[The following article appeared in the Investors Business Daily, Wednesday, January 12, 2000]
Adam Smith is widely regarded as the father of modern economics. But he wasn’t. The real founder may be someone most people have never heard of. More than 40 years before Adam Smith wrote “The Wealth of Nations,” Richard Cantillon authored the “Essai sur la Nature du Commerce en General.”
Joseph Schumpeter, the great historian of economics, called Cantillon’s treatise “the first systematic presentation of the field of economics.” William Stanley Jevons, one of the founders of neoclassical economics, called the book the “cradle of political economy.”
And economist Murray Rothbard called Cantillon “the founding father of modern economics.”
So who was Cantillon? He was Irish by birth. His family had been well-to-do landlords. But they had their wealth taken from them, after fighting for the monarchy, when Oliver Cromwell seized power.
Cantillon, like many of the losing royalists in the 17th century, went to France. He became a banker, and eventually made himself even wealthier than his parents had been.
Cantillon’s experience in the world of business gave him keen insights into how the economy worked. In fact, his views were in many ways more complete than those of Adam Smith, who worked as a teacher and tax collector in the 18th century.
Like Smith after him, Cantillon argued against the mercantilists. The mercantilists believed that a nation’s wealth was determined by its stock of gold and silver. They favored high tariffs to protect domestic industries.
But Cantillon, like Smith, said wealth isn’t money.
Rather, wealth is the amount of goods and services a person--or nation--has. The more goods and services a man can consume, the wealthier he is. Cantillon, and Smith, said the purpose of trade was to increase the amount of goods and services a nation has at its disposal. Both argued for free trade.
But there were key differences between the two. And where they differed, Cantillon generally had better insights into the market.
“Cantillon engaged in the first sophisticated modern analysis of market pricing, showing in detail how demand interacts with existing stock to form prices,” Rothbard wrote [in his History of Economic Thought].
Cantillon didn’t newly discover the fact that prices are determined by supply and demand. The idea had first been put forth centuries earlier by Catholic philosophers.
But Cantillon was the first to show in detail how the two forces interact to set prices. He also firmly established that demand is made up of the subjective evaluations of consumers.
Cantillon showed how the value of a good is determined by the subjective desires of those acting in the market. Smith, by contrast, put forth an objective theory of value. He said the value of good was determined by the labor it took to make it.
Cantillon was also the first to show just how important the entrepreneur is to the economy.
Cantillon stressed the uncertain nature of the economy. It is the entrepreneur’s role to meet that uncertainty by taking risks. He invests, hires workers and buys raw materials to make goods. He does this all only with the hope of earning a profit.
The successful entrepreneur can become wealthy. The unsuccessful ones can lose everything.
The market, Cantillon said, depends on the successful entrepreneur. In his view, the entrepreneur “brings prices and production in line with demand,” according to economist Mark Thornton.
But the entrepreneur is nowhere to be found in Smith’s great work. He stresses the role of the businessman as manager. A firm’s owner hires labor and buys raw material to meet demand, which is taken as a given.
The fact that such demand might not exist, that a manager’s plans can go awry, is barely even noticed.
For Smith, the world, at least the world he talks about in his book, doesn’t seem all that risky and uncertain.
Cantillon’s work was ignored for many years. Since being rediscovered in the late 19th century, it has been championed by many great economists. Perhaps it’s time to recognize Cantillon as the father of economics.
