Wednesday Wisdom

WHO?

Richard Cantillon was born in County Kerry, Ireland in 1680. As a young man he moved to France, studied economics and rose the ranks of the banking industry. Cantillon's financial career began under the mentorship of an uncle who owned a banking house in Paris. Upon his uncle's death, Cantillon took over the business and expanded it significantly. His expertise and keen insight into the financial markets allowed him to navigate and profit from the speculative bubbles of his time, notably John Law's Mississippi Scheme​. The Mississippi Scheme was one of the first financial asset bubbles which was created by economist John Law at behest from the French Regent, Philippe II, Duke of Orléans. France was having an extreme debt crisis and Phillipe asked Law to develop a strategy to monetize French Louisiana assets. Law set up the Banque General and issued paper currency that would be backed by Louisiana’s gold and silver. Law promoted the wealth and potential of the Louisiana territories and Richard Cantillon was an early investor. The promotion of the potential of Louisiana led to a frenzy of investment in the Mississippi Company’s shares. These shares rapidly increased in value, creating an economic bubble. Law's bank issued large quantities of paper money to support the rising prices of the shares, contributing to inflation and overextension of credit​ and finally a complete crash, leaving the French government holding the bag of debt. In 1720, after the bubble burst, Law fled the country in disgrace leaving the French economy in tatters.

What he produced

Cantillon made a fortune on the Mississippi Bubble by getting in early and cashing out when he realized that Law’s practice of artificially low rates and money printing were unsound and bound to fail. His experience in the financial bubble shaped his thinking about the dangers of unchecked monetary expansion and speculative bubbles.

In 1730 Cantillon published his work "Essai sur la Nature du Commerce en General” which laid the foundational ideas about the intrinsic value of goods, determined by the land and labor involved in their production. He also explored the notion of market prices, which could deviate from intrinsic (fair) values due to various factors. Cantillon is credited with pioneering the concept of the entrepreneur and in recognizing the role of risk and uncertainty in economic activities. His work outlined the dynamics of money supply and its effects on prices and the economy. Cantillon had a huge influence on many economists like Adam Smith and on future monetary theories and central banking.

2024 why do we care?

Cantillon's theory suggests that inflation is not neutral; it redistributes wealth from later recipients to earlier ones, often exacerbating economic inequality. For example, when central banks increase the money supply, financial markets tend to experience a surge in asset prices first, benefitting investors and financial institutions. Conversely, wage earners and those on fixed incomes suffer as they encounter higher living costs without corresponding income increases. This is known as the “Cantillon Effect” and it calls into question the ethics behind excessive money expansion. The “Cantillon Effect” highlights the complexity of monetary policy and its broader socioeconomic implications, suggesting that policymakers need to consider these distributive impacts when managing the money supply.

The Federal Reserve is in a precarious situation as it tries to stem inflation, keep the economy growing all while managing increased government spending. The difference between economic data produced and the way most Americans feel about the economy seems to be at odds these days as money supply increases and the Cantillon Effect works its way through the economy. While the economic numbers produced are sanguine, the underlying problem seems to be that the country has been moving towards greater wealth inequality as the hidden tax of inflation affects citizens differently.

As Cantillon wrote in his seminal piece "When the increase of actual money comes into the State, it spreads among the inhabitants by degrees, and thus augments consumption, which naturally raises the price of everything."

And now you know...

Philosophy is the art of thinking, the building block of progress that shapes critical thinking across economics, ethics, religion, and science. 

Thank you, Dad, for the gift of curiosity.

METAPHYSICS: Literally, the term metaphysics means ‘beyond the physical.’ Typically, this is the branch that most people think of when they picture philosophy. In metaphysics, the goal is to answer the what and how questions in life. Who are we, and what are time and space?

LOGIC: The study of reasoning. Much like metaphysics, understanding logic helps to understand and appreciate how we perceive the rest of our world. More than that, it provides a foundation for which to build and interpret arguments and analyses. 

ETHICS: The study of morality, right and wrong, good and evil. Ethics tackles difficult conversations by adding weight to actions and decisions. Politics takes ethics to a larger scale, applying it to a group (or groups) of people. Political philosophers study political governments, laws, justice, authority, rights, liberty, ethics, and much more.

AESTHETICS: What is beautiful? Philosophers try to understand, qualify, and quantify what makes art what it is. Aesthetics also takes a deeper look at the artwork itself, trying to understand the meaning behind it, both art as a whole and art on an individual level. A question an aesthetics philosopher would seek to address is whether or not beauty truly is in the eye of the beholder.

EPISTEMOLOGY: This is the study and understanding of knowledge. The main question is how do we know? We can question the limitations of logic, how comprehension works, and the ability (or perception) to be certain.