Send us your blog post, blog address, address of other great sites or suggestions by email.

Monday, May 27, 2013


Richard Cantillon's Essai has been justly called by W. Stanley Jevons ‘the first treatise on economics’, and the historian of economic thought Charles Gide referred to it as the first systematic treatment of political economy. The best overall assessment is that of F.A. Hayek, the Austrian economist who has done important work in the history of thought: ‘this gifted independent observer, enjoying an unsurpassed vantage point in the midst of the action, coordinated what he saw with the eyes of the born theoretician and was the first person who succeeded in penetrating and presenting to us almost the entire field which we now call economics.

The scholastics had written general treatises on almost all of human knowledge, in which discussions of economics or the market played a subordinate part; and in the mercantilist era the mercantilists and their critics delivered at best intelligent aperçus on particular economic – usually economic policy – topics. But Richard Cantillon was the first theorist to demarcate an independent area of investigation – economics – and to write a general treatise on all its aspects.

One reason that Cantillon was the ‘first of the moderns’ is that he emancipated economic analysis from its previous intertwining with ethical and political concerns. The mercantilists, dominant in economic thought for the preceding century or two, were special pleaders whose titbits of analysis were pressed into the service of political ends, either in subsidizing particular interests or in building up the power of the state. The medieval and renaissance scholastics, while incomparably more thoughtful and systematic, had imbedded their economic analysis in a moral and theological framework. To break out of the mercantilist morass, it was necessary to step aside, to focus on the economic features of human action and to analyse them, abstracting them from other concerns, however important. Separating out economic analysis from ethics, politics, or even concrete economic data did not mean that these matters were unimportant or should never be brought back in. For it was impossible to decide the ethics of economic life, or what government should or should not do, without finding out how the market worked, or what the effect of interventions might be. Cantillon presumably, at least dimly, saw the need for this at least temporary emancipation of economic analysis.

Furthermore, Cantillon 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 Gedanken-experiment (or thought-experiment). Human life is not a laboratory, where all variables can be kept fixed by the experimenter, who can then vary one in order to determine its effects. In human life, all factors, including human action, are variable, and nothing remains constant. But the theorist can analyse cause-and-effect relations by substituting mental abstractions for laboratory experiment. He can hold variables fixed mentally (the method of assuming ‘all other things equal’) and then reason out the effects of allowing one variable to change. By starting with simple ‘models’ and introducing successive complications as the simpler ones are analysed, the economist can at last discover the nature and operations of the market economy in the real world. Thus the economist can validly conclude from his analysis that ‘All other things equal (ceteris paribus), an increase in demand will raise price’.
In the 1690s, as we have seen (Chapter 9), a leader of the emergent classical liberal opposition to the statism and mercantilism of Louis XIV, the provincial judge the Sieur de Boisguilbert, had introduced into economics the method of abstraction and successive approximations, beginning with the simplest model and proceeding in increasing complexity. In illustrating the nature and advantages of specialization and trade, Boisguilbert had begun with the simplest hypothetical exchange: two workers, one producing wool, the other wheat, and then extended his analysis to a small town, and finally to the entire world.

Richard Cantillon greatly developed this systematic method of abstractions and successive approximations. He liberally used the ceteris paribus method. Through this analytic method he uncovered ‘natural’ cause-and-effect relations in the market economy. The France of Cantillon's day was a country of great landed feudal estates, the result of the conquests of previous centuries. And so Cantillon brilliantly began the economic analysis in his Essai with the assumption that the whole world consists of one giant estate.

In that admittedly ‘unrealistic’ but illuminating construct, all production is dependent on the wishes, the desires, of the monopoly owner, who simply tells everyone what to do. Put another way, production depends on demand, except that here there is in effect one demander, the monopoly landowner.
Cantillon then makes one simple realistic change in his model. The landowner has farmed out the land to various producers of all kinds. But as soon as that happens, the economy cannot continue with one man giving orders. For its continued operation, the individual producers must exchange their products, and a free market economy comes into being, with its attendant competition, trade and price system. Furthermore, money arises out of this exchange as a commodity serving as a much-needed medium of exchange and ‘measure’ of values.

Austrian Perspective on the History of Economic Thought (2 volume set)

No comments:

Post a Comment