Modern Textbooks on Macroeconomics Rarely Mention Cantillon and His Contributions to Business Cycle Theory

Since his rediscovery by Jevons in the late nineteenth century, the economics profession has applauded Cantillon as a methodologist and theorist of the first and highest order. However, the main body of the economics profession has largely ignored his work on business cycles. In fact, modern textbooks on macroeconomics rarely, if ever, make any mention of Cantillon and his contributions in this area. This neglect is puzzling given the profession’s lack of consensus on what causes business cycles and given that one of Cantillon’s primary reasons for inventing economics was to explain the cause of the business cycle and the events surrounding the Mississippi Bubble.

Hébert (1985) first suggested that Cantillon presented the “germ” of Austrian business cycle theory à la Hayek’s work on prices and production, and Hayek himself lauded Cantillon’s contributions and insights. Rothbard (1995) also found that Cantillon provided the “first hint” of Austrian business cycle theory, but Hülsmann (2001) contended that even this acknowledgment understated Cantillon’s contribution, despite Cantillon’s failure to offer a full-blown version of the Austrian business cycle theory. The contention here is that Cantillon provided a cogent theory of business cycles, where cycles are caused by government manipulation of money and banking. Furthermore, he anticipated the key features of the Austrian approach in that his analysis is based on the non-neutrality of money, artificial changes to relative prices, and the resulting alterations in consumption, production, and investment decisions that ultimately are revealed to be harmful for the economy. On the key issues of theory, Cantillon clearly falls into the Austrian camp. Nowhere do we find him emphasizing psychological or irrational causes of the business cycle, such as animal spirits or bandwagon effects; and while money is clearly important, Cantillon downplayed the usefulness of the quantity theory of money and attacked the whole notion of government control of the money supply. Rather than emphasizing a stable purchasing power of money, Cantillon emphasized the Austrian point that any given quantity of money will be sufficient.

—Mark Thornton, “Cantillon on the Cause of the Business Cycle,” Quarterly Journal of Austrian Economics 9, no. 3 (Fall 2006): 46.