4
RICHARD CANTILLON (1680–1734)
The economist who faked his own death
Of all the people profiled in this book, none had a more eventful life than Richard Cantillon. His was full of sex, fraud and murder. Though he is barely known today, some regard him as the true founder of economics. He was the first person to look past the enormous complexity of the world, and try to find the overarching forces that led some countries to be rich and others poor.
The Cantillon family history can be traced back a long way.1 Henry Cantillon, a Norman, accompanied William the Conqueror as he invaded England in 1066. He received for his loyal service some land in Devonshire, England, though within a few decades the family moved to Ireland. In the mid-16th century Roger Cantillon married Elizabeth Stuart, meaning that the Cantillon family became linked to the future royal house of England. Richard was probably born sometime in the 1680s in County Kerry–quite possibly, on land that was owned by Sir William Petty (see Chapter 2).
Given Cantillon’s colourful life, it is a wonder that he had the time for intellectual pursuits. He was a gifted banker, based largely in Paris, though he had money in banks in London, Amsterdam, Brussels, Vienna and Cadiz (he avoided keeping money in Paris because of the high taxes there). He made a huge fortune by speculating in shares of the Mississippi Company, a French business monopoly in North America. He spoke several languages and toured all over the world, visiting Brazil, Japan and China.2 He fraternised with Montesquieu and Voltaire. Cantillon was also a hedonist: among his many affairs he “was on very good terms with the Princess of Auvergne”3 and as Antoin Murphy, his biographer, documents, he had a taste for fine champagnes and burgundies.
Cantillon was also a huckster, with form for defrauding business partners. Some co-investors in the Mississippi Company felt cheated out of their money; at the height of the bubble Cantillon had sold his personal stake in the company, even as he had encouraged others to continue buying. A neighbour described him as “a debauched man [with] his servants of bad reputation”. His cashier said Cantillon was “a Tyrant whom it would be more Justice and Charity to crush than to be the least usefull to”. In 1734 Cantillon got his comeuppance. At his house in Albemarle Street, in a posh part of west London, he dismissed his cook. A few days later the cook used a ladder to climb into the house. After stuffing his pockets with valuables and cash he butchered Cantillon, then set the house on fire to make the whole thing look like an accident. His victim was buried in the grounds of St Pancras Old Church.
Only one of Cantillon’s manuscripts survives: the Essay on the Nature of Trade in General, probably written in 1728–30 but published in 1755. On one level it is clearly a work of its time. Among Cantillon’s references are the two Plinys and the book of Genesis. But Cantillon drew even more heavily, as one scholar puts it, on “two excellent teachers, Travel and Trade”. When he wanted to insert a fact, Cantillon would often hop in his carriage to check it himself. Cantillon “had houses in seven of the principal towns of Europe, and the slightest point of information to acquire or calculation to verify made him cross Europe from one end to the other”, in the words of one biographer. Cantillon liked his abstract theories, but–like Sir William Petty–he wanted to make sure that they bore some correspondence to the real world.4
Striding out on his own
Many historians of economic thought hold Cantillon in high regard. Henry Higgs, a founding member of the British Economic Association, argued that while “[t]here were earlier English works of great merit, such as those of Vaughan, Locke, Child, Mun, etc… Cantillon’s essay is, more emphatically than any other single work, ‘the Cradle of Political Economy’.” That “cradle” quotation is, in turn, taken from William Stanley Jevons (see Chapter 17), who was obsessed with Cantillon. Murray Rothbard, from a libertarian perspective, calls Cantillon “the founding father of modern economics”.
Does Cantillon deserve such adulation? To be sure, he seems to be thinking about the economy as a system: “If I spend money,” he appears to be asking himself, “where does it go, and then when it is spent again, where does it go next?” But few of his ideas were developed in much depth. One must always be vigilant to the possibility that historians and economists are just trying to sound clever: “The foundational economic idea that you thought was first articulated by Adam Smith was actually discovered by an unknown essayist a century beforehand.” The vague, florid style of writers such as Cantillon allows historians to find the first murmurings of any theory they like, so long as they look hard enough.
No figure in this book has been employed in this way more than Cantillon, who is credited with all sorts of economic inventions, often tenuously. Some argue that he developed the “price-specie-flow” theory, an idea more commonly associated with David Hume. Indeed, some writers go so far as to accuse Hume of having plagiarised Cantillon. Yet here Cantillon’s analysis was, in the words of one economist, “highly technical [and] sometimes elusive”, whereas Hume’s exposition, as we shall see, was written in plain English (see Chapter 6). Cantillon might or might not have had the idea first, but Hume was the only one who definitely had it all, and if he was able to extract it from Cantillon’s murky writing on the subject, he did so by a feat of intellectual penetration not much less impressive than coming up with it off his own bat.
Nonetheless, there is something genuinely revolutionary about Cantillon. He was perhaps the earliest author to theorise about the impact of geography on economic activity. More importantly, one can clearly see in Cantillon’s work an attempt to think like a modern economist. He recognised that in any economic decision, there were always trade-offs. And he saw the need to abstract away from the messy complexity of the real world in order to discern cause and effect.
Place matters
Take Cantillon’s economic geography first. That subject deals with questions such as why cities form and why particular economic activities are located in particular places. Traditionally, economists did not think much about geography and land, though recently that has been changing. But for Cantillon, space was everything.
Cantillon recognised that the price for a given product (say, a pair of shoes) would not be the same in all places. That is because it costs money to transport goods from one place to another. Cantillon was a wine dealer who traded in the very finest clarets and champagnes, so he had personal experience of this. As he puts it, “[t]he carriage of Wine from Burgundy to Paris often costs more than the Wine itself costs in Burgundy.”
Recently economic historians have adapted the thinking behind Cantillon’s insight to provide an approximation of how globalised world markets have looked over time. The theory goes that when it is easy to buy from foreign markets and transport costs are low, the range of available prices across the world for the same commodity (such as coal) will be smaller than when it is difficult. Price differentials between countries for identical commodities, in a word, measure how globalised the world is. Research by Kevin O’Rourke and Jeffrey Williamson, for instance, finds that price differentials for different commodities fell during the 19th century, as the first wave of globalisation took hold.
Cantillon also pre-empted much work in urban economics. He explained the location of economic activity as an attempt to minimise transportation costs. Cantillon noticed that markets tended to be situated right in the middle of an area containing lots of little villages. “[I]t is more natural and easy that the Villagers should bring their products thither for sale on market-days and buy the products they need, than that the Merchants… should transport them to the Villages,” he noted. He added that businesspeople would see additional benefits of locating close to others. They would pick up tricks of the trade, for instance. Economists these days refer to these benefits as “agglomeration effects”, which were then explored in a lot more detail by Alfred Marshall (see Chapter 20).
The philosophy of the dismal scientist
Cantillon also had a big role to play in developing two central ideas of economic theory: opportunity cost and ceteris paribus. To understand both of these concepts is to understand how economists think about problems–how an economist’s brain works.
Take opportunity cost first. As Gregory Mankiw, a Harvard economics professor, puts it, “[t]o get one thing that we like, we usually have to give up another thing that we like. Making decisions requires trading off one goal against another.” Going to university may allow a student to earn more in a job–but since they miss out on years of earning during the time they are at college, it could be some time before a university education becomes a worthwhile investment. Assessing whether or not a decision is a good one is only truly possible once you consider what you could have done instead. Benjamin Franklin has a memorable phrase which encapsulates the idea: “He that can earn Ten Shillings a Day by his Labour, and… sits idle one half of that Day, tho’ he spends but Sixpence during his… Idleness, ought not to reckon That the only Expence; he has really spent or rather thrown away Five Shillings besides.”
Cantillon cannot get the idea of opportunity cost out of his head. Think back to the example of whether or not it represents a good investment for a young person to go to college. Cantillon discusses at length an almost analogous situation, where a “labourer’s son” should or should not start an apprenticeship. In Cantillon’s example, the son “begins to help his father either in keeping the flocks, digging the ground, or in other sorts of country labour”. The father has a choice: he could send him on the apprenticeship, which in the long term should boost the son’s earning potential. But in the short term the father will definitely lose the son’s assistance. “The son is thus an expense to his father and his labour brings in no advantage till the end of some years.” Cantillon only poses the question, and offers no answer.
Cantillon also had thoughts on what economists refer to as “ceteris paribus”. In order to determine how one thing affects another, economists often simplify the world. Imagine that an economist is thinking about the impact of a higher minimum wage on unemployment. Many things determine the rate of unemployment, including the skills of the population and overall economic growth. Economists, however, want to focus on just one causal relationship: the effect of the minimum wage on unemployment.
Therefore, they will assess the impact “all else equal” (ceteris paribus).5 Imagine, they say, that economic growth is what it is today, that the skill level of the population does not change, and that there are no natural disasters. And so on. “Rather than hopscotching among them, economists often try to discuss one factor at a time,” says Timothy Taylor.6 The concept of ceteris paribus is one of the first things that economics students are taught.
Cantillon uses the phrase “other things being equal” at least five times in the Essay on the Nature of Trade in General. One example is where he deals with the effect of geography on the cost of imports. According to Cantillon, countries that have “seas and rivers flowing into the capital will get a better price for their produce in proportion than those which are distant (other things being equal) because water transport is less expensive than land transport”. Cantillon is not ruling out the possibility that countries with poor sea transport will have less expensive products than those with only land transport. But he is identifying a causal relation between geography and price.
To a modern audience, thinking in this way hardly sounds revolutionary. Yet in Cantillon’s time, it was a big step forward. When confronted by “extraneous” factors, such as politics, Cantillon insisted that such considerations be put aside, “so as not to complicate our subject”. As Friedrich Hayek puts it, Cantillon uses “the method of isolating abstraction… with true virtuosity… He repeatedly excludes the effects of accidental circumstances in order to avoid overcomplicating an already complex problem.” As we will see in Chapter 9 on David Ricardo, this methodology became hugely influential. Thinking in ceteris paribus terms makes it easier to discern cause and effect.
Under the influence of Cantillon, economics became a more neutral, scientific discipline. Murray Rothbard argues that Cantillon’s immediate predecessors “were special pleaders whose titbits of analysis were pressed into the service of political ends, either in subsidising particular interests or in building up the power of the state”. Cantillon played a different role. He saw himself as an impartial observer of the economy. So, for instance, he was interested in the question of what determined population growth–but was not interested in the question of how big the population “should” be. That was for the people themselves to decide. “It is… a question outside of my subject whether it is better to have a great multitude of Inhabitants, poor and badly provided, than a smaller number, much more at their ease.”
Perhaps it is precisely because Cantillon’s insights seem so commonsensical that today he is barely heard of. His French was fairly poor, which made the original Essay heavy going. One reviewer complained of the book’s “defects of style and the aridity of its subject”. Another reason for Cantillon’s lack of fame, suggested by some economists, is that Adam Smith stole his best ideas and passed them off as his own. “Cantillon’s name had already been stripped from most if not all his ideas by the closing years of the eighteenth century,” wrote Joseph Spengler, a historian, “a century, incidentally, whose authors are not noted for their recognition of sources of inspiration.”
One step ahead
But Cantillon would not begrudge the world his lack of fame. He had already had the last laugh. Was he really murdered as he slept in his house in Mayfair? The runaway cook was never found. Three servants were hauled to the Old Bailey, with the Crown charging them with “assaulting him, and with both hands and feet on the breast, belly, groin and privy-parts, kicking, and striking, and beating him, and giving him severe mortal wounds and bruises”. Yet all were quickly acquitted. Antoin Murphy reckons that our hero may have staged his own death in order to escape from irate business partners. Some six months after the fire, a mysterious, evasive man named Chevalier de Louvigny turned up in Suriname. He was carrying a trunkload of documents of a Mr Richard Cantillon.