Cantillon: enrichment and “decadence”
Sometime before Melon delivered his work to the public, Richard Cantillon had dealt with “commerce in general” in a manuscript probably written between 1728 and 1730[56] but only printed in 1755.
In his Essai sur la nature du commerce en general, and unlike Melon, Cantillon does not offer a conjectural history of commerce based explicitly on the distinction between the spirit of conquest and the spirit of commerce. The commercial society is not presented as a particular stage instilling a climate of liberty into economic activity. The spirit of conquest only appears surreptitiously as a justification for original land ownership, without any judgement being made on this mode of acquisition, and in a passage where Cantillon points out that one of the means of increasing the amount of money in a country is “Violence and Arms” (Cantillon [1755] 1931, 195).Land, labour and dependence
Cantillon provides another conjectural construction, explaining the development of commerce and the organisation of societies from the unequal distribution of land amongst men. Societies are all founded on this inequality, which justifies the superiority of landowners and the dependence of other orders. History shows how this dependence is perpetuated over time with the emergence of villages and, consequently, of the first markets, then towns, cities and capitals. This territorial hierarchisation is concomitant with the formation of large landholdings owned by “princes” and “noblemen” spending more of their income on conveniences of life and luxuries, and consecutively the growth of professions satisfying this consumption.
To analyse this process, Cantillon imagines a first pyramidal model of the economy: at the upper level the landowners, at the intermediate level the “overseers” (“inspecteurs”), namely the stewards or managers of estates of the former, at the lower level, labourers and artisans, whether “Slaves or free men” ([1755] 1931, 33).
Then he sketches a second model, more suited to the development of urban markets, at the top of which are always the landowners, now dominating the “entrepreneurs” and hired workmen of all activities. The entrepreneurs have therefore replaced the overseers. The primary characteristic of their activity is risk. They invest funds in some activity with no certainty of the benefits that they will derive from it: “They pay a certain price... to resell wholesale or retail at an uncertain price”, “working at a risk [‘au hazard’], some get rich and gain more than a double subsistence, others are ruined and become bankrupt” ([1755] 1931, 51; 41). These entrepreneurs are possibly deceivers ([1755] 1931, 55), but not necessarily greedy, unlike traders in Melon’s Essay. Nor are they like those labourers and artisans who live from day to day without changing “their mode of living”: as soon as they get rich, they imitate the behaviour of the landowners ([1755] 1931, 63).These two models are built on the same rule of evaluation of the wealth of a territory: “the amount of Land and Labour which enters into Production” ([1755] 1931, 107) determines the “real or intrinsic value” of commodities, including that of gold or silver ([1755] 1931, 97). It is around this value that market prices fluctuate. These models also convey a rule of distribution of the product of land and labour in what Cantillon calls the three “Rents”: that which goes to the landowner, that which goes to the maintenance of men and livestock and reconstitutes the costs of production, finally that which should remain with the entrepreneur “to make his undertaking profitable” ([1755] 1931, 121).
Cantillon first turns to farmer entrepreneurs and traders in agricultural products and examines the city/country or capital/province relationship. The economy forms a circle connecting production, income and expenditure. It is mainly considered as a circulation of expenditure in which landowners and farmer entrepreneurs play a determining role.
The expenditure of the three “rents” is “the mainspring of circulation in the State” ([1755] 1931, 123). The farmer entrepreneurs circulate these rents, some of which are paid in money and others in kind. Agricultural production is consumed in the countryside and in the cities. Thus the rents, in particular those of the landowners and farmers, are spent on commodities coming partly from cities and partly from the countryside. Their expenditure forms the income of the inhabitants of cities, which they in turn spend on agricultural products.In this description of the economy, Cantillon maintains his central idea that all members of society live off the product of the land and therefore at the expense of the landowners:
I will then lay it down as a principle that the Proprietors of Land alone are naturally independent in a State: that all the other Classes are dependent whether Undertakers of hired, and that all the exchange [“troc”] and circulation of the State is conducted by the medium of these Undertakers.
([1755] 1931, 57)
The circle of enrichment and “decadence”
The inequality of landownership that characterises any society is transmuted into an inequality of circulation. Cantillon talks of a “constant balance” ([1755] 1931, 149-51; 157) between the capital and the provinces. By this expression, he means a balance that is constantly favourable to the capital, which reveals a continuous debt of the provinces towards it - by the rent that it must pay and the manufactured goods that it buys - settled by the sending of agricultural goods. This expression is also used to describe the inequality of circulation between the States, itself considered as an inequality of power: “The inequality of the circulation of Money in the different States constitutes the inequality of their respective power, other things being equal; and this inequality of circulation is always respective to the balance of Foreign Trade” ([1755] 1931, 159). Everything therefore appears as if international relations were the extension of the national capital/province relationship and as if the latter were the extension of the relationship of the landowner to his dependents, each of these relationships resulting in a debt.
Everything in a State depends on the landowners. The larger the State, the greater the influence of the large landowners, the more their way of living and their expenditure are felt ([1755] 1931, 47; 81; 93); the smaller it is, the leaner the production of its land, the more it has to survive through its trade at the expense of the foreign landowners ([1755] 1931, 133; 233). However, the purpose of trade between these States, large and small, is the same: to capture a part of the product of the land and the labour from abroad in actual money (“argent effectif”). The powerful State is that which “gives less Land and Labour than it receives” ([1755] 1931, 189). A State benefits from its foreign trade (i) when it “exchange a small product of Land for a larger in Foreign Trade”; (ii) when it “exchanges its Labour for the produce of foreign land” and (iii) when it “exchange its Produce conjointly with its Labour, for a larger Produce of the Foreigner conjointly with equal or greater labour” ([1755] 1931, 225). Trade is therefore not always beneficial, nor equal for all participating States.
What to export? Cantillon adopted a few commonplaces of the science of commerce. For example, “It will always be found... that the exportation of all Manufactured articles is advantageous to the State, because in this case the Foreigner always pays and support Workmen useful to the State” ([1755] 1931, 233; 91). Any State, then, should export its manufactures or the products of its land “in exchange so far at it may be for gold and silver in kind” ([1755] 1931, 233) and not against foreign manufactures because this would weaken its own strength. Finally, a large maritime State should not encourage seafaring by foreigners, nor allow the Dutch to be the “only sea-carriers in Europe” ([1755] 1931, 241): by enacting their Navigation Act, the English made their traders entrepreneurs, not “Agents or Clerks of foreign merchants” ([1755] 1931, 243; 171).
Cantillon then tackles a certain number of themes that later literature will bring together under the expressions “quantity theory of money” or “price-specie-flow mechanism”.
“Everybody, he writes, agrees that the abundance of money or its increase in exchange, raises the price of everything” ([1755] 1931, 161). But what is the link between the variation in the quantity of money in circulation and the variation in domestic prices? John Locke (1632-1704) assumed strict proportionality (Locke [1692] 1991, 242-5). Cantillon qualifies this assumption according to which “the value of all things is proportionable to their abundance or scarcity, and the abundance or scarcity of the silver for which they are exchanged” ([1755] 1931, 117). First of all, prices can vary without this proportionate effect, for example, according to the fancy and moods of the landowners who urge them to increase their luxury expenditure ([1755] 1931, 29, 59). Distance from the markets also plays a role: prices can vary for the same product sold in the town or the country, in the capital or in the provinces, and even from one State to another ([1755] 1931, 121; 153; 161). Second, if the proportionate effect is particularly felt in a closed economy, it is much less the case in an open economy. Taking the example of England, which authorises the importation of corn, but not that of beef meat, Cantillon notes that the price of corn in this country tends to align with the international price and does not vary proportionally with the quantity of money that circulates in the country, whatever this quantity, and that, conversely, the price of beef meat is sensitive to the effects of an inflow of money ([1755] 1931, 179-81) - in other words, wheat is, here, what the theory of international trade today calls a “traded good” and beef a “non-traded good”.Finally, the origin of the variations in the quantity of precious metals in circulation also has a differential effect on prices - of necessaries, conveniences, luxuries or investment goods - depending on the channels of transmission of these monetary impulses, and, thereby, also on economic activity cycles through changes in the balance of trade.
So prices do not all increase at the same time and those which do increase do not do so in the same proportion, it all depends on who benefits from this increase in the quantity of money and how he spends this new money.[57] Locke, Cantillon comments, “has clearly seen that the abundance of money makes everything dear, but he has not considered how it does so” ([1755] 1931, 160).Indeed, new coins can spread throughout the State through three different channels.[58] The first is that of an extraction of precious metals ([1755] 1931, 164-6). The increased amount of money augments consumption spending, rather that of luxury spending, of all those who took part in this increase, which in its turn increases prices and employment. The rise in prices reduces the purchasing power of workmen and artisans - some of whom are forced to emigrate - and makes domestic products less competitive than their foreign competitors. Imports increase, exports decrease, the balance of trade goes into deficit and monetary circulation reduces. If precious metals are extracted in considerable quantities and continuously, imports of foreign articles that maintain the lifestyle of landowners increase and the country is inexorably impoverished. Spain and Portugal, unable to retain gold and silver extracted from the mines of America, fell into decay (“decadence”, to use Cantillon’s word [1755] 1931, 193).
The second channel is the inflow of specie resulting from favourable foreign trade ([1755] 1931, 166-70). This inflow is initially beneficial insofar as the increase in price takes place gradually and allows the State to “maintain a small balance of trade against the foreigner or at least keep the balance level [‘au pair’] for many years” ([1755] 1931, 169; 183). The idea of gradation or non-immediacy is important here: money is concentrated in the hands of entrepreneurs preferring to accumulate and invest it rather than immediately spending it on articles and manufactures. This expense will come later, when they have made their fortune; there will then follow an ineluctable bidding up of all things. The decay of a State can also be slowed down thanks to thriving navigation, low transport costs and technological superiority for which its manufacturing is renowned ([1755] 1931, 169; 183) and which partly compensate the price increase. The balance will certainly be less favourable, but positive for a few more years. But, even if it is generally through this second route that a State “grows more substantially” ([1755] 1931, 181), the decay will nevertheless occur in the long term, always caused by two concomitant phenomena: (i) a less competitive manufacturing due to rising domestic prices; (ii) and, as before but in a delayed manner, too much consumption of luxuries by the landowners - gradually imitated by the subordinate ranks ([1755] 1931, 93) - satisfied by cheaper imports. So,
When a State has arrived at the highest point of wealth... it will inevitably fall into poverty by the ordinary course of things. The too great abundance of money, which so long as it lasts forms the power of States, throws them back imperceptibly but naturally into poverty.
([1755] 1931, 185)
The third way of increasing the quantity of precious metals in the country, finally, is the inflow of capital, in the form of loans made abroad by the State or by private entrepreneurs ([1755] 1931, 191-5). If this inflow affects prices and the economic activity cycle less, it is nonetheless pernicious: foreign borrowing is “a present ease [which] comes to a bad end” ([1755] 1931, 193). It certainly allows entrepreneurs “to set people on work and to establish Manufactories in the hope of profit” ([1755] 1931, 191), but it is expensive because “the interest paid to the Foreigner is always much more considerable than the increase of public revenue which his money occasions” ([1755] 1931, 193), and dangerous because this capital can suddenly be withdrawn, putting the State “at the mercy of the Foreigners” ([1755] 1931, 191).
Cantillon’s vision is cyclical, especially in the case of the second channel, the enrichment of a country through foreign trade. Falling into decline, a State will have no means of recovering other than by cheaper exports, ultimately once again causing a positive balance of trade and an inflow of precious metals. But then the traders will start to make their fortune again, the princes and lords will once more get richer, and “Luxury will install itself” plunging the State into a new decline ([1755] 1931, 193). “Such is approximately the circle which may be run by a considerable state which has both capital [‘fonds’] and industrious inhabitants” ([1755] 1931, 195). Poorly endowed with land and labour, the small republics can prosper through trade only accidentally, never sustainably. Only the large territorial nations, “however low they may be fallen... are always capable of being raised by good administration to a high degree of power by trade alone” ([1755] 1931, 195). Although it results from a quantitative mechanism, the circle of enrichment and decay has a deeper origin, inherent in political societies. It applies just as much to trading nations as to conquering nations, as the history of ancient Rome shows, and the cause is the same: the luxury of the landowners and the decrease in the circulation of money.
3.