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Source link: http://archive.mises.org/5152/cantillon-for-laymen/

Cantillon for Laymen

June 7, 2006 by

The “father of modern economics,” said economist Murray Rothbard, was a “gallicized Irish merchant, banker, and adventurer who wrote the first treatise on economics more than four decades before the publication of the Wealth of Nations.” The great Richard Cantillon, believed to be born in about 1680, most likely in Ireland, immigrated to Paris, and later on, moved to London, where details of his life are somewhat fuzzy. FULL ARTICLE

{ 14 comments }

Marco de Innocentis June 7, 2006 at 10:20 am

Have you actually read any of Cantillon’s works, or just what Rothbard and others have written about him? It seems to me that, far from “contributing to the marginalist or individualist-subjectivist revolution”, he was a believer in the good old labour theory of value. You can find Cantillon’s Essay (in English) at the URL

http://www.econlib.org/library/NPDBooks/Cantillon/cntNTtoc.html

Chapter 10, part I, is titled “The Price and Intrinsic Value of a Thing in general is the measure of the Land and Labour which enter into its Production”. Here Cantillon states

The price of a pitcher of Seine Water is nothing, because there is an immense supply which does not dry up; but in the Streets of Paris people give a sol for it—the price or measure of the Labour of the Water-carrier.
By these examples and inductions it will, I think, be understood that the Price or intrinsic value of a thing is the measure of the quantity of Land and of Labour entering into its production, having regard to the fertility or produce of the Land and to the quality of the Labour.
But it often happens that many things which have actually this intrinsic value are not sold in the Market according to that value: that will depend on the Humours and Fancies of men and on their consumption.
If a gentleman cuts Canals and erects Terraces in his Garden, their intrinsic value will be proportionable to the Land and Labour; but the Price in reality will not always follow this proportion. If he offers to sell the Garden possibly no one will give him half the expense he has incurred. It is also possible that if several persons desire it he may be given double the intrinsic value, that is twice the value of the Land and the expense he has incurred.
If the Farmers in a State sow more corn than usual, much more than is needed for the year’s consumption, the real and intrinsic value of the corn will correspond to the Land and Labour which enter into its production; but as there is too great an abundance of it and there are more sellers than buyers the Market Price of the Corn will necessarily fall below the intrinsic price or Value. If on the contrary the Farmers sow less corn than is needed for consumption there will be more buyers than sellers and the Market Price of corn will rise above its intrinsic value.
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. However in well organized Societies the Market Prices of articles whose consumption is tolerably constant and uniform do not vary much from the intrinsic value; and when there are no years of too scanty or too abundant production the Magistrates of the City are able to fix the Market Prices of many things, like bread and meat, without any on having cause to complain.

This seems to me as far as you could possibly get from a marginal theory of value.

quasibill June 7, 2006 at 10:51 am

Maybe I’m missing something, but what you quoted doesn’t at all seem objectionable.

After describing how an owner values or “prices” things (I’ll agree his language is sloppy), he goes on to state:

“But it often happens that many things which have actually this intrinsic value are not sold in the Market according to that value: that will depend on the Humours and Fancies of men and on their consumption.”

Seems like subjectivity of value to me and the “consumption” term seems to be a reference to marginal valuation.

“If a gentleman cuts Canals and erects Terraces in his Garden, their intrinsic value will be proportionable to the Land and Labour; but the Price in reality will not always follow this proportion.”

Again, I see nothing wrong with this statement. Clearly, you value your time and effort at some level. If what others will pay you for your time and effort is less than what you value it at, you won’t engage in commerce. In other words, you value your time and labor in a marginal fashion.

Again, with some sloppiness of language, but this:

“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.”

seems to me to be a starting point in talking about marginal price setting. And the next sentences seem to suggest that in an open market, prices will tend to stabilize at a point where they are just sufficient to support the underlying process of production. I didn’t think that this was too controversial – am I wrong?

Paul Edwards June 7, 2006 at 11:15 am

Marco,

It’s a great quote, and I agree that it has an element of ambiguousness to it. My interpretation is that at the moment he was writing this, he did not fully recognize that what he was essentially saying was that “intrinsic values” are non-existent, irrelevant, and un-quantifiable, since they play no real role in the establishment of prices.

I think it is very cool to read the very material that provided the transition from one broken way of viewing price formation to the next more correct view. You can see the remnant of the incorrect labor theory of value intertwined with the newer revelation that it is simply supply and demand which dictates price, and that intrinsic value plays no part in its establishment.

C. Cathey June 7, 2006 at 12:25 pm

Paul-

Listen to Dr. Thornton’s discussion (http://mises.org/MultiMedia/mp3/ASC2005/Thornton.mp3) for a discussion of Cantillon’s use of “intrinsic values”.

CC

Marco de Innocentis June 7, 2006 at 12:53 pm

Paul,

Cantillon is saying the exact opposite of what you want him to say. I suggest you concentrate on the last paragraph. It’s not ambiguous at all, it’s a very clear exposition of the classical labour theory of value (CLTOV), later associated with Smith and Ricardo.

Quasibill,

Seems like subjectivity of value to me and the “consumption” term seems to be a reference to marginal valuation.

Even the most die-hard supporters of the CLTOV had to recognise that market prices fluctuate, therefore they cannot always equal intrinsic values. However, they held that in the long run market prices would fluctuate around intrinsic values.

Greg June 7, 2006 at 12:58 pm

Austrian economics should be renamed irish economics

Curt Howland June 7, 2006 at 1:02 pm

Marco, in the long run if the price I can charge for my product does not give me back at least the cost of my production, I will not produce it.

Is this what you mean by “fluctuate around intrinsic values”? It seems perfectly reasonable to me regardless of labor theory of value or anything else.

quasibill June 7, 2006 at 1:34 pm

Marco,

So you’re saying the wording “intrinsic value” had specific meaning, like jargon, in the time period/strain of thought? And I’m mistaken in attributing it to mere sloppiness?

(Yes, these are questions, not snarkiness – my knowledge of the intellectual history of economics is very thin).

Curt,

It seems to me that it would be the costs of production PLUS the subjective marginal value I place on my time and effort (not necessarily the same thing as costs) that would determine the price I would set if I intended to engage in long-term production. And I agree, I thought this “equilibrium” price was an expected result of a truly open market.

Paul Edwards June 7, 2006 at 1:44 pm

Marco,

LOL. I truly have no emotional attachment to any particular view of what Cantillon thought. I have actually never read him, beyond the quote you present. But from that quote let me make some observations:

The following excerpts seem to agree with your interpretation of his position as they strongly suggest that he believes that prices really are the measure of labor in a product.

“but in the Streets of Paris people give a sol for it—the price or measure of the Labour of the Water-carrier.

“the Price or intrinsic value of a thing is the measure of the quantity of Land and of Labour entering into its production

“the real and intrinsic value of the corn will correspond to the Land and Labour which enter into its production;

“their intrinsic value will be proportionable to the Land and Labour;”

These, on the other hand seem to go against your interpretation, if I understand you correctly:

“many things which have actually this intrinsic value are not sold in the Market according to that value:

“that will depend on the Humours and Fancies of men and on their consumption

“but the Price in reality will not always follow this proportion [to land and labor]

“if several persons desire it he may be given double the intrinsic value, that is twice the value of the Land and the expense he has incurred

“but as there is too great an abundance of it and there are more sellers than buyers the Market Price of the Corn will necessarily fall below the intrinsic price or Value. If on the contrary the Farmers sow less corn than is needed for consumption there will be more buyers than sellers and the Market Price of corn will rise above its intrinsic value.

“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”

These describe how prices are determined on the market; not through some intrinsic value, but through objective supply and subjective demand. Sounds Austrian to me.

It seems as if he was confused, but at the same time, he seemed to be at or on the brink of realizing that supply and demand are the only factors determining price.

Paul Edwards June 7, 2006 at 2:00 pm

CC,

Thanks. I found Thornton’s text discussion and it argues that the term “intrinsic value” would read much better if “opportunity cost” was used instead because that concept is what Cantillon was driving at. However, I think it is necessary for us to overlook a few Cantillon comments that I refer to in my above post in order to strictly maintain Thornton’s position. Specifically these two:

“but in the Streets of Paris people give a sol for it—the price or measure of the Labour of the Water-carrier.

“the Price or intrinsic value of a thing is the measure of the quantity of Land and of Labour entering into its production”

—–

http://mises.org/journals/scholar/Thornton8.pdf :

“In his chapter on intrinsic value, Cantillon noted that land and labor have different production possibilities and comparative advantages and that the proportion of land to
labor in production is variable. Then after defining intrinsic value and distinguishing it
from market price, he (37/29/16) proceeded with the following example of alternative uses of the resources in building a garden; an example similar to the one Stigler would later point to in John Stuart Mill as an early formulation of the opportunity cost concept:”

“If a gentleman cuts canals and erects terraces in his garden, their intrinsic value will be proportionable to the land and labor; but the price in reality will not always follow this proportion. If he offers to sell the garden possibly no one will give him half the expense he has incurred. It is also possible that if several persons desire it he may be given double the intrinsic value, that is twice the value of the land and the expense he has incurred.”

“In this example, the intrinsic value is stipulated as possibly twice its market price, but if the garden is built it will be because he values the garden more than what could have been produced on the land, plus the expenses of building the garden. Cantillon described
intrinsic value here in terms of the direct expenses and opportunities foregone, stating that the garden’s intrinsic value is “the value of the land and the expense he has incurred.” He included both the direct expenses of building the gardens as well as the opportunity cost of the land in farming—a masterful example of opportunity cost with clear subjective elements that conforms to contemporary practice. It is even reminiscent of modern textbook examples that examine the opportunity cost of capital invested in a small business and the entrepreneur who accepts a lower income in order to become her own boss and the potential to reap large profits if the demand for her services is high.

“When you add the context of his discussion (62-3/49/23-4) of the entrepreneur-farmer who adjusts production levels across many possible agricultural and non-agricultural outputs, based on judgment, but without being able to exactly foresee market prices, you get more than the “flavor” of opportunity cost. You get the unmistakable context for identifying opportunity cost.”

Dr. Mark Thornton June 7, 2006 at 2:38 pm

Thanks to Paul Edwards for posting my working paper on Cantillon and the discovery of opportunity cost. The paper contains several examples of how Cantillon used opportunity cost and relates it to intrinsic value and thus he did not have a labor or classical theory of value. The paper has been accepted for publication by History of Political Economy.

Gavin Kennedy June 8, 2006 at 2:48 am

One can find traces of future ideas that were developed years after in almost any 18th-century text or pamphlet on aspects of political economy, including Wealth of Nations. I think some people are clutching at straws to show Cantillon was ‘better’ than Smith, or vice versa. It is a pointless debate, not subject to resolution.

Cantillon had a distinction between ‘intrinsic price or value’ (‘le prix ou la valeur intrinseque’) and ‘market’ price (le prix du marché) in the Essai (Part 1: Chapter 10) and Smith distinguished between ‘Natural Price’ and ‘Market Price’ in Wealth of Nations (Book 1: chapter VII). Both of them stated cost of production as a determinant of price (‘la mesure de la terre du travail qui entre dans sa production’)and both recognised, as they must if they went to their local markets, that prices varied as demand and supply varied. To criticise Smith for having a labour theory of value and thereby make him responsible for Marxism and the horrors that followed (as Rothbard verges upon) is nonsense, and becomes even more dubious when Cantillon is exonerated because close reading of his words (English or French?) uncovers supposed proto-utility thinking.

Secondly, the French word ‘entrepreneur’ has a slightly different meaning than it has gained from English speaking economics. You can witness this in France. Many times my rural French neighbours speak of so-and-so as ‘l’entrepreneur’ in answer to a question as to what he does. By this they often means he runs a small lorry business, etc., but they do not mean that he or she is entrepreneurial in the sense I suspect we are talking about here, but that (in English) he is a ‘contractor’. Smith used the English word ‘projector’ when referring to what we, in English, mean by the adoption of the French word, ‘entrepreneur’. There may be a little language confusion on debates that use entrepreneur meaning one thing in French and another in English (of which English speakers in the US and Britain sometimes do with different meanings to the same word ostensibly from the same language!)

Neo-classical economics removed people from their equations, including ‘entrepreneurial’ (English meaning) activity. Crediting Cantillon with the discovery of the entrepreneur in business when he simply meant what French people mean by the word, namely ‘contractors’, not what 21st-century economists mean, is disingenuous.

C. Cathey June 8, 2006 at 11:12 pm

Gavin-

Why aren’t contractors entrepreneurs?

CC

Gavin Kennedy June 9, 2006 at 3:18 am

High CC
Good question. I didn’t stray into defining entrepreneur as used by modern economists because I assumed a common discourse on this subject in the thread.

Not all proprietors, owners of businesses and such like are entrepreneurs in the English language sense. Being one implies a certain ground breaking, above average, even very high, risk taking in new ventures of the kind that Schumpeter expressed as the ‘perennial gale of creative destruction’. These are the people who innovate, even revolutionise products, processes and markets, cross frontiers of technology and marketing, and who build businesses way beyond the aspirations (and more important, perhaps, the abilities) of the rest of us.

Many businesses are managed as routine, seldom changing, and administered by risk- averse type persons, who envisage little change in their market environment. Not all capitalists are entrepreneurs, which leaves the gaps and the room for those who are.

By ‘contractor’ is meant people like ‘haulage contractor’ or ‘building contractor’. They could be entrepreneurs, like the shipping owner who created the container industry in place of ‘loose’ cargo, or the global courier companies, or the iPod, Apple computers, and Microsoft. ‘Contractors’ in the French ‘entrepreneur’ sense could become entrepreneurs in the English sense – if they delivered a new service in their business sector not successfully applied before; for example, if one of them invested in a national network of self-haulage delivery branches (‘U-Move’?).

In early-mid 18th-century France, when Cantillon writing (and Adam Smith in 1748-52) these differences in meanings are important when we make assertions about their insights. My point is that we should be careful to transport modern terminology back 200-plus years and expect to have the necessary exactness for meaningful comparisons about their relevance today.

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