Richard cantillon an essay on economic theory pdf

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In Essai , Cantillon provided an advanced version of John Locke's quantity theory of money , focusing on relative inflation and the velocity of money . Cantillon suggested that inflation occurs gradually and that the new supply of money has a localised effect on inflation, effectively originating the concept of non-neutral money . Furthermore, he posited that the original recipients of new money enjoy higher standards of living at the expense of later recipients. The concept of relative inflation, or a disproportionate rise in prices among different goods in an economy, is now known as the Cantillon effect. Cantillon also considered changes in the velocity of money (quantity of exchanges made within a specific amount of time) influential on prices, although not to the same degree as changes in the quantity of money. While he believed that the money supply consisted only of specie, he conceded that increases in money substitutes—or bank notes—could affect prices by effectively increasing the velocity of circulating of deposited specie. Apart from distinguishing money from money substitute, he also distinguished between bank notes offered as receipts for specie deposits and bank notes circulating beyond the quantity of specie—or fiduciary media—suggesting that the volume of fiduciary media is strictly limited by people's confidence in its redeemability. He considered fiduciary media a useful tool to abate the downward pressure that hoarding of specie has on the velocity of money.

Differences between prior mercantilists and Cantillon arise early in Essai , regarding the origins of wealth and price formation on the market. [53] Cantillon distinguishes between wealth and money, considering wealth in itself "nothing but the food, conveniences, and pleasures of life." [54] While Cantillon advocated an "intrinsic" theory of value, based on the input of land and labour (cost of production), [55] he is considered to have touched upon a subjective theory of value. [56] Cantillon held that market prices are not immediately decided by intrinsic value, but are derived from supply and demand. [57] He considered market prices to be derived by comparing supply, the quantity of a particular good in a particular market, to demand, the quantity of money brought to be exchanged. [58] Believing market prices to tend towards the intrinsic value of a good, Cantillon may have also originated the uniformity-of-profit principle—changes in the market price of a good may lead to changes in supply, reflecting a rise or fall in profit. [59]

Richard cantillon an essay on economic theory pdf

richard cantillon an essay on economic theory pdf

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