Friday, September 7, 2012

Richard Cantillon and Keynesian Absurdities

I am reading Richard Cantillon's book, An Essay on Economic Theory, which is an English translation of his original French work, Essai sur la Nature du Commerce en Général. Richard Cantillon (1680-1734) was an Irish banker whose aforementioned only surviving work was hailed by William Stanley Jevons as the cradle of political economy. Murray Rothbard christen him as the father of modern economics rightly displacing Adam Smith from that position.

I am mentioning Cantillon's almost 300 year old work because in the first chapter of his systematic treatise, he smashed the major tenets of Keynesian theory viz., printing money is wealth creation and consumption is the main driver of economic progress. Cantillon exposed the then famous mercantalist fallacies of considering  money as 'wealth', and because Keynesiansim is nothing but an old mercantalist wine in the new mathematical bottle, it is not difficult to see how his work also smashes today's Keynesianism too. Let us see what Cantillon said re what is wealth and which economic activity, consumption or production, is important for the progress of an economy.

In the first chapter (part I), which is titled 'Wealth', Cantillon said: 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. 

Land produces grass, roots, grain, flax, cotton, hemp, shrubs and several kinds of trees, with fruits, bark, and foliage like that of the mulberry tree for silkworms, and it supplies mines and minerals. From these, the labor of man creates wealth. 

Rivers and seas provide fish for the food of man, and many other things for his enjoyment. But these seas and rivers belong to the adjacent lands or are common to all, and man’s labor extracts fish and other advantages from them.

In just three paragraphs he enunciated the eternal truth of wealth and wealth creation. Wealth is nothing but the supply of food, conveniences like cars, planes, refrigerators, washing-machines, computers, shoes, cloth, home etc. etc., and pleasures of life like music, books, foreign trips, health spas etc. etc. Land and human labor are the two original factors of production which provide this wealth to us. As you can see, Cantillon focuses on the real economic goods which are destined for final consumption. Contrast this with today's absurd Keynesian theories of money printing as wealth creation! Keynesian policies, which are followed by the governments all over the world today and venerated by the mainstream economists and other media pundits, tell us, that if central bankers can print just a bit more money then our economies will get out of the recession and start progressing again. They tell us, that to increase the economic growth, money printing is a must. They tell us, that economic activity is constrained by the availability of supply of money! Nothing can be more further from the truth. As Cantillon said three centuries ago, wealth is only created when we produce more real economic goods, and as discussed by Austrian economists in recent time, for this to happen there is no need for more money. Whatever supply of money is available is optimum to function as a common medium of exchange. Printing and creating money out of thin air - as RBI and other central bankers around the world are doing - only dilutes the purchasing power of every circulating currency note in the economy; It only creates inflation. Production of real economic goods can only be increased via production, saving, investment and capital accumulation. If the society as a whole is not saving more than what it is consuming, and then investing the saving in accumulation of more capital goods, then, economic progress is impossible. Indian populace is very thrifty, but all the saved money is being looted or crowded out by the government inflation and spending actions.

Not only this, first part of Cantillon's work is titled, Production, Distribution, and Consumption. One can clearly see, that Cantillon discusses the activity of production first because he knew - not unlike modern Keynesians and other mainstream economists - that without production, consumption is not possible. If an economy first produces something only then, later on, the inhabitants of that economy can enjoy the consumption of those produced economic goods. This eternal economic truth is forgotten today. All major economists and other media pundits are advising their governments to boost consumption via money printing and spending. Such policies are only going to create more inflation. It can not add an unit of more wealth in the economy. It will only dilute the purchasing power of money. It will only transfer the already available wealth from those who will receive the freshly printed money in the end to those who will receive it first.

I only wish people read Cantillon's brilliant work and understand what is real wealth and how one can generate it. As long as people will not educate themselves about these truth of economic laws, governments will continue to create havoc via their inflationary policies.




    

1 comment:

  1. This is the thing I was looking for my thesis work. You are awesome. Great Work. Thanks for posting it.

    ReplyDelete

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