Richard Cantillon (French: [kɑ̃tijɔ̃]; 1680s – May 1734) was an Irish-French economist and author of Essai Sur La Nature Du Commerce En Général (Essay on the Nature of Trade in General), a book considered by William Stanley Jevons to be the "cradle of political economy"...
Three fragments from one paragraph in the Wikipedia article:
Addressing the mercantilist belief that monetary intervention could cause a perpetually favourable balance of trade, Cantillon developed a specie-flow mechanism foreshadowing future international monetary equilibrium theories. He suggested that in countries with a high quantity of money in circulation, prices will increase and therefore become less competitive in relation to countries where there is a relative scarcity of money.
Cantillon also held that increases in the supply of money, regardless of the source, cause increases in the price level and therefore reduce the competitiveness of a particular nation's industry in relation to a nation with lower prices.
Cantillon did not believe that international markets tended toward equilibrium, and instead suggested that government hoard specie to avoid rising prices and falling competitiveness.
I have removed the word "Thus" from the beginning of the second fragment and the word "However" from the beginning of the third. These words connect the latter fragments to what comes before in a way that requires me to stop and think about the relationships between fragments. I don't want to do that. It's a distraction.
I want to think about the ideas within the fragments. Here, let me focus on the ideas:
- In countries with a high quantity of money in circulation, prices will
increase; these nations therefore become less competitive in international trade.
- Increases in the supply of money, regardless of the source, cause
increases in the price level and therefore reduce the nation's competitiveness in international trade.
- He suggested that government hoard specie to avoid rising prices and declining competitiveness in international trade.
It's
all one idea, isn't it: Inflation at home makes a nation less
competitive in international markets. (Don't focus on "the supply of
money" as the cause of inflation; that is a separate topic. The key idea
in the fragments above is that one of the effects of rising prices is the
tendency toward trade deficits.)
For me, the idea was obvious, once I thought of it. But it took me a very long time to think of it. Since the inflationary '70s, when I got interested in the economy, this paragraph from Wikipedia is I think the first time I ever saw the idea laid out with a little emphasis.
Oh, yes, I recall Thomas Palley, back in 2017, saying
Moreover, the last four decades have seen several episodes of extended dollar over-valuation that have caused large trade deficits that have done great damage to U.S. manufacturing.
"Dollar overvaluation" is not the same as inflation, but it has a similar impact on prices. I took Palley's sentence as confirmation of my thought that inflation makes a nation less competitive in international markets. Not that I had the idea before Richard Cantillon, of course. I'm not that old. But I only recently found the Cantillon paragraph at Wikipedia.
The Cantillon paragraph
only seems to emphasize inflation's impact on trade because I am focusing on
that aspect of it. At the source, the three fragments shown above are
followed by two additional sentences that are not related to inflation. One
sentence is on Cantillon's view that the balance of trade can be
improved "by offering a better product". The other considers
mercantilism as the possible source of Cantillon's "preference" for a
favorable balance of trade.
The paragraph after the one considered here moves on to consider Cantillon's theory of interest. Wikipedia
does not emphasize the impact of inflation on international trade. We're lucky we got the three sentences we got.
There has been a lot of discussion in this country (and elsewhere I suppose) about our trade deficits, and a lot about inflation, but almost none (that I have seen) pointing out our trade deficits as a consequence of inflation.
If you want to call something "the Cantillon effect", it should be this.
3 comments:
At CQ Researcher I find "Wage Policy in Recovery", an article from 1961. I quote:
The Committee for Economic Development has called on American business and labor to develop “new attitudes, new expectations and new policies about prices and wage rates” in view of the growth of foreign competition.
[they quote]
The United States is not a closed economy. It competes with cithers and it must adapt its price-wage policies to the competition it meets in foreign and domestic markets. Specifically this means that in order to get and keep markets some part of the benefits of higher productivity will have to appear in the form of lower prices. All the benefits …cannot be swallowed up in higher money wage rates.
[their quote ends]
The C.E.D. concluded that absorption of productivity gains by wage increases caused “not only inflation at home but an intolerable burden on the international financial position.”
[my quote ends]
Kneejerk: I don't like these guys because they go directly to wages as the problem. HOWEVER, they do make the argument that rising prices at home is bad for our balance of trade. So they are another confirmation of this idea from Cantillon.
As always, I apply the idea to the cost of finance and its effect of prices as well as on aggregate demand and economic growth. If we reduce the cost of finance, there is more money available for wages and profits both. And it can be easily done, as we are no longer on a gold standard.
Of course, we have to be cautious -- more cautious by far than MMT seems to be. But THERE IS NO REASON that most of our money has to come to us as money that costs us interest until we repay the principal.
We don't have to have the gold standard. What we have to have is better economic policy.
ALSO from the "Wage Policy in Recovery" article, quoting President Kennedy from a speech of 2 February [1961]:
"All of us must now be conscious of the need for policies that enable American goods to compete successfully with foreign goods. We cannot afford unsound wage and price movements which push up costs, weaken our international competitive position, restrict job opportunities and jeopardize the health of our domestic economy."
Okay, he loses track of the idea when he talks about restricting job opportunities and jeopardizing the health of our economy.
But Kennedy is on the money when he says we "cannot afford unsound wage and price movements which push up costs [and] weaken our international competitive position".
Inflation at home makes us less competitive in international markets.
But now I have another thought: I guess the fall in value of the dollar relative to other currencies -- this did not happen in Cantillon's time, nor in Kennedy's -- might offset the effects of inflation. I have to think about this more.
I was on this topic in 2017 on my old blog, here:
Comparative advantage, economies of scale, and the cost of finance
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