From Political Arithmetick to Circular Flow: Richard Cantillon
Richard Cantillon’s Essai sur la Nature du Commerce en General (Essay on the Nature of Trade in General, 1755 [1964]), probably written in 1728-34 in English, but published only posthumously in 1755 in French, provided the theoretical bridge between seventeenth-century British economics and French physiocracy - between William Petty and Franςois Quesnay.
From Petty, Cantillon took over a number of elements, most importantly, the idea of a “body politick” that is able to obtain a surplus produce over and above the requirements of the means of production and subsistence. However, unlike Petty, who tended to analyse the generation, distribution, and disposition of the surplus on the assumption of a powerful state directing it, Cantillon gave far more emphasis to the allocative functions of competitive markets. In Cantillon’s Essay, the processes of the circulation of commodities are linked up with those of production and of distribution, so that the conception of the economic system as a circular flow comes out much clearer. In addition, Cantillon also introduced the notion of entrepreneurial profits and refined Petty’s analysis of natural values by means of his concept of “intrinsic values”.The generation and distribution of the surplus
Cantillon’s Essay opens with a statement on the creation of wealth which is immediately reminiscent of Petty’s formulation cited above, except for the asymmetrical roles attributed to land and labour: “The Land is the Source or Matter from whence all Wealth is produced. The Labour of man is the Form which produces it: and Wealth in itself is nothing but the Maintenance, Conveniencies, and Superfluities of Life” (1755 [1964]: 1).
Cantillon’s division of society into classes and sectors is closely related to the primary role he attributed to land in the creation of wealth, and has also a geographical dimension.
Since land is considered to be the source of all wealth, social stratification in Cantillon is based on land ownership. Accordingly, one class consists of the owners of land (the “prince” and the nobility), who are entitled to dispose of the surplus produce even though they have not participated in its generation. The other class, which includes farmers, merchants and artisans as well as wage labourers, is made up of all those who do not own land. While wage labourers subsist on incomes that are fixed by wage contracts in advance, the incomes of farmers, merchants and artisans are subject to uncertainty; they are “undertakers” or entrepreneurs. Geographically, the distinction is between the “country” and the “cities”, the former including villages and market towns, in which “there must... be enough Farriers and Wheelwrights for the Instruments, Ploughs, and Carts which are needed” (1755 [1964]: 4). For Cantillon, then, the “country” (or the “rural” part of the economy) includes production of manufactured inputs needed in agricultural production; conceptually, this sector is equivalent to a vertically integrated sector that produces agricultural surplus for the “cities”, where the proprietors of the land live and dispose of the surplus as they see fit: “[T]he overplus of the Land is at the disposition of the Owner” (1755 [1964]: 3). As in Petty, surplus is taken to be realized in income form essentially as rents (and taxes), with its commodity composition being explained by the modes of living of the landlords and the nobility.Prices and income distribution
In his theory of value Cantillon referred explicitly to Petty’s thought, of which he embraced the main idea: “The Price and Intrinsic Value of a Thing in general is the measure of the Land and Labour which enter into its Production” (1755 [1964]: 27). His notion of “intrinsic value” is synonymous with Petty’s “natural value” as referring to production costs under normal or average conditions and, as in Petty, is complemented by the concept of “market value”.
With regard to the determination of “intrinsic values” Cantillon had recourse to a “three rents” conception, which he seems to have adopted from Bellers (1714), but in which he newly introduced profit or “entrepreneurial income” as a separate income category:It is the general opinion in England that a Farmer must make three Rents (1) The principal and true Rent which he pays to the Proprietor, supposed equal in value to the produce of one third of his Farm, a second Rent for his maintenance and that of the Men and Horses he employs to cultivate the Farm, and a third which ought to remain with him to make his undertaking profitable. (1755 [1964]: 121)
The three “rents” of the farmer thus need to cover his production costs, including replacement of the used-up means of production and the farm workers’ (and the farmer’s own) subsistence requirements, the “true” rent he has to pay to the landlord, and his remuneration for agricultural entrepreneurship. The profits of the farmer-entrepreneur were conceived by Cantillon merely as remuneration for risk taking, and not systematically related to capital advances. Hence the notion of a rate of profits, and the idea of a tendency towards a uniform rate of profits under competitive conditions, is still absent from Cantillon’s analysis.
With regard to the determination of a “par” between labour and land, Cantillon dismissed the method proposed by Petty as “fanciful and remote from natural laws”; in his view, Petty had “attached himself not to causes and principles but only to effects” (1755 [1964]: 43). In Cantillon’s understanding, the workers’ means of subsistence (that is, Petty’s “food”) enter as a cost element into the production costs of all commodities (besides other cost elements such as raw materials), and thus are merely a component part of “intrinsic values”, but not their cause. In order to find this underlying “cause” or “source”, Cantillon insisted, the amount of food required for subsistence must be further reduced to the amount of land that was needed for generating it.
He accordingly proposed another method, different from Petty’s, which to most interpreters has been suggestive of a land theory of value (1755 [1964]: 41).The method proposed consisted in reducing labour, or rather the amounts of “food” needed for performing this labour, to (what Cantillon considered to be) its ultimate source in nature: the amounts of land needed to generate this “food”. As in Petty, the value of labour is given by the daily amount of food required for subsistence by the worker and his offspring (1755 [1964]: 35). This amount of food is then further reduced to the amount of land needed in its production. Accordingly, the “intrinsic values” of commodities are given by the amounts of land needed directly and indirectly in their production.
James Steuart’s Contributions, in Relation to those of the French Physiocrats
Cantillon’s analysis of the circular flow of income and expenditure was to serve as the basic conceptual model from which Franςois Quesnay was to develop his Tableau economique in the late 1750s. Quesnay clearly depicted the social production process as a circular process based on sectoral interdependencies, and he also emphasized the role of capital advances in the production process, introducing (in terms of his “avances annuelles”, “avances primitives” and “avances foncieres”) also the distinction between circulating and fixed capital (see Gehrke and Kurz 1995).
Contemporaneous with the contributions of the French Physiocrats was James Steuart’s Inquiry into the Principles of Political Oeconomy, which was published in 1767 (although the parts relevant here had been drafted by 1759). Compared with the French contributions, Steuart’s work lacked a clear conception of the circular flow and, in particular, a notion of profits in relation to advanced capital. This latter concept had not been present in Quesnay’s writings either, but in Anne-Robert- Jacques Turgot’s Reflections of 1766, where the role of competition in equalizing rates of return on capital (net of differential risk and other returns for entrepreneurship) was for the first time clearly stated.
Steuart rather related profits to the income of the farmer or master manufacturer over and above his subsistence, that is, he amalgamated profits with surplus wages. He also had no satisfactory principle for determining the distribution of the surplus and no clear conception of capital advances and profitability in relation to price determination. His main contributions to the further development of British classical political economy consisted in going beyond Cantillon’s notion of entrepreneurial profit and in introducing habit formation elements into the subsistence wage concept.Steuart’s notion of agricultural surplus or “net product” refers to “the quantity of food and necessaries remaining over and above the nourishment, consumption and expence of those engaged in agriculture” (1767 [1966]: 54). Similar to Petty and Cantillon, surplus is supposed to be realized in income form as rent, and in a passage reminiscent of Cantillon’s “three rents” conception, Steuart observed:
It is very certain, that all rents are in a pretty just proportion to the gross produce, after deducting three principal articles. First, The nourishment of the farmer, his family, and servants, Secondly, The necessary expences of his family, for manufactures, and instruments for cultivation of the ground. Thirdly, His reasonable profits, according to the custom of every country. (1767 [1966]: 53)
The novel elements are, first, that necessary expenses explicitly included manufactured commodities, and, second, the inclusion of “reasonable profits” amongst the expenses to be deducted. However, since profits were not systematically related to capital advances, it remained unclear what was meant by “reasonable”.
In his explanation of the concept of subsistence Steuart introduced the distinction between “physical-necessary” and “political-necessary”, defining the former as providing “ample subsistence where no degree of superfluity is implied” (1767 [1966]: 269-70). As opposed to this, “political-necessary” subsistence comprises provision for “desires” which “proceed from the affections of [the] mind, are formed by habit and education, and when once regularly established, create another kind of necessary” (Steuart 1767 [1966]: 270).
In Steuart, subsistence wages can thus also contain surplus elements which have been rendered necessary from habit and custom. The size of profits he sought to explain with reference to the conditions of “supply” and “demand” - which meant that it was left indeterminate in normal conditions. (This indeterminacy comes out also in the reference to “reasonable profits, according to the custom of every country” in the above quotation.)Closely related to what has just been said, Steuart’s treatment of prices was also unsatisfactory, primarily because the idea of capitalist competition as an organizing principle of price formation was missing. Here also Turgot’s exposition, or Graslin’s contributions (see Faccarello 2009), were more advanced than Steuart’s. Prices were conceived by Steuart as being regulated by “real values”, understood as costs of production (exclusive of profits) with an element of “profit upon alienation” added on (1767 [1966]: 159). He also noted the possibility of profits being “consolidated” into the “real value” of commodities (1767 [1966]: 192-3); this perhaps reflects an attempt to make profits a permanent component part of price in normal conditions. Steuart recognized that the reference to “costs of production” as price-determining involved him in circular reasoning, but was unable to provide any remedy for this.
The agricultural sector occupies a central position in Steuart’s economic system because it generates demand for the manufacturing sector and determines the size of the population that can be sustained. Although Steuart’s formulations are somewhat ambiguous, there is also a construction similar to the Petty-Cantillon notion of surplus labour in corn model or integrated rural sector terms, that is, the ratio between total employment in the agricultural sector and the quantity of labour directly and indirectly required to produce the necessary food or subsistence. Like Petty and Cantillon, Steuart also discussed the relation between necessary and total employment in the economy as a whole, and related population size to agricultural surplus (1767 [1966]: 36). However, Steuart was well aware that, by including “clothing” and other manufactures among the means of subsistence, the two sectors are mutually providing each other with necessary inputs. And he variously reversed the causality, arguing that the activity level of the agricultural sector is determined by the demand from those employed in manufacturing and trade, rather than the other way around.