The Essai
The Essai sur la nature du commerce en general, probably written sometime between 1728 and 1730 was published in Paris in 1755 bearing the fictitious imprint of Fletcher Gyles of London.
Cantillon had an ambitious objective as the title of his work show. He wanted to write an essay on the nature of trade in general. Trade (“le commerce”) was a synonym for economic activity at the time. So Cantillon’s objective was to produce an essay on the nature of economic activity in general.
To do this Cantillon needed to produce an economic model. This required abstraction which Cantillon produced by assuming initially that the economy consisted of just one single landed estate “which I wish to consider here as if it was unique in the world” (Cantillon 1755: 76).
Building on the abstraction of the single landed estate, with three principal actors (the landlord, supervisors and workers) Cantillon progressively transformed this primitive structure from a command economy to a market economy, from a barter system to a monetary system, and from a closed to an open economy. This transformation involved the introduction of a new series of principal actors, the entrepreneurs, who replaced the supervisors. Despite the continuing power of the proprietor of the landed estate to influence economic activity through his expenditure decisions, he became essentially a mute actor expressing his views through the prices that he was prepared to pay for commodities on the market. He could no longer verbally dictate his commands to the supervisors. The entrepreneurs - there are many of them ranging from entrepreneur producers to entrepreneur wholesalers, to entrepreneur retailers and even entrepreneur beggars - have a key role to play in the price-making process.
Cantillon summarized the role of the entrepreneur in a short sentence. The entrepreneur buys at a known price (“un prix certain”) to sell at an unknown price (“un prix incertain”).
In other words the entrepreneur knows the price of factors of production that he uses in the form of wages for labour, rent for land and profits for capital. Combining these inputs he produces output at a known price. However, he cannot guarantee that his selling price will cover his costs of production. The entrepreneur faces uncertainty. If he assesses the purchasing decisions of buyers correctly, and prices his commodities appropriately, he will make a profit. If he prices his commodities at excessively high prices and is unable to sell them, then he will be forced off-stage and out of business. Bringing in the distinction between market price and intrinsic value (costs of production plus normal profits), Cantillon showed how resources could be allocated through the market as entrepreneurs moved into sectors where the market price was above the intrinsic value of a commodity and moved out of areas where intrinsic value was above the market price. Smith relied heavily on Cantillon’s model in chapter 7, book 1 of the Wealth of Nations (Smith 1776 [1976]) when he distinguished between market price and natural price to show the allocation of commodities.Cantillon was not only interested in the way entrepreneurs ensured the flow of goods and services between markets, he was also concerned with analysing the aggregated flow of goods and services in the economy. Building on the earlier work of Petty and Law, Cantillon traced out in detail the circular flow of income model.
Cantillon’s analysis inspired Franςois Quesnay to encapsulate the circular flow process in the tableau economique. Cantillon and Quesnay differed in terms of their view on the consequences arising from the produit net in agriculture. Quesnay was able to envisage the agricultural surplus producing economic growth. Cantillon believed that any growth in agricultural production would just increase population. Quesnay was more interested in the dynamic income-generating process and the implications that it had for fiscal policy, that is, the possibility of the produit net in agriculture supporting the full weight of taxation through the imposition of a single tax - the imp∂t unique.
Cantillon had a different objective in mind when analysing the circular flow, for he believed that it would enable him to determine the amount of money required in the economy. He needed to compile an estimate of the output of the economy and then, making allowances for the velocity of circulation of money, derive an estimate of the amount of money required to drive this level of output. He estimated the amount of money required in a state, duly modified by his analysis of the velocity of circulation of money, was one-third of the landlord’s rent. As the landlord’s rent was one-third of overall output this meant that he estimated the demand for money at one-ninth of output. This, he calculated, was near enough to Petty’s estimate that the money in circulation was equal to one-tenth of the produce of the soil.