CANTILLON’S INQUIRY INTO THE
CAUSES OF FINANCIAL CRISES
Oleg Ananyin
National Research University “Higher School of Economics” Moscow, Russia
_________________________
The 27th Annual EAEPE Conference - A New Role for the Financial System
Genoa, 17-19.09.2015, Italy
“…[L]ike Beckett's Godot, while Law never
appears in the Essai, both he and the System
are ever present” (Antoin Murphy)
• “Having outlined his understanding of the economic system,
Cantillon then tested his model to see whether it would accept
or reject the new grafts that John Law applied to it.
o Was the basic underlying model capable of accepting a new
credit system based on paper money?
o Could it be stimulated through monetary expansion? …
o Could it be manipulated through the use of exchange rate policy?
• As such the strong secondary objective of the Essai was to
provide a critique of Law and his System”. (Antoin Murphy, 1989)
Why Cantillon?
• There is a remarkable testimony of Victor de Riqueti, marquis de
Mirabeau, the co-author of Francois Quesnay and co-initiator of
Physiocratic school of classical economics:
“One man conceived and explained the Tableau portraying the
source, the course and the effects of circulation, to make it the core
and the foundation of economic science, and the compass for the
governing of states. Another developed the fruit of the tree of life
and presented it to humanity...”
• The context of this testimony suggests that by “Another [man]”
Mirabeau means F. Quesnay. If so, there remains no other candidate
for “one man conceived and explained the Tableau [économique]…
to make it… the foundation of economic science”, but Richard
Cantillon.
• To assess the range of the issue a known fact of major influence of
Quesnay’s ideas on Adam Smith should also be kept in mind.
Who is Cantillon?
• Date of birth: unknown (1680 – 1690 – 1697 - ?)
• Place and date of death: shrouded in mystery (Cantillon’s house in
London was burnt down in 1734, and a charred corpse was found in
it... Whose corpse? – Of Cantillon, up to official version…
• But some later Cantillon’s documents were found in Surinam, and
there remained a mysterious story about a gentlemen arrived to
Paramaribo and disappeared without a trace just after arrival …
• Cantillon’s manuscript “Essai sur la Nature du Commerce en Général”:
was published anonymously in 1755 in French:
 allegedly in London (as pointed at the title page), or in Paris, as
experts tend to think;
 allegedly translated from English (but English original is not found)
 without statistical Supplement (mentioned in the main text)
Some additional facts
• A banker and merchant, beneficiary of great bubbles of
1720;
• Highly influential in the formative period from 1750s to
1770s (appreciated, among others, by Quesnay, Turgot,
Condillac, sir James Steuart, and Adam Smith); no less
valued by plagiarists;
• Later forgotten, almost entirely (with few exceptions,
including Karl Marx);
• Rediscovered in 1881 by W.S. Jevons, one of the founders
of modern economics, who defined Cantillon’s Essai ‘the
cradle of political economy’.
Two pillars
• The two pillars on which Cantillon’s
theoretical edifice is built are:
(a) the assumption of natural, or equilibrium state of
economy;
(b) separation of ‘real’ and ‘monetary’ dimensions of
an economic system.
Natural state
I. An equilibrium, or natural state is conceived as a
characteristic of an objective circular flow process
predetermined independently of market forces;
II. Market forces pushing the system towards the natural
equilibrium state are assumed to be driven by humans
and therefore imperfect with various sources of
uncertainty ever present to cause deviations (from
natural state);
III. Natural state is explained without not only any
recourse to ‘invisible hand’, but without normative
connotations as well: equilibrating trend is taken to be
natural, yet ‘blind’.
Basic deterministic model
“The Fancies, the Fashions,
and the Modes of Living of
the Prince, and especially of
the Landowners, determine
the use to which Land is put”
Landlord’s
manners
Adaptive human
fertility
LAND
FERTILITY
‘Three rents theory’ as a fully determined
wealth production scheme:
 by land fertility
 by consumption customs of people
 by landlords (unstable) manners
 by human (adaptive) fertility
“The Number of Labourers,
Handicraftsmen and others, who work
in a State is naturally proportioned to
the Demand for them”
PRODUCTION
of WEALTH
Non-identity of natural
and normative
normative
natural
“It does not appear that Providence
has given the Right of the Possession
of Land to one Man preferably to
another: the most ancient titles are
founded on Violence and Conquest…
But howsoever people come to the
property and possession of Land we
have already observed that it always falls
into the hands of a few in proportion to
the total inhabitants”
… the Number of Inhabitants of a State
depends on the Means allotted them of
obtaining their Support; and as this
Means of Subsistence arises from the
Method of cultivating the soil, and this
Method depends chiefly on the Taste,
Humours and Manner of Living of the
Proprietors of Land, the Increase and
Decrease of Population also stand on
the same Foundation
“If a Proprietor or Nobleman in Poland,
to whom his Farmers pay yearly a Rent
equal to about one third of the Produce
of his Land, pleases to use the Cloths,
Linens, etc. of Holland … there will be a
good third of the produce of the Land in
Poland abstracted from the Food of the
People, and, what is worse, mostly sent
to the Foreigner and often serving to
support the Enemies of the State”
natural
normative
Market as a locus of uncertainty
 “There is never a variation in intrinsic values, but the impossibility of
proportioning the production of merchandise and produce in a State to their
consumption causes a daily variation, and a perpetual ebb and flow in
Market Prices”;
 It is here that an entrepreneur enters the game. The market mechanism is
driven by various types of middlemen-entrepreneurs responsible for the
adaptation of production possibilities to changing manners of the final
consumers;
 The mechanism is not assumed to work smoothly: “It often happens that
Sellers who are too obstinate in keeping up their price in the Market, miss
the opportunity of selling their Produce or Merchandise to advantage and
are losers thereby”;
 In more general terms: “[the] method of fixing Market prices has no exact or
geometrical foundation, since it often depends upon the eagerness or easy
temperament of a few Buyers or Sellers, it does not seem that it could be
done in any more convenient way”.
Monetary system as a locus of
manipulations
Exchange economy is conceived by Cantillon as monetary,
and all deviations from ‘natural state’ take therefore
monetary form. They are caused:
• either by imperfections in entrepreneurs’ responses to
market demand, or
• by harmful monetary regulations.
In each case these deviations have human origin. However,
unlike entrepreneurs’ failures for which they are fully
responsible, effects of monetary regulations are due to
governmental, or power, agencies and tend to charge
burden on a broader public.
Two spheres of manipulations
• Cantillon considers two spheres where
manipulations could be observed:
o manipulations with exchange rates under bi-metallic
monetary regimes;
o what he calls ironically “refinements of credit” –
practices became known during Great Bubbles of the
early XVIII century, including that of Law’s ‘System’
Bi-metallic system manipulations
• Cantillon presents careful analysis of “strange
variations” of price levels occurred in France and
caused by conscious manipulations of exchange
proportions between gold and silver, explains their
effects upon foreign trade and income distribution.
• His conclusion: “The King makes a considerable
profit…, but it costs France three times as much to
enable him to make this profit”
Regulations under Great Bubbles
 Cantillon’s method is the same: he defines the channels
through which human agents – in this case governmental
agencies – influence economic processes, and indicates
limits of this influence.
 In relation to John Law’s system it was the introduction
of a public bank that created new instruments of
manipulations. Cantillon showed that financial
innovations led to a widening of the gap between the
natural state and actual state of affairs.
 His final conclusion was straightforward:
Real/monetary dichotomy
It is … undoubted that a Bank with the complicity of a
Minister is able to raise and support the price of public
stock and to lower the rate of interest in the State at the
pleasure of this Minister when the steps are taken
discreetly, and thus pay off the State debt. But these
refinements which open the door to making large
fortunes are rarely carried out for the sole advantage of
the State, and those who take part in them are generally
corrupted. The excess banknotes, made and issued on
these occasions, do not upset the circulation, because
being used for the buying and selling of stock they do
not serve for household expenses and are not changed
into silver. But if some panic or unforeseen crisis drove
the holders to demand silver from the Bank the bomb
would burst and it would be seen that these are
dangerous operations.
Interventions
(i.e. deviations from
natural state):
possible, yet
corrupted
Real &
monetary
economies
as relatively
separated
Limits of
real/monetary
separation
Cantillon’s legacy
• In order to reveal the flaws of Law’s ‘System’ Cantillon had to construct a
theoretical structure which laid the groundwork for future developments of
economic theories. The idea of the circular flow of social product became the
core of the famous ‘Tableau Économique’. The idea of ‘immutable laws of
production’ (J.S. Mill’s term) as a kind of benchmark around which actual
economic activities tend to gravitate served the common ground to both Classical
political economy and much of neoclassical theorizing. Dichotomy of
real/monetary phenomena, Knightian entrepreneurs, Pasinetti’s pre-institutional
framework of economic analysis, – all these concepts and approaches have their
evident predecessors in Cantillon’s Essai.
• Recent theories of financialization can also be traced back to Cantillon’s analysis
of “the refinements of credit”. He was the first to show that a financial system is
such a superstructure over ‘real’ economy that might be treated as ‘neutral’ only
in the abstract, and is misleading being applied to the real world. Assessing
experiences of Great Bubbles Cantillon became aware of the possibility that a
financial system inhabited with people pursuing their private purposes can
acquire certain – although limited – degree of independence from the ‘real’
sector as its base, and perceived this possibility to be socially dangerous.