Cantillon and Smith

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Cantillon and Smith

• ECON 205W
• Summer 2006
• Prof. Cunningham

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Richard Cantillon (1680?-1734)

• Some proponents say that his was the first
  systematic treatise on economics.
• Great influence on Smith?
• He was an Irishman with a Spanish name who lived
  in France, but whose book was published in
  England.

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His Treatise

• Essays on the Nature of Commerce in General
• Attempted to reduce economics to a few elementary
  principles.
• Emphasis on monetary concerns.
• Concept of equilibrium across markets.
• Mechanical linkages across economic elements,
  driven by individuals pursuing self-interest.
• Motivated by Newtons writings on mechanics in
  physics.
• Modern method.

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Treatise (2)

• Land is the source of all material value.
• Three parts
• I. Relates economic structure, wages, population,
  and value.
• II. Money, exchange, interest, prices.
• III. Foreign Exchange and equilibrium of money
  markets.

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Adam Smith (1723-90)

• Born in Kirkcaldy, Scotland (near Edinburgh).
• His nature and background.
• Studied at Glasgow under Hutcheson, professor of
  moral philosophy and head of the Scottish
  Naturalist School.
• Attended Oxford for 6 years.
• 1750, took the Chair of Logic at Glasgow College.
• 1752, took the better paying job of Chair of
  Moral Philosophy

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Smith (2)

• 1759, Theory of Moral Sentiments
• 1776, An Inquiry into the Nature and Causes of
  the Wealth of Nations
• 1790, Died.

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Theory of Moral Sentiments

• Moral philosopher looking at the total range of
  human conduct.
• The sentiments
• Self-love
• Sympathy
• Love of labor
• Propensity to truck and barter
• Sense of propriety
• Desire to be free

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Wealth of Nations

• Five books
• 1. Production and distribution with special
  reference to labor
• 2. Capital and Accumulation
• 3. Economic development and policies to aid it
• 4. Different systems of political economy
• 5. Public finance

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Role of Government

• Government should only do what people cannot do
  individually
• Provide justice (protect property rights)
• Provide defense
• Maintain public works and institutions that would
  not be maintained for lack of a profit motive.
  (Public goods)
• Minimal intervention in the economic sphere.

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Labor

• Productive vs. nonproductive labor
• Nonproductiveproducing services
• Division of labor (pin factory)
• Arises because of the propensity to truck and
  barter
• Not due to any difference in human ability.
• Limited only by the extent of the market.
• Specialization and division of labor are
  necessary for productivity gains
• Specialization not only by skills.

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Exchange

• Division of labor leads to exchange
• Real price, natural price, just price
• Market price may deviate from the natural price.
  Adjustment processes.
• Compares values in exchange with values in
  use
• Labor theory of value

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Wages and Interest

• Wages related to wage fund concept.
• Lending and interest
• No problem with this.
• Fails to recognize that savings may fail to be
  invested, or that there may be time lags.
• Under conditions of perfect mobility, the balance
  of advantages and disadvantages of different jobs
  will become equal.

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Foreign Trade

• Prefers domestic trade to foreign since it
  supports a greater quantity of domestic labor.
• Foreign trade increases the extent of the market.
• Absolute advantage.
• Rejects several arguments for protectionism.
  Tends to favor free trade.