 poorer people or a smaller population of people who enjoy a higher standard of living. 309 00:34:54.860 --> 00:35:00.060 That must be for the values of the citizenry to decide. 310 00:35:00.060 --> 00:35:06.320 Professor Tarascio points out that Cantillon's population analysis was far more subtle and 311 00:35:06.320 --> 00:35:13.860 modern than that of Smith, Ricardo or Malthus. Rather than worry about a future unchecked 312 00:35:13.860 --> 00:35:20.460 population explosion, Cantillon's theoretical framework accounted for the current cultural 313 00:35:20.460 --> 00:35:27.060 change to smaller families in industrialized countries, as well as the likelihood that 314 00:35:27.060 --> 00:35:34.140 Population will adjust itself downward to any future depletion of resources. 315 00:35:34.140 --> 00:35:40.460 Catillon pointed out, for example, that as ancient civilizations declined, their population 316 00:35:40.460 --> 00:35:43.580 size declined along with them. 317 00:35:43.580 --> 00:35:50.180 The number of inhabitants of the Roman state in Italy, for example, declined from 25 million 318 00:35:50.180 --> 00:36:10.260 Richard Catillon was also the founder of Spatial Economies, of the analysis of economic activity 319 00:36:10.260 --> 00:36:14.260 in relation to geographical space. 320 00:36:14.260 --> 00:36:20.040 In a sense, of course, mercantilists, by advocating a favorable balance of geographical 321 00:36:20.040 --> 00:36:26.920 Spatial trade analyzed, even if badly, economic activities to the extent that they crossed 322 00:36:26.920 --> 00:36:29.800 national borders. 323 00:36:29.800 --> 00:36:36.440 Spatial analysis, as Professor Hebert has pointed out, deals with distance, transportation 324 00:36:36.440 --> 00:36:43.480 cost and its relation to prices as well as to the location of economic activities, and 325 00:36:43.480 --> 00:36:49.520 area, the geographical development and boundaries of markets. 326 00:36:49.520 --> 00:36:56.200 Catillon not only developed location theory but integrated it into his general microeconomic 327 00:36:56.200 --> 00:36:57.860 analysis. 328 00:36:57.860 --> 00:37:04.660 In particular, he saw that the prices of produce, even when money and monetary prices were in 329 00:37:04.660 --> 00:37:10.880 equilibrium, would always be higher in the cities than in their place of production by 330 00:37:10.880 --> 00:37:16.380 an amount needed to cover the costs and risks of transport. 331 00:37:16.380 --> 00:37:23.320 In consequence, products that are bulky and or perishable would be too costly or impossible 332 00:37:23.320 --> 00:37:30.540 to transport to the cities, and hence would be far cheaper at their places of production. 333 00:37:30.540 --> 00:37:36.440 Such products, then, would generally be grown in border areas around the cities, where the 334 00:37:36.440 --> 00:37:41.600 transport costs to the urban markets are not prohibitive. 335 00:37:41.600 --> 00:37:48.240 In manufacturing, furthermore, Catillon saw that in cases where plants have to use bulky, 336 00:37:48.240 --> 00:37:55.640 low value per unit weight raw materials, they would tend to locate near the output of such 337 00:37:55.640 --> 00:37:56.640 materials. 338 00:37:56.640 --> 00:38:02.920 For in that case, it would be less costly to transport the less bulky, more valuable 339 00:38:02.920 --> 00:38:09.280 finished products to urban markets than to ship the raw materials. 340 00:38:09.280 --> 00:38:15.580 In the location of areas of urban markets, Catillol was highly suggestive, pointing out 341 00:38:15.580 --> 00:38:22.120 that it is far less costly for buyers and sellers to gather at one spot than to travel 342 00:38:22.120 --> 00:38:28.340 around the periphery seeking each other out and finding out the various prices that buyers 343 00:38:28.340 --> 00:38:33.560 were willing to pay or sellers were willing to accept. 344 00:38:33.560 --> 00:38:40.460 In modern terms, Catillon might say that central markets develop naturally because they enormously 345 00:38:40.460 --> 00:38:48.140 lower the transaction, transport, information and other costs of trade. 346 00:38:48.140 --> 00:38:54.140 While Catillon therefore saw how markets and the location of economic activity were able 347 00:38:54.140 --> 00:39:01.600 to regulate themselves harmoniously, he was not a consistent free trader internally, just 348 00:39:01.600 --> 00:39:25.180 Money and Process Analysis 349 00:39:25.180 --> 00:39:30.760 A highlight of Cantillon's theory of money is his treatment of the value of money as a 350 00:39:30.760 --> 00:39:36.280 as a special case of the value of market commodities in general. 351 00:39:36.280 --> 00:39:42.840 As in the case of any product, the alleged intrinsic value of gold is the cost of its 352 00:39:42.840 --> 00:39:44.340 production. 353 00:39:44.340 --> 00:39:51.320 The value of gold and silver, like other commodities, is set by the values and hence the demands 354 00:39:51.320 --> 00:39:56.580 of users in the market, by the consent of mankind. 355 00:39:56.580 --> 00:40:02.360 As in the case of other commodities, too, Cantillon has no cost of production theory 356 00:40:02.360 --> 00:40:05.320 of the value of gold and silver. 357 00:40:05.320 --> 00:40:11.760 He simply holds, as elsewhere, that these products can only be produced if costs can 358 00:40:11.760 --> 00:40:16.160 be covered by the value of the product. 359 00:40:16.160 --> 00:40:23.240 The process of aligning costs and values in gold, however, takes a relatively long time, 360 00:40:23.240 --> 00:40:30.240 Since its annual output is a small proportion of the total stock in existence, if the nominal 361 00:40:30.240 --> 00:40:36.840 value of gold falls below its cost of production, it will cease being mined. 362 00:40:36.840 --> 00:40:43.120 And if costs fall sharply, production of gold will be stepped up, thus tending to align 363 00:40:43.120 --> 00:40:46.920 costs and normal values. 364 00:40:46.920 --> 00:40:54.040 All recognize that government paper and bank money virtually have no costs of production, 365 00:40:54.040 --> 00:40:58.740 and therefore no intrinsic value in his terminology. 366 00:40:58.740 --> 00:41:05.220 But he pointed out that market forces keep the value of such fiduciary money at par with 367 00:41:05.220 --> 00:41:11.460 the value of the gold or silver in which that paper can be redeemed. 368 00:41:11.460 --> 00:41:17.920 As a consequence, an increase in the supply of fictitious or imaginary money has the same 369 00:41:17.920 --> 00:41:22.260 effect as increase in the circulation of real money. 370 00:41:22.260 --> 00:41:30.420 But, Catillon noted, let confidence in the money be damaged and monetary disorder issues 371 00:41:30.420 --> 00:41:33.780 and the fictitious money collapses. 372 00:41:33.780 --> 00:41:40.540 He pointed out, too, that government is particularly subject to the temptation to print fictitious 373 00:41:40.540 --> 00:41:47.260 Money, a lesson he had undoubtedly learned from, or at least seen embodied in, the John 374 00:41:47.260 --> 00:41:49.740 Law experiment. 375 00:41:49.740 --> 00:41:55.500 Catillon also provided a sound analysis of how the market determines the ratio of the 376 00:41:55.500 --> 00:41:59.180 values of gold and silver. 377 00:41:59.180 --> 00:42:05.140 One of the superb features of Catillon's essay is that he was the first in a pre-Austrian 378 00:42:05.140 --> 00:42:12.120 and Analysis to understand that money enters the economy as a step-by-step process and 379 00:42:12.120 --> 00:42:19.380 hence does not simply increase or raise prices in a homogeneous aggregate. 380 00:42:19.380 --> 00:42:25.840 Hence he criticized John Locke's Naive Quantity Theory of Money, a theory still basically 381 00:42:25.840 --> 00:42:32.940 followed by monetarist and neoclassical economists alike, which holds that a change in the total 382 00:42:32.940 --> 00:42:40.680 The actual supply of money causes only a uniform proportionate change in all prices. 383 00:42:40.680 --> 00:42:46.980 In short, an increased money supply is not supposed to cause changes in the relative 384 00:42:46.980 --> 00:42:50.500 prices of the various goods. 385 00:42:50.500 --> 00:42:57.580 Thus Cantillon, asking, in what way and in what proportion the increase of money raises 386 00:42:57.580 --> 00:43:10.780 In general, an increase of actual money causes in a state a corresponding increase of consumption, 387 00:43:10.780 --> 00:43:14.680 which gradually brings about increased prices. 388 00:43:14.680 --> 00:43:20.700 If the increase of actual money comes from mines of gold and silver in the state, the 389 00:43:20.700 --> 00:43:26.500 owner of these mines, the adventurers, the smelters, the refiners, and all the other 390 00:43:26.500 --> 00:43:33.260 where workers will increase their expenses in proportion to their gains, they will consume 391 00:43:33.260 --> 00:43:40.100 more commodities, they will consequently give employment to several mechanics who had not 392 00:43:40.100 --> 00:43:47.340 so much to do before, and who for the same reason will increase their expenses. 393 00:43:47.340 --> 00:43:54.660 All this increase of expense in meat, wine, wool, etc., diminishes the share of the other 394 00:43:54.660 --> 00:43:59.820 Other Inhabitants of the State who do not participate at first in the wealth of the 395 00:43:59.820 --> 00:44:02.140 minds in question. 396 00:44:02.140 --> 00:44:09.300 The alteration of the market, or the demand for meat, wine, wool, etc., being more intense 397 00:44:09.300 --> 00:44:14.060 than usual, will not fail to raise their prices. 398 00:44:14.060 --> 00:44:19.980 These high prices will determine the farmers to employ more land to produce them in another 399 00:44:19.980 --> 00:44:21.300 year. 400 00:44:21.300 --> 00:44:27.180 These same farmers will profit by this rise of prices and will increase the expenditure 401 00:44:27.180 --> 00:44:30.260 of their families like the others. 402 00:44:30.260 --> 00:44:35.880 Those then who will suffer from this dearness and increased consumption will be first of 403 00:44:35.880 --> 00:44:42.660 all the landowners during the term of their leases, then their domestic servants and all 404 00:44:42.660 --> 00:44:48.580 the workmen or fixed wage earners who support the families on their wages. 405 00:44:48.580 --> 00:44:55.020 All these must diminish their expenditure in proportion to the new consumption. 406 00:44:55.020 --> 00:45:02.020 It is thus approximately that a considerable increase of money from the mines increases 407 00:45:02.020 --> 00:45:04.260 consumption. 408 00:45:04.260 --> 00:45:11.340 In short, the early receivers of the new money will increase spending according to their preferences, 409 00:45:11.340 --> 00:45:17.420 raising prices in these goods at the expense of a lower standard of living among the late 410 00:45:17.420 --> 00:45:23.140 Receivers of the New Money, or among those on fixed incomes who don't receive the new 411 00:45:23.140 --> 00:45:30.140 money at all. Furthermore, relative prices will be changed in the course of the general 412 00:45:30.140 --> 00:45:37.060 price rise, since the increased spending is directed more or less to certain kinds of 413 00:45:37.060 --> 00:45:43.820 products or merchandise according to the idea of those who acquire the money, and market 414 00:45:43.820 --> 00:45:52.140 prices will rise more for certain things than for others. Moreover, the overall price rise will 415 00:45:52.140 --> 00:45:59.660 not necessarily be proportionate to the increase in the supply of money. Specifically, since those 416 00:45:59.660 --> 00:46:06.380 who receive new money will scarcely do so in the same proportion as their previous cash balances, 417 00:46:06.380 --> 00:46:27.540 Catillol summed up his insights splendidly, while hinting at the important truth that 418 00:46:27.540 --> 00:46:33.340 economic laws are qualitative but not quantitative. 419 00:46:33.340 --> 00:46:40.020 An increase of money circulating in a state always causes there an increase of consumption 420 00:46:40.020 --> 00:46:43.220 and a higher standard of expenses. 421 00:46:43.220 --> 00:46:49.420 But the dearness caused by this money does not affect equally all the kinds of products 422 00:46:49.420 --> 00:46:57.100 and merchandise proportionably to the quantity of money, unless what is added continues in 423 00:46:57.100 --> 00:47:00.900 the same circulation as the money before. 424 00:47:00.900 --> 00:47:07.080 That is to say, unless those who offered in the market one ounce of silver be the same 425 00:47:07.080 --> 00:47:13.480 and only ones who now offer two ounces when the amount of money in circulation is doubled 426 00:47:13.480 --> 00:47:17.720 in quantity, and that is hardly ever the case. 427 00:47:17.720 --> 00:47:24.040 I conceive that when a large surplus of money is brought into a state, the new money gives 428 00:47:24.040 --> 00:47:31.040 a new turn to consumption and even a new speed to circulation, but it is not possible to 429 00:47:31.040 --> 00:47:34.760 say exactly to what extent. 430 00:47:34.760 --> 00:47:41.500 Not only that, but as Professor Hebert has pointed out, Cantillon also provided a remarkable 431 00:47:41.500 --> 00:47:50.160 proto-Austrian analysis of the different effects of the money going into consumption or investment. 432 00:47:50.160 --> 00:47:55.840 If the new funds are spent on consumer goods, then goods will be purchased according to 433 00:47:55.840 --> 00:48:01.960 the inclination of those who acquire the money, so that the prices of those goods will be 434 00:48:01.960 --> 00:48:07.320 driven up and relative prices necessarily changed. 435 00:48:07.320 --> 00:48:13.120 If in contrast, the increased money comes first into the hands of lenders, they will 436 00:48:13.120 --> 00:48:20.000 increase the supply of credit and temporarily lower the rate of interest, thereby increasing 437 00:48:20.000 --> 00:48:22.080 Banking Investment. 438 00:48:22.080 --> 00:48:28.400 Repudiating the common superficial view brought back to economics in the 20th century by John 439 00:48:28.400 --> 00:48:35.680 Maynard Keynes that interest is purely a monetary phenomenon, Catillon held that the rate of 440 00:48:35.680 --> 00:48:42.820 interest is determined by the number and interactions of lenders and borrowers, just as the prices 441 00:48:42.820 --> 00:48:49.280 of particular goods are determined by the interaction of buyers and sellers. 442 00:48:49.280 --> 00:48:54.840 Thomas Cartillon pointed out that, if the abundance of money in a state comes into the 443 00:48:54.840 --> 00:49:01.180 hands of moneylenders, it will doubtless bring about the current rate of interest by increasing 444 00:49:01.180 --> 00:49:03.740 the number of moneylenders. 445 00:49:03.740 --> 00:49:09.800 But if it comes into the hands of those who spend, it will have quite the opposite effect, 446 00:49:09.800 --> 00:49:15.420 and will raise the rate of interest by increasing the number of entrepreneurs who will find 447 00:49:15.420 --> 00:49:21.500 activity by this increased spending and who will need to borrow in order to extend their 448 00:49:21.500 --> 00:49:25.380 enterprise to every class of customers. 449 00:49:25.380 --> 00:49:32.580 An increased supply of money, therefore, can either lower or raise interest rates temporarily 450 00:49:32.580 --> 00:49:39.340 depending on who receives the new money, lenders or people who will be inspired by their new 451 00:49:39.340 --> 00:49:43.940 found wealth to borrow for new enterprises. 452 00:49:43.940 --> 00:49:50.260 In his analysis of expanding credit lowering the rate of interest, furthermore, Cartillan 453 00:49:50.260 --> 00:49:56.240 provides the first hints of the later Austrian theory of the business cycle. 454 00:49:56.240 --> 00:50:01.920 In addition, Cartillan presented the first sophisticated analysis of how the demand for 455 00:50:01.920 --> 00:50:09.140 money, or rather its inverse, the speed or velocity of circulation, affects the impact 456 00:50:09.140 --> 00:50:13.180 of money, and hence the movement of prices. 457 00:50:13.180 --> 00:50:20.840 As he put it, an acceleration or greater rapidity in circulation of money in exchange is equivalent 458 00:50:20.840 --> 00:50:25.500 to an increase of actual money up to a point. 459 00:50:25.500 --> 00:50:31.480 One of the reasons why prices do not change in exact proportion to a change in the quantity 460 00:50:31.480 --> 00:50:35.900 of money is alterations in velocity. 461 00:50:35.900 --> 00:50:42.620 A river which runs and winds about in its bed will not flow with double the speed when 462 00:50:42.620 --> 00:50:45.820 and the amount of water is doubled. 463 00:50:45.820 --> 00:50:51.940 Catillon also saw that the demand for cash balances will depend on the frequency of payments 464 00:50:51.940 --> 00:50:54.540 made in the society. 465 00:50:54.540 --> 00:51:01.060 As Monroe sums up Catillon's position, the longer the interval between payments, the 466 00:51:01.060 --> 00:51:06.980 larger are the sums which have to accumulate in the payer's hands and the more money is 467 00:51:06.980 --> 00:51:09.820 required in the country. 468 00:51:09.820 --> 00:51:16.380 If people save large sums, furthermore, they may have to keep money locked up for considerable 469 00:51:16.380 --> 00:51:17.940 periods. 470 00:51:17.940 --> 00:51:23.500 On the other hand, the development of more efficient clearing systems for debts, as well 471 00:51:23.500 --> 00:51:28.140 as of paper money, will economize on cash. 472 00:51:28.140 --> 00:51:33.780 The rapidity of circulation is increased by the practice of offsetting accounts between 473 00:51:33.780 --> 00:51:38.880 merchants and by the use of bankers and goldsmiths' notes. 474 00:51:38.880 --> 00:51:44.360 For these men do not keep an equivalent amount of money on hand. 475 00:51:44.360 --> 00:51:50.660 Catillon summed up his analysis of the interaction of quantity and velocity. 476 00:51:50.660 --> 00:51:56.280 According to the principles we have established, the quantity of money circulating in exchange 477 00:51:56.280 --> 00:52:03.000 fixes and determines the price of everything in a state, taking into account the rapidity 478 00:52:03.000 --> 00:52:07.160 or sluggishness of circulation. 479 00:52:07.160 --> 00:52:13.240 Cantillon also provided a masterful discussion of the relations between gold and silver and 480 00:52:13.240 --> 00:52:20.800 advocated freely fluctuating exchange rates between gold and silver, attacking any attempts, 481 00:52:20.800 --> 00:52:26.960 certainly any long-lived attempts, to fix the exchange rate between them. 482 00:52:26.960 --> 00:52:31.320 For such a rate is soon bound to vary from the market rate. 483 00:52:31.320 --> 00:52:38.280 Thus, Cantillon saw the problem in trying to maintain a bimetallic standard with fixed 484 00:52:38.280 --> 00:52:42.840 parities between two precious metals. 485 00:52:42.840 --> 00:52:48.960 All in all, we can understand Hayek's enthusiasm when he concludes that Cantillon's monetary 486 00:52:48.960 --> 00:52:55.520 theory constitutes without doubt the supreme achievement of a man who was the greatest 487 00:52:55.520 --> 00:53:12.480 8. 488 00:53:12.480 --> 00:53:16.040 INTERNATIONAL MONETARY RELATIONS 489 00:53:16.040 --> 00:53:22.000 One of the most notable features, and certainly the one drawing the most attention from historians 490 00:53:22.000 --> 00:53:28.760 of Kantian's Extensive Monetary Theory was his pioneering analysis of the tendency towards 491 00:53:28.760 --> 00:53:35.520 international monetary equilibrium, or the specie flow price mechanism that has been 492 00:53:35.520 --> 00:53:40.200 generally attributed to the later writings of David Hume. 493 00:53:40.200 --> 00:53:47.560 Kantian applied his micro-analysis of changes of the money supply within a country to changes 494 00:53:47.560 --> 00:53:51.760 in the distribution of money between countries. 495 00:53:51.760 --> 00:53:57.740 For over two centuries, mercantilist writers and statesmen in Europe had advocated an increased 496 00:53:57.740 --> 00:54:04.980 supply of specie in a country as a means of building up state power, and they were increasingly 497 00:54:04.980 --> 00:54:11.740 clear that, short of having gold or silver mines, a nation could only increase its stock 498 00:54:11.740 --> 00:54:16.460 of money by having a favorable balance of trade. 499 00:54:16.460 --> 00:54:22.300 It was clear to the mercantilists that this was not a policy every nation could successfully 500 00:54:22.300 --> 00:54:28.500 pursue, for the favorable balances of trade of some nations would necessarily have to 501 00:54:28.500 --> 00:54:33.860 be offset by the unfavorable balances of others. 502 00:54:33.860 --> 00:54:40.700 In this disequilibrium situation it was every nation for itself, as each attempted to benefit 503 00:54:40.700 --> 00:54:46.540 at the Expense of Other Nations by Restrictionist and Warlike Policies. 504 00:54:46.540 --> 00:54:49.820 But there was a further problem in the background. 505 00:54:49.820 --> 00:54:55.940 Since most writers were at least roughly familiar with the quantity theory or supply-demand 506 00:54:55.940 --> 00:55:01.700 analysis of the value of money, an inner contradiction loomed. 507 00:55:01.700 --> 00:55:09.100 For if Nation A managed to acquire a favorable balance of trade and to accumulate specie, 508 00:55:09.100 --> 00:55:15.100 The increase of specie would raise prices in nation A, make the country's products 509 00:55:15.100 --> 00:55:21.780 uncompetitive in the world markets, and bring the favorable balance to an end. 510 00:55:21.780 --> 00:55:28.780 No one was more lucid about the problem of money and international payments than Cantillon. 511 00:55:28.780 --> 00:55:35.580 He pointed out that specie can either be acquired within a country by mining ore, or through 512 00:55:35.580 --> 00:55:42.780 subsidies, warfare, invisible payments, borrowing, or a favorable balance of trade with other 513 00:55:42.780 --> 00:55:44.620 countries. 514 00:55:44.620 --> 00:55:51.120 But then, in the cation process analysis, either the mine owners or the exporters would 515 00:55:51.120 --> 00:55:54.580 spend or lend the money. 516 00:55:54.580 --> 00:56:00.420 Part of the expenditure of the new money would surely be spent abroad, and furthermore the 517 00:56:00.420 --> 00:56:08.580 The increased stock of money would raise prices at home, making domestic goods less competitive. 518 00:56:08.580 --> 00:56:14.220 Exports would fall, and imports of cheaper foreign products would increase, and gold 519 00:56:14.220 --> 00:56:20.420 would flow out of the country, reversing the favorable balance of trade. 520 00:56:20.420 --> 00:56:27.300 In this way, Cantillon worked out an international monetary theory integrated with his domestic 521 00:56:27.300 --> 00:56:34.700 Analysis and was one of the first to work out a theory of international monetary equilibrium. 522 00:56:34.700 --> 00:56:40.620 For the world market managed to frustrate, at least in the long run, governmental attempts 523 00:56:40.620 --> 00:56:45.980 to intervene and secure favorable balances of trade. 524 00:56:45.980 --> 00:56:51.440 It should be noted further that Cantillon's analysis contained the basis of both major 525 00:56:51.440 --> 00:57:20.680 Richard Cantillon understood the grave inner contradiction of mercantilism, increased specie 526 00:57:20.680 --> 00:57:37.680 His unsatisfactory way out was to advise the king to hoard much of the increased stock, so as not to drive up prices. 527 00:57:37.680 --> 00:57:48.680 Unsatisfactory because money is meant to be spent eventually, and once spent, the dreaded price increase would willy-nilly take place. 528 00:57:48.680 --> 00:57:56.880 Prof. Salerno, however, has introduced a cautionary note in the Encomiums to Cantillon, pointing 529 00:57:56.880 --> 00:58:04.960 out that he has been called only a semi-equilibrium theorist, because he did not portray a satisfactory 530 00:58:04.960 --> 00:58:11.160 picture of what the equilibrium state would be like, and he did not think of the world 531 00:58:11.160 --> 00:58:16.000 economy as tending firmly towards equilibrium. 532 00:58:16.000 --> 00:58:21.880 As a result, Catillon did not present a theory of the international distribution of gold 533 00:58:21.880 --> 00:58:24.960 and silver in equilibrium. 534 00:58:24.960 --> 00:58:31.880 He thought of the economy instead as engaging in endless cycles of disequilibrium, rather 535 00:58:31.880 --> 00:58:36.760 than as tending towards equilibrium. 536 00:58:36.760 --> 00:58:39.760 9. 537 00:58:39.760 --> 00:58:43.720 The Self-Regulation of the Market 538 00:58:43.720 --> 00:58:49.480 There is no point wasting time in fruitless speculation on whether or not Richard Cantillon 539 00:58:49.480 --> 00:58:51.760 was a mercantilist. 540 00:58:51.760 --> 00:58:57.200 Eighteenth-century writers did not group themselves into such categories. 541 00:58:57.200 --> 00:59:03.560 While he inconsistently suggested, in accordance with state-building notions of the age, that 542 00:59:03.560 --> 00:59:10.840 the king should amass treasure from a favorable balance of trade, the entire thrust of Cantillon's 543 00:59:10.840 --> 00:59:18.000 The world's work was in a free-trade, laissez-faire direction, for it was clear that mercantilist 544 00:59:18.000 --> 00:59:21.840 measures would ultimately be self-defeating. 545 00:59:21.840 --> 00:59:27.520 More important, Cantillon was the first to show in detail that all parts of the market 546 00:59:27.520 --> 00:59:35.600 economy fit together in a natural, self-regulative, equilibrating pattern, with existing supply 547 00:59:35.600 --> 00:59:43.480 Why and Demand determining prices and wages, and ultimately the pattern of production. 548 00:59:43.480 --> 00:59:49.760 Consumer values furthermore determined demand, with population adjusting to cultural and 549 00:59:49.760 --> 00:59:51.960 economic factors. 550 00:59:51.960 --> 00:59:58.480 The equilibrators of the economy were the entrepreneurs, who adjust to and cope with 551 00:59:58.480 --> 01:00:02.280 the all-pervasive uncertainty of the market. 552 01:00:02.280 --> 01:00:08.480 And if the market economy, despite the chaos it might seem to superficial observers, is 553 01:00:08.480 --> 01:00:15.120 really harmoniously self-regulating, then government intervention as such is either 554 01:00:15.120 --> 01:00:20.000 counterproductive or unnecessary. 555 01:00:20.000 --> 01:00:26.040 Particularly instructive is Catillon's attitude toward usury laws, that vexed question which 556 01:00:26.040 --> 01:00:33.120 which had at last brought unwarranted discredit on the entire economic analysis of the Medieval 557 01:00:33.120 --> 01:00:36.620 Renaissance Catholic scholastics. 558 01:00:36.620 --> 01:00:43.400 This shrewd merchant and banker saw that particular interest rates on the market are proportionate 559 01:00:43.400 --> 01:00:47.680 to the risks of default faced by the creditor. 560 01:00:47.680 --> 01:00:54.520 High interest is the result of high risk, not of exploitation or oppression. 561 01:00:54.520 --> 01:01:00.320 As Catillon wrote, all the merchants in a state are in the habit of lending merchandise 562 01:01:00.320 --> 01:01:07.360 or produce for a time to retailers and proportion the rate of their profit or interest to that 563 01:01:07.360 --> 01:01:09.580 of their risk. 564 01:01:09.580 --> 01:01:15.180 High rates of interest bring about only a small profit because of the high proportion 565 01:01:15.180 --> 01:01:18.640 of default on risky loans. 566 01:01:18.640 --> 01:01:25.720 Catillon observed, too, that the later Catholic scholastics had eventually, if reluctantly, 567 01:01:25.720 --> 01:01:30.160 agreed to allow high rates of interest for risky loans. 568 01:01:30.160 --> 01:01:37.640 Furthermore, there should be no imposed maximum on interest, since only the lenders and borrowers 569 01:01:37.640 --> 01:01:41.600 can determine their own fears and needs. 570 01:01:41.600 --> 01:01:48.240 For they would be hard put to find any certain limit, since the business depends in reality 571 01:01:48.240 --> 01:01:53.120 on the Fears of the Lenders and the Needs of the Borrowers. 572 01:01:53.120 --> 01:02:00.400 Finally, Cantillon saw that usury laws could only restrict credit and thereby drive up 573 01:02:00.400 --> 01:02:04.840 interest rates even further on the inevitable black markets. 574 01:02:04.840 --> 01:02:11.640 Hence, usury laws would not lower interest rates, but rather raise them, because the 575 01:02:11.640 --> 01:02:17.960 contracting parties, obedient to the force of competition or the current price settled 576 01:02:17.960 --> 01:02:24.720 by the Proportion of Lender or Borrowers will make secret bargains, and this legal constraint 577 01:02:24.720 --> 01:02:32.520 will only embarrass trade and raise the rate of interest instead of settling it. 578 01:02:32.520 --> 01:02:35.840 10. 579 01:02:35.840 --> 01:02:41.000 Influence Richard Cantillon's pioneering essay was widely 580 01:02:41.000 --> 01:02:45.640 read and highly influential throughout the 18th century. 581 01:02:45.640 --> 01:02:52.800 It was widely read, as was the custom of the day, in underground manuscript form, by literary, 582 01:02:52.800 --> 01:02:58.680 scientific and intellectual people interested in the advance of thought and in the practical 583 01:02:58.680 --> 01:03:01.160 problems of the day. 584 01:03:01.160 --> 01:03:06.720 The wide reliance on such manuscripts resulted from the severe French censorship of that 585 01:03:06.720 --> 01:03:08.800 period. 586 01:03:08.800 --> 01:03:15.520 The essay then was widely read from its writing in the early 1730s, and still more so after 587 01:03:15.520 --> 01:03:19.160 after its publication in 1755. 588 01:03:19.160 --> 01:03:25.480 It was read eagerly and thoroughly by the first school of economists, the physiocrats, 589 01:03:25.480 --> 01:03:30.980 and by their great associate or fellow traveler, A. R. J. Turgot. 590 01:03:30.980 --> 01:03:38.020 In that cosmopolitan 18th century society where British and French intellectuals intermingled, 591 01:03:38.020 --> 01:03:44.840 the essay was certainly read and echoed by the eminent Scottish philosopher David Hume. 592 01:03:44.840 --> 01:03:52.440 has the honor of being one of the very few books cited by Hume's close friend Adam Smith, a man 593 01:03:52.440 --> 01:03:59.080 whose hyperdeveloped sense of his own originality prevented him from citing or recognizing many 594 01:03:59.080 --> 01:04:07.560 predecessors. Catillon was thus highly influential among continental and British economists until the 595 01:04:07.560 --> 01:04:18.600 After the publication of that work, however, the knowledge and influence of Cantillon fell 596 01:04:18.600 --> 01:04:25.900 prey to the general post-Smithian custom of ignoring any and every economist preceding 597 01:04:25.900 --> 01:04:27.660 Adam Smith. 598 01:04:27.660 --> 01:04:34.340 The general 19th century habit of obliterating knowledge of economists before Adam Smith 599 01:04:34.340 --> 01:04:40.900 committed grave injustice against earlier economists and gave rise to the erroneous, 600 01:04:40.900 --> 01:04:47.580 and still widely held, illusion that economic science sprang full-blown out of the head 601 01:04:47.580 --> 01:04:54.500 of one great man, much as Athena was supposed to have sprung, fully grown and fully armed 602 01:04:54.500 --> 01:04:57.200 from the brow of Zeus. 603 01:04:57.200 --> 01:05:03.100 But the most malignant aspect of this Smith worship is that the lost economists were in 604 01:05:03.100 --> 01:05:10.460 in many respects far sounder than Adam Smith, and in forgetting them, much of sound economics 605 01:05:10.460 --> 01:05:13.620 was lost for at least a century. 606 01:05:13.620 --> 01:05:19.820 In many ways, as we shall see, Adam Smith deflected economics, the economics of the 607 01:05:19.820 --> 01:05:25.940 continental tradition beginning with the medieval and later scholastics, and continuing through 608 01:05:25.940 --> 01:05:32.300 French and Italian writers of the eighteenth century, from a correct path, and on to a 609 01:05:32.300 --> 01:05:57.600 Smithian classical economics, as we have come to call it, was mired in aggregative analysis, cost of production, theory of value, static equilibrium states, artificial division into micro and macro, and an entire 610 01:05:57.600 --> 01:06:04.640 and erasure of pre-Smithian economics enabled Smithian classical economics to take hold 611 01:06:04.640 --> 01:06:08.820 and dominate economic thought for a hundred years. 612 01:06:08.820 --> 01:06:15.920 The marginal revolution of the 1870s, especially the Austrian theory beginning in that decade, 613 01:06:15.920 --> 01:06:23.480 in many ways returned economics to the proper individualistic, micro and subjective value 614 01:06:23.480 --> 01:06:32.200 Pre-Smithian Path on the European Continent. It is no accident that Cantillon himself was rediscovered 615 01:06:32.200 --> 01:06:40.840 in 1881 by the quasi-Austrian English marginal revolutionist W. Stanley Jevons, who was 616 01:06:40.840 --> 01:06:48.600 commendably eager to rediscover lost economists buried by the dominant Smith-Ricardo orthodoxy. 617 01:06:48.600 --> 01:06:56.720 But economics has unfortunately far from rid itself of the Smith-Ricardo baggage. 618 01:06:56.720 --> 01:07:03.200 The current revival of Austrian theory, and the increasing search for a way out of contemporary 619 01:07:03.200 --> 01:07:09.720 orthodoxy by many mainstream economists, is an attempt to complete the promise of the 620 01:07:09.720 --> 01:07:17.160 badly named marginal revolution, really an individualist-subjectivist revolution, and 621 01:07:17.160 --> 01:07:22.160 to complete the casting out of the classical British paradigm.