An Historical Investigation
Chapter 5: The Circular Flow of Goods and Money
5. The Circular Flow of Goods and Money INTRODUCTION This chapter takes this historical investigation of equilibrium theory into the 18th century. I shall sidestep many interesting authors and focus on the work of two men who are often mentioned in the same breath of air, the Irish banker Richard Cantillon (ca.1680–1734) and the French physician François Quesnay (1694–1774). Cantillon is praised as the first ‘modern’ economist (Spengler 1954). This praise is mainly due to the analytical quality of his one known published work, the Essai sur la nature du commerce en général, published posthumously in 1755. Crucial to this work is the conception of the market economy as a self-regulating mechanism which tends towards equilibrium (Hébert 1987). The theoretical apparatus behind this equilibrium tendency was highly innovative for its time and included uncertainty, entrepreneurship and a clear conception of a bargaining theory of price determination. It is not surprising that today Cantillon is seen as a precursors of the process approach to equilibrium theory (Vickers 1959 and Rothbard 1995). Yet Cantillon did more than explain the working of the price mechanism. A second important element of his work was the circular flow of money and income. Very likely, Cantillon was indebted to Boisguilbert on certain aspects of this concept (Groenewegen 1987). In turn he influenced Quesnay and his band of followers, known as the physiocrats. As Schumpeter (1954, 218) argued, the fundamental features of Quesnay’s analytical set up are foreshadowed in Cantillon’s work....
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