Cantillon’s Stock, Flow, and Velocity of Money

The insights of Richard Cantillon (? – 1734), both a banker and merchant by trade, on the flow and velocity of money have withstood the test of time (Ekelund and Hébert, 1997). Cantillon, as a banker with firsthand knowledge, had many accurate notions about how the stock, velocity, and flow of money affected the economy. Being also a merchant, he understood the importance of the entrepreneur as a mediator of economic risk in the market. Cantillon is clearly different from the other writers of the mercantilist period. He came closest to establishing a new system of economic thought most likely due to his empirical approach to discovering basic economic principles. Unfortunately, Richard Cantillon was murdered in his sleep by a servant who had been terminated from employment and his book, entitled Essai sur la nature du commerce en general, is his single contribution to economic thought.

Cantillon’s contributions to pre-classical economic philosophy are various and sundry. He correctly perceived the economy as a set of interconnected sub-markets, each with corresponding income flows, back and forth. Cantillon developed a notion of intrinsic value, value of the good which in and of itself did not change, except for the subjective evaluation of the marketplace. Cantillon saw labor adjusting to fit demand without government intervention, in the same basic manner as entrepreneurial activities are shifted to meet demand. When speaking of entrepreneurs he boiled down their activities to bearing the inherent risk of the market by responding to demand, whenever and wherever -- this human response to demand defines the essence of competition. Cantillon also identified and studied the causal chain that connects changes in the money stock to changes in aggregate expenditures. Cantillon comprehensively defined monetary velocity. Cantillon observed what those who followed him failed to notice: loaning funds obtained from precious metals lowered interested rates while spending the same funds ultimately raised interest rates. Perhaps these contributions, which were unique insights for his time, inspired Ekelund and Hébert (1997) to dub Richard Cantillon’s Essai a masterpiece of insight and clarity before the age of Adam Smith.

Reference

Ekelund, R. B., Jr., & Hébert, R. F. (1997). A history of economic theory and method (4th ed.). New York: McGraw Hill.