An Essay on Economic Theory

1. Wealth is Land and Labor, Not Money.

LAND IS THE SOURCE or matter from which all wealth is drawn; man’s labor provides the form for its production, and wealth in itself is nothing but the food, conveniences, and pleasures of life.

Defining wealth. Cantillon fundamentally redefines wealth, moving beyond the mercantilist obsession with accumulating gold and silver. He asserts that true wealth consists of the tangible goods and services that provide sustenance, comfort, and enjoyment to people. This includes:

• Food (grass, roots, grain, fish)
• Materials (flax, cotton, timber, minerals)
• Conveniences and pleasures of life

Land and labor. The two primary factors of production are land, which provides the raw materials, and human labor, which transforms these materials into usable forms. Without labor, land's potential remains untapped; without land, labor has no raw material to work upon. This foundational concept underpins all subsequent economic analysis in the essay.

Beyond specie. While gold and silver are useful as money, they are not wealth in themselves. Their value, like all other commodities, is derived from the land and labor required to extract and refine them. This distinction is crucial for understanding how economies truly prosper, focusing on real production rather than monetary accumulation.

2. Property Owners are the Economy's Prime Movers.

All the classes and inhabitants of a state live at the expense of the property owners.

Central role of owners. Cantillon posits that property owners, by virtue of their control over land, are the ultimate drivers of economic activity. Their decisions regarding land use and consumption patterns dictate the allocation of resources throughout the entire economy. All other classes, from farmers to artisans to merchants, are ultimately dependent on the expenditures of these landowners.

Influence on production. The tastes and desires of property owners directly determine what is produced. If they prefer wine, vineyards are cultivated; if they prefer silks, mulberry trees are planted. This top-down influence shapes the entire productive structure of the state, as farmers and artisans adjust to meet this demand.

Economic interdependence. While property owners are "naturally independent," all other individuals are "dependent," either as entrepreneurs or hired workers. This creates a circular flow where the owners' rents are spent, supporting various trades, which in turn generate income that eventually flows back to the land. This mutual dependence is a core insight into the functioning of a market economy.

3. Entrepreneurs Drive All Economic Activity, at Risk.

The Farmer is an Entrepreneur who promises to pay the property owner, for his farm or land, a fixed sum of money... without assurance of the profit he will derive from this enterprise.

Risk-takers. Cantillon is credited with introducing the concept of the entrepreneur into economic theory. He defines entrepreneurs as individuals who undertake economic ventures with uncertain outcomes, paying a fixed price for inputs (like rent or raw materials) and selling their products at an uncertain market price. This inherent uncertainty is central to their role.

Resource allocation. Entrepreneurs, from farmers to merchants to artisans, are the primary allocators of resources. They make self-interested judgments about what consumers desire and how best to produce it, constantly adjusting their activities based on market signals. This decentralized decision-making process is more efficient than direct management by landowners.

Profit and loss. The entrepreneurial function involves bearing risk. Some entrepreneurs grow rich, earning more than double their subsistence, while others face ruin and bankruptcy. This dynamic of profit and loss is essential for guiding resources to their most valued uses and ensuring that production aligns with consumer demand.

4. Intrinsic Value is Land and Labor; Market Prices Fluctuate.

The price, or intrinsic value of a thing, is the measurement of the quantity of land and of labor entering into its production, having regard to the fertility or productivity of the land, and to the quality of the labor.

Objective value. Cantillon defines the "intrinsic value" of a good as the sum of the land and labor required for its production, accounting for the quality of both. This concept is akin to what modern economics calls opportunity cost, representing the real resources expended. Examples include:

• A pound of flax into fine lace (high labor, low land)
• Hay in a field (high land, low labor)
• A refined steel spring (almost entirely labor)

Market price variations. While intrinsic value remains constant, market prices fluctuate daily due to the "desires and moods of men" and the imbalance between supply and demand. If too much wheat is sown, its market price falls below intrinsic value; if too little, it rises above. This dynamic ensures that resources are eventually reallocated to meet actual consumption needs.

No exact calculation. Cantillon acknowledges that an exact, geometrical calculation of intrinsic value is often impossible due to the varying qualities of land and labor. However, the concept provides a theoretical benchmark against which market prices can be understood, highlighting the constant "ebb and flow" of economic adjustments.

5. Money's Circulation Links All Economic Classes.

The three rents of the farmer must therefore be considered the principal sources or, so to speak, the mainspring of circulation in the state.

Circular flow. Cantillon presents a sophisticated model of the circular flow of money, originating from the farmer's production. Farmers typically earn "three rents": one for the property owner, one for their own maintenance and farm expenses, and a third as profit. This income then circulates through the economy.

Velocity of money. The speed at which money circulates significantly impacts the quantity needed for transactions. If payments are made quarterly instead of annually, less money is required for the same volume of trade. Factors influencing velocity include:

• Frequency of payments (annual, semi-annual, quarterly)
• Use of credit and barter
• Hoarding by individuals
• Large payments vs. small retail transactions

Interdependence. Money facilitates the exchange between rural and urban areas, connecting farmers, property owners, artisans, and merchants. While some transactions can occur through barter or credit, cash is essential for retail purchases and for making large, regular payments like rents and taxes, ensuring the continuous functioning of the economy.

6. New Money Affects Prices Unevenly (Cantillon Effects).

I conclude from all this that by doubling the quantity of money in a state, the prices of products and merchandise are not always doubled.

Uneven price changes. Cantillon refutes the simplistic notion that an increase in the money supply uniformly raises all prices. Instead, he argues that new money enters the economy at specific points and gradually diffuses, causing prices to rise unevenly. This phenomenon, now known as the "Cantillon Effect," means that those who receive the new money first benefit, while those who receive it later or not at all are disadvantaged by rising prices.

Impact on consumption. An increase in hard money (e.g., from mines or trade surpluses) leads to increased expenditures by the initial recipients (mine owners, merchants). This boosts demand for certain goods, causing their prices to rise first. For example, meat prices might triple while wheat prices rise by less than a fourth, depending on import restrictions.

Real economic effects. These uneven price changes have real economic consequences:

• Beneficiaries: Mine owners, entrepreneurs, artisans whose products are in higher demand.
• Sufferers: Property owners (during fixed leases), fixed-wage earners, and those whose consumption is curtailed by rising prices.
  This can lead to emigration, changes in production patterns, and a shift in wealth distribution.

7. International Trade Balances Money Flows (Price-Specie-Flow).

The only way to keep them in a state is to conduct foreign trade so that the balance is not adverse to the state.

Mechanism of adjustment. Cantillon describes how international trade imbalances lead to specie flows, which in turn affect domestic prices and ultimately restore equilibrium. If a country has a trade surplus, money flows in, raising domestic prices. This makes its exports less competitive and imports more attractive, eventually reversing the specie flow.

Exchange rates as indicators. Exchange rates naturally reflect the balance of trade and the costs/risks of transporting specie. A country with a trade deficit will see its currency exchange above par (meaning it costs more of its own currency to buy foreign currency), indicating that money needs to be sent abroad. Conversely, a surplus leads to an exchange rate below par.

Ineffectiveness of prohibitions. Cantillon argues that prohibiting the export of gold and silver is futile and counterproductive. Such laws merely increase the risk and cost of smuggling, leading to higher prices for imported goods and a greater outflow of money through illicit channels. The only effective way to retain money is to maintain a favorable balance of trade.

8. Interest Rates Reflect Loanable Funds, Not Just Money Supply.

The abundance or scarcity of money in a state always raises or lowers the price of everything in markets, without any necessary connection to the rate of interest...

Distinction from money supply. Cantillon clearly distinguishes between the quantity of money in circulation and the rate of interest. He argues that an abundance of money does not automatically lower interest rates. Instead, interest rates are determined by the supply and demand for loanable funds, which is influenced by factors like:

• Lenders' confidence: Rumors and perceived risks.
• Borrowers' needs: Entrepreneurial ventures, lavish spending by nobles.

Factors influencing interest.

• Frugality vs. lavish spending: Frugal nobles reduce demand for loans and increase the supply of savings, lowering interest. Lavish spending by nobles and the state (e.g., for war) increases borrowing and raises rates.
• Entrepreneurial activity: High anticipated profits encourage borrowing, driving up interest rates.
• Risk: Higher risk of default (e.g., small entrepreneurs, wartime) leads to higher interest rates.

Usury laws are ineffective. Attempts by governments to legally cap interest rates are deemed useless. Market forces, driven by competition among lenders and borrowers, will always prevail, leading to secret deals and hindering legitimate trade. The market rate, reflecting risk and opportunity cost, is the natural rate.

9. Government Currency Debasement Harms the Economy.

All the history of all times shows that when princes have debased their money, keeping it at the same nominal value, all raw commodities and merchandise have gone up in price in proportion to the debasement of the coinage.

Deception and chaos. Cantillon demonstrates that when a prince debases currency (reduces its precious metal content) or manipulates its nominal value, it causes widespread economic chaos. While the prince might gain a temporary profit from minting, the nation suffers significantly. This manipulation leads to:

• Rapid debt repayment: Debtors rush to pay with depreciating money.
• Increased imports: Foreign goods become relatively cheaper.
• Hoarding: Informed individuals hoard stable money.
• Trade imbalances: Money flows out to pay for imports.

Long-term detriment. The initial "abundance" of money from debasement is fleeting and artificial. It leads to higher prices, ruins domestic manufactures, and ultimately impoverishes the state. When the currency is later revalued, prices crash, causing bankruptcies and further economic distress. France's experience with such policies is cited as a prime example of their destructive nature.

Gresham's Law. Cantillon implicitly describes Gresham's Law, noting that when governments fix the ratio between gold and silver coins at a rate different from the market, the overvalued metal drives the undervalued metal out of circulation. Sir Isaac Newton's attempt to fix the guinea's value in England is presented as a flawed policy that failed to account for market realities.

10. Population Depends on Subsistence, Shaped by Owners' Tastes.

The increase and decrease of population also stand on the same foundation [as the taste, desires, and manner of living of the property owners].

Subsistence as a limit. Cantillon argues that population growth is not an abstract mathematical progression but is fundamentally limited by the means of subsistence available. Land can support a population only to the extent that it is cultivated to produce food and other necessities. He contrasts:

• China: High population density due to intensive agriculture and minimal consumption per person.
• American savages: Low population density due to reliance on hunting and vast land requirements per person.

Owners' influence. The choices and "ways of life" of property owners are paramount in determining how land is used and, consequently, the population a state can support. If owners prefer parks and horses over grain, fewer people can be sustained. Their demand for luxuries or foreign goods diverts land and labor from producing basic necessities.

Critique of Malthusian precursors. Cantillon implicitly criticizes early attempts to calculate population growth based on fixed ratios, like those of Sir William Petty and Mr. Davenant. He emphasizes that human choices and economic conditions, particularly the consumption patterns of the wealthy, are the true determinants of population levels, not just biological reproduction rates.

11. Strategic Trade and Naval Power Build National Wealth.

The most important form of trade for the increase or decrease of a state’s power is foreign trade.

Advantages of foreign trade. Cantillon highlights that foreign trade can significantly enhance a state's power and wealth, especially when it involves:

• Exporting manufactured goods: This supports domestic labor and brings in specie.
• Importing gold and silver: These metals are durable and universally exchangeable, serving as a true reserve stock.
• Using one's own ships: This fosters a strong merchant marine, which is crucial for naval power in times of war.

Disadvantages of certain trade. Conversely, trade can be detrimental if a state:

• Exports raw materials for foreign manufactures: This supports foreign labor and diminishes domestic employment.
• Imports luxuries: This drains specie and diverts resources from essential production.
• Relies on foreign shipping: This strengthens rival navies and weakens its own.

English Navigation Acts. Cantillon famously endorses the English Navigation Acts, not as a protectionist measure for its own sake, but as a strategic policy to build a strong merchant marine. This ensures a ready supply of ships and sailors for defense during wartime, demonstrating a pragmatic view of national interest.

12. Banks Accelerate Circulation but Carry Inherent Risks.

The advantage of all banks in a city, public or private, is to accelerate the circulation of money and to prevent so much of it from being hoarded, as it would naturally be for long time intervals.

Utility of banks. Banks, whether private goldsmith-bankers or national institutions, primarily serve to accelerate the circulation of money. By accepting deposits and issuing notes or book credits, they reduce the need for individuals to hoard cash, thereby putting more money into active circulation. This efficiency benefits trade and economic activity.

Fractional reserve banking. Cantillon observes that bankers typically keep only a fraction of their deposits in reserve, lending out the rest at interest. The proportion of reserves depends on the nature of their clients:

• Wealthy, frugal clients: Allow for lower reserves (e.g., 1/10).
• Entrepreneurs, frequent withdrawals: Require higher reserves (e.g., 1/3 to 1/2).
  This practice increases the effective money supply beyond the physical specie.

Inherent risks. Despite their utility, banks carry significant risks. If a bank fails to redeem its notes on demand, its credit is ruined, leading to economic chaos. Cantillon is particularly wary of national banks in large states, suggesting they offer little real advantage and can create "fictitious and imaginary money" that causes the same disadvantages as real inflation, but vanishes at the "first gust of scandal." He implicitly critiques John Law's Mississippi Company scheme through this lens.

Last updated: January 10, 2026