Question

What is the similarities between Adam Smith and Richard Cantillion in terms of economic thougt? it can be value, equilirium price, price determination and price specie flow issues.

Answer 1

Cantillon saw the economy as an organized system with interconnected markets that operate in such a fashion as to achieve a kind of equilibrium.  But he was more concerned with the process of the market than with some end state.Mutual dependence and evolution depending upon “need and necessity.” Entrepreneurs who conduct “all the exchange and circulation of the state” keep the system in adjustment.

Cantillon engaged in the first sophisticated modern analysis of market pricing, showing in detail how demand interacts with existing stock to form prices. In contrast to the later Smith-Ricardo classicists, and foreshadowing the Austrians, Cantillon was largely interested in price formation in the real world — i.e., actual market prices — rather than in the chimera of long-run "normal" pricing.

For Cantillon then it is not so much that intrinsic values exist automatically and spontaneously and that market prices are drawn towards them, as that the prices offered in the market determine whether or not it is worth producing things. In other words, it is the prices offered that determine what production costs can be incurred not that production costs determine what the prices must be.

To Cantillion, it would have been inconceivable to fall into the Ricardian, Walrasian, and neoclassical trap of assuming that the market is characterized by perfect knowledge and a static world of certainty. The real-world marketplace is permeated by uncertainty, and it is the function of the businessman, the "undertaker," the entrepreneur, to meet and bear that uncertainty by investing, paying expenses, and then hoping for a profitable return. Profits, then, are a reward for successful forecasting, for successful uncertainty bearing, in the process of production.

Thus Cantillon divides producers in the market economy into two classes: "hired people" who receive fixed wages, or fixed land rents, and entrepreneurs with nonfixed, uncertain returns. Cantillon also sees that the pervasive uncertainty borne by the entrepreneurs is partly the consequence of a decentralized market. In a world of one monopoly owner, the owner himself decides upon prices and production, and there is little entrepreneurial uncertainty. But in the real world, the decentralized entrepreneurs face a great deal of uncertainty and must bear its risks. For Cantillon, competition and entrepreneurship go hand in hand.

Cantillon noted that successful and prudent entrepreneurs can become rich, while failed and profligate entrepreneurs will go bankrupt. He also demonstrated that members of a profession naturally proportion themselves based on the demand for their product. Cantillon thereby presented a model of the transition from the feudal-command economy to the market economy and demonstrated the workings of what we now call consumer sovereignty and the circular-flow model of the economy. Cantillon’s model makes clear that the self interest of entrepreneurs can be relied upon to regulate the economy according to the demands of consumers.

According to Adam Smith, economics of self-interest in capital markets will propel people to keep a large portion of their capital employed domestically. Smith believed that we could rely on self-interest—not some government decree—to direct and maintain the capital that we subsist on.In building his moral philosophy of social harmony, the near equality in the distribution of goods—despite the tremendous inequality of land ownership—plays a key role because it is an example of harmony that involves basic necessities and is more or less seen as an automatic process after it is theoretically revealed to the reader. Smith found that the landowner will consume little more than that of the lowest peasant. The deception is so great that in some respects the poor are actually better off in terms of leisure and stress.

Smith  advocated "the liberal plan of equality, liberty and justice." These three virtues together characterize the free society, and in fact they are but three facets of a single truth. Equality, as the term is used in the Declaration of Independence, and here by Adam Smith, means the abolition of privilege — one law for all men alike because all men are one in their essential humanity. Because all people are created equal, it is wrong for government to play favorites and bestow advantages on some at the expense of others. Justice is equality before the law, and this describes a society where each person may freely pursue his own goals, provided he does not infringe the equal right of all the others to pursue theirs.

Self-interest and competition are two extremely powerful economic forces. Self-interest is the catalyst of economic activity. Competition is the regulator of economic activity. Together they form what Adam Smith called “The Invisible Hand”. While producers and consumers are not behaving with the intent of helping others or society, necessarily, they do. It’s like an invisible hand that guides resources to their most valuable use.