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Opportunity Cost

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Richard Cantillon and the Discovery of Opportunity Cost
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Dr. Mark Thornton
Senior Fellow
Ludwig von Mises Institute
518 West Magnolia Avenue
Auburn, AL 36832-4528
[email protected]
334-321-2106
Fax-321-2119

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The author would like to thank [hidden]


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Richard Cantillon and the Discovery of Opportunity Cost




Abstract: Opportunity cost is a core, defining concept of economic science.
The early Austrian economists are generally credited with the discovery of
the concept and its early application. Here, it is shown that Richard
Cantillon, the father of economic theory and method, developed and applied
the concept of opportunity cost. His “intrinsic value” was not an objective
cost approach, but merely an attempt to estimate opportunity cost. This
finding exonerates Cantillon from the charge of objective cost theorist and
predates the discovery of opportunity cost one hundred and forty years
earlier. Had his readers, including Adam Smith, properly understood him, a
gigantic cul-de-sac in economic theory—the labor theory of value—could
have been avoided.


* * * * *


Cantillon provided one of the clearest early explanations of market price.
However, his notion of intrinsic value has quite possibly been a red
herring in the history of economic analysis. There seemed little doubt in
Cantillon’s mind that market price depends on factors other than “real
costs,” some of which are subjective. – R. F. Hébert (1985, p. 270).


I. Introduction

Consideration of what must be foregone in order to produce a good has been variously
called user cost, alternative cost, and since its popularization by Frank Knight,
opportunity cost. In contrast to accounting costs or the tallying of the inputs of
production, the concept of opportunity cost examines what those inputs could have
alternatively produced. A parcel of land could be employed to grow crops, as a
recreational park, or to provide the site on which to build a house. Whatever action is
chosen, the next most highly valued alternative is the opportunity cost. As such,


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opportunity cost lies at the heart of economic choice and entrepreneurial action. In
contrast, accounting costs often miss the vital information on which choices are actually
made.
Opportunity cost is a central concept of economic science. In a world without
scarcity, all alternatives could be achieved, choice would not be necessary, and cost
would not exist. When choice among alternatives is necessary, individuals must
formulate subjective values for goods. Thus, both supply and demand have their
foundation in the concept of opportunity cost because consumers must also evaluate their
alternatives, make a choice, and sustain a cost in terms of their most highly valued option
foregone.
2
Models can be developed and tested that seemingly ignore opportunity cost,
but genuine economic insight relies on the analysis of alternatives taken and alternatives
foregone.
Stigler (1941, p. 147) attributed the economist’s conception of cost to the Austrian
branch of the neoclassical period:
Menger lays the groundwork for a correct theory of productive
organization—i.e., for the determination of the allocation of resources.
The final development, however, the theory of alternative cost, is left for
Wieser to formulate.

Later, in an act of academic self- flagellation, Stigler (1955, p. 8) found that John Stuart
Mill understood the concept of opportunity cost in 1848 in an example of the alternative
uses of agricultural land. Here Mill, unlike Marshall, made a “frank and clear
recognition” that rent is derived from the existence of alternative uses for resources.

2
Alchian (1968, p. 371).


3
Indeed, the concept of opportunity cost can also be seen in the work of J.H. von
Thünen (1823), and possibly even in that of Galiani (1750) and Condillac (1776).
3

Coming forward in time, the concept of opportunity cost was developed by Böhm-
Bawerk (1894, 1889), Frank A. Fetter (1904), Herbert J. Davenport (1908, 1913), Philip
H. Wicksteed (1910, 1914), Frank H. Knight (1921, 1928), Gottfried Haberler (1930,
1934), and Lionel Robbins (1930, 1932, 1934).
4
Marshall never wrote explicitly about the
concept, preferring instead to rely on equilibrium and simple competition among
competing uses of resources to guide allocation.
5
In contrast, Schumpeter (1954, p. 1044)
considered opportunity cost to be the great contribution of the early neoclassical period.
This important history of this key concept of economic theory is in fundamental
error. The seemingly unlikely claim of this paper is that Richard Cantillon discovered the
concept of opportunity cost one hundred and forty years earlier than its conventional
dating. This finding is especially surprising given Cantillon’s use of “valeur intrinseque,”
his well-known search for a par value between land and labor, and subsequent
interpretations that describe him as an objective cost theorist and a proponent of a land
theory of value. This contention seems all the more improbable because Cantillon used
intrinsic value to designate his estimate of opportunity cost.
To sustain this claim, it will be shown that Cantillon understood and presented the
concept of opportunity cost in his sole surviving contribution, An Essay on the Nature of
Commerce in General (1755, hereafter Essay), and that his concept and overall economic

3
Galiani and Condillac were students of Cantillon’s book. It would seem that von Thünen was possibly
influenced by Cantillon either directly, or indirectly by the Physiocrats, but no German translation was
available in his time.
4
For complete references and a more complete history of the development of opportunity cost see
Buchanan (1969a).
5
Stigler (1941, p. 66 and p. 93, n.1).



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model meet all the conditions of our modern terminology. There are good reasons why
his discovery of the concept was not perceived and acknowledged, but there also is some
evidence that Cantillon’s contribution was passed down and absorbed by the currently
acknowledged discoverer, Carl Menger. Cantillon’s life was one of many mysteries and
his economics has presented many puzzles, but the central puzzle is solved here—
Cantillon was the first to discover the concept of opportunity cost.
6

If such a claim could indeed be sustained, would it mean anything more than a
rewrite of history of economics textbooks? In addition to the four important scientific
reasons to study the history of the economics in general, Schumpeter (1954, pp. 4-6, 301)
might have added, that like in the case of Galiani on value theory, a more careful reading
of Cantillon on cost would truly have “rendered superfluous all the nineteenth-century
squabbles—and misunderstandings—on the subject.” As such, this undiscovered
discovery represents a gigantic and unnecessary detour in the history of economic
thought.
7

To that I would add at least one more positive reason that leads me to explore and
press this claim. Cantillon has received universal accolades and acknowledgements since
his rediscovery by William Stanley Jevons. Cantillon has been credited with being the
first economic theorist to develop scientific economic methodology and the first to
develop a systematic understanding of the economy. In retrospect, his work is now
segmented into three parts. The first and largest grouping is where his contributions have

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Murphy (1986) provides an excellent and engaging discussion of all the surrounding Cantillon’s life and
thought and provides a thorough analysis of the potential answers. Remaining mysteries include whether or
not Cantillon staged his own murder. Current debates involve questions concerning his influence on and
relationship to subsequent schools of economic thought. Also see Blaug (1991) for a collection of
important papers on Cantillon’s economics.
7
This is not to suggest that no benefits were derived along the way, only that overall improvement in
economic science could have been much faster and further along the way.


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been highly acclaimed by scholars.
8
The second part is where Cantillon has been
criticized, such as his views on cost.
9
The third section contains his ideas that have been
noted but largely neglected by mainstream economics.
If Cantillon were found to be correct in the area of cost—in the sense of matching
or approaching modern standards—then there would be only two groupings: where he is
correct and where he has been neglected. Adding to his credits the discovery of
opportunity cost exonerates him from the charge of “objective cost theorist” and lifts his
reputation to new heights. Given that the neglected aspects of his work coincide with the
issues of most disagreement within the economics profession—specifically
macroeconomics, monetary theory, and business cycles—there is great potential for
improving economic science and education by pursuing his neglected contributions in
this new light.

II. The Cantillon Puzzle

If he were chained to a hopelessly incompetent understanding of economic cost,
how could Cantillon stumble onto so many important advances in economic theory? This


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See for example Thornton (1998) for a recent description of his contributions. Cantillon is the originator
of many of the basic methods, concepts, and theories used by economists. He was the first to use
abstraction and deduction, methodological individualism and subjectivism as a system of analysis. He
developed models of price and wage determination. Cantillon integrated advanced notions of population
theory, spatial economics and public finance into his overall analysis of the economy. His treatment of
money and banking is considered very modern. Cantillon was the first to provide a microeconomic analysis
of the role of money in the economy including the balance of payments and the business cycle. He
described the price-specie-flow mechanism before Hume and was the first to systematically analyze the
pitfalls of discretionary monetary policy.
9
See Walsh (1987), Brewer (1988), and Aspromourgos (1989) for descriptions and criticisms of Cantillon.
Throughout the Essay he used the term intrinsic value, an idea that is now anathema to modern economists.
In the extreme, this concept is a primitive, even mystical mechanism, far inferior to later developments by
the classical economists.


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is the central puzzle of Cantillon’s economics. According to Hayek (1952, pp. 24, 31,
209-10), all major advances in economics are linked to the proper understanding of
subjective value and opportunity costs. In like manner, Buchanan (1969a, 1969b, p. 64)
asserts that reliance on objective valuations causes “methodological chaos.” And yet
Higgs (1931, p. 386) described Cantillon as “the economist’s economist,” and
Schumpeter wrote that he was the starting point for price theory and the first “to give us a
bird’s-eye view of economic life.”
10

The resolution of this puzzle is that Cantillon was not an objective cost theorist.
Intrinsic value in the Essay has been interpreted as objective cost, but Cantillon used the
term to indicate the concept of opportunity cost. At the most basic level, Cantillon was
using the first dictionary definition of intrinsic to convey value placed within or inside
the good and the second definition to communicate that this value was private and
intimate, but not the third more modern definition; that it belonged to the thing in itself,
or by its very nature.
11
This third meaning derives its popularity from its applications in
the physical sciences after Cantillon’s death and this was the meaning with which Adam
Smith ([1776] 1976, pp. 480-488) used the word—to refer to the properties of the good,
usually money. Cantillon’s term intrinsic value (circa 1730) therefore should be read as


10
“But let us bear in mind that it was the ‘subjective’ or ‘utility’ theory of price that had the wind until the
influence of the Wealth of Nations—and especially of Ricardo’s Principles—asserted itself. Even after
1776, that theory prevailed on the Continent, and there is an unbroken line of development between Galiani
and J.B. Say. Quesnay, Beccaria, Turgot, Verri, Condillac, and many minor lights contributed to
establishing it more and more firmly. They all linked price and the mechanism of pricing directly to what
they conceived to be the fundamental purpose of economic activity, the satisfaction of wants. They all
accepted Cantillon’s definition of richesse, not only as a phrase to be forgotten as soon as stated, or, as in
the case of Smith, to be remembered only in order to recommend policies favorable to consumers, but as
the starting point of price analysis.” Schumpeter (1954, p. 302).

11
Oxford English Dictionary, 2
nd
Ed., Vol. VIII (1989, p. 22).


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what has been given up to produce a good and that this value or price is of a private
nature and does not refer to the objective properties of the good itself.
Cantillon (23-24/19/12)
12
used the concept of opportunity cost in the same way it
is used today. For instance, he gave us the 18
th
-century equivalent of the classic textbook
example of the opportunity cost of going to college:
A Labourer’s Son at seven or twelve years of age begins to help his Father
either in keeping the Flocks, digging the ground, or in other sorts of
Country Labour which require no Art or Skill.
If his Father puts him to a Trade he loses his Assistance during the
Time of his Apprenticeship and is necessitated to cloath him and to pay
the expenses of his Apprenticeship for some years. The Son is thus an
expense to his Father and his Labour brings in no advantage till the end of
some years.

Here the father loses the cost of the apprenticeship (tuition) as well as the foregone labor
(income) for a period of seven years (four years). Cantillon went on to use opportunity
cost—“the time lost in learning the trade and the cost and risk incurred in becoming
proficient”—to help explain the rent or higher wage paid to artisans and craftsmen. He
used the word cost to refer to expenses incurred and included the cost of clothing in
opportunity cost because children on the farm contributed much to the production and
upkeep of their homespun clothing, while those in apprenticeships did not.
13

Therefore when one examines Chapter X of the Essay (33/27/15), “The Price and
Intrinsic Value of a Thing in general is the measure of the Land and Labour which enter
into its Production,” it should be understood as the opportunity cost of a thing can, in
general, be reckoned or estimated by the resources which you have employed in its

12
The first page number(s) will be to the original French edition in Higgs (1931), the second page number
will be to the English edition in Higgs (1931), and the third number is to the Brewer edition (2001).

13
See Braudel (1981, p. 315).


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production. He began the chapter with a discussion of productivity and comparative
advantage, using examples of both land and labor. Land and labor have comparative
advantages. Higher quality resources produce greater market value, but also enter into
your opportunity cost, or price of production. Opportunity cost is regulated by alternative
uses and market prices. He is clearly not referring to the quantity of resources but to their
alternative value. When Cantillon (36/29/16) writes:
By these examples and inductions it will, I think, be understood that the
Price or intrinsic value of a thing is the measure of the quantity of Land
and of Labour entering into its production, having regard to the fertility or
produce of the Land and to the quality of the Labour.

This should be understood as: the opportunity cost of something can be measured
by the resources used in its production with regard to what they could have
produced and estimated by market prices. Cantillon then went on to distinguish
between opportunity cost and market price. When developing the concept of
opportunity cost Cantillon deployed examples of the alternative uses of resources,
which Stigler (1985, p. 8) would later point to in John Stuart Mill as an early
formulation of the opportunity cost concept. For example, both Cantillon and
Mill used the illustration of the opportunity cost (agricultural production) of
building a garden.
The existence of the puzzle can be explained by two primary factors. First,
Cantillon died (or disappeared) twenty years before his book was ever published. His
manuscript circulated among a small group of intellectuals, but he had little opportunity
to explain the details of his writings and made no surviving public comments, except
where he explicitly warns, in the Essay (140/107/46) itself, that readers are likely to
misinterpret the term intrinsic value. In addition, there are no other extant publications of


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Cantillon, and the empirical supplement to the book, which supposedly illustrates many
of his points, was lost.
The manuscript has been recognized by everyone who has read it as brilliant and
pathbreaking, but there is ample evidence that readers could not fully comprehend the
manuscript in its entirety. Higgs ([1894] 1926, p. 214) reported that Cantillon’s
reputation could “never have rested upon the popularity of his little book” and that
Gournay “had to exercise his great personal influence to persuade his disciples not to
neglect it as others were doing.” The elder Mirabeau accounted for “the failure of the
book as due to the defects of its style and the aridity of its subject.”
Many great economists of the 18
th
-century labored at length to illustrate or extend
Cantillon’s analyses. One of the best examples of this difficulty is Francois Quesnay and
his toiling over the production of the Tableau Economique. It would seem that he
eventually found his own efforts inferior because he returned more directly to Cantillon’s
approach in the final version, Analyse du formule arithmetique du Tableau
Economique.
14
The Marquis de Mirabeau also sought to write a book based on Cantillon
or to publish Cantillon’s manuscript as his own, but failed to produce either project. Even
Cantillon’s most able students, notably Gournay, Quesnay, Mirabeau, Turgot, Smith, and
Say had difficulties with his book. According to Higgs ([1894] 1926, p. 215), Cantillon’s
concise style caused him to be “much misrepresented and misunderstood,” even by such
an original thinker as Jevons. Therefore, it is not surprising that the elusive concept of
opportunity cost remained unappreciated by his early readers.

14
Brewer (1992, p. 164). There is also some evidence presented by Benitez-Rochel and Robles-Teigeiro
(2003) that Cantillon was in turn influenced on this point by Boisguilbert.



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The second reason for the puzzle rests with Adam Smith. Cantillon is one of the
few writers acknowledged in the Wealth of Nations, and there are forty footnotes in the
Glasgow edition indicating a correspondence between the words and ideas of Cantillon
and those of Smith. The influence of the Physiocrats on Smith might also be largely
attributed, indirectly, to Cantillon.
15

It is also widely acknowledged that Cantillon was a primary influence on Smith’s
notion of “natural price.” Here Smith could have adopted Cantillon’s concept of intrinsic
value into his own idea of natural price. Eatwell (1982, p. 204) claims that Cantillon only
provided part of Smith’s concept, while Brewer (1992, p. 194) found that Cantillon and
Turgot are needed to fully form Smith’s conception. The interpretation offered here
argues that Smith took a basic concept from Cantillon, but channeled it into a strictly
objective concept altogether different than Cantillon intended.
In Chapter Eight, Book One of the Wealth of Nations ([1776] 1976, p. 85), Smith
referenced and paraphrased from Cantillon’s Chapter XI of Part I (42-43/33/17-18) on the
issue of the par value between land and labor; the chapter that follows Cantillon’s chapter
on intrinsic value. William Petty inaugurated this search for this par value with the intent
to find fixed values on which to “account” for an economy. Cantillon clearly did a much
better job than Petty in exploring the topic, but he found that even with key qualifications
and unrealistic assumptions only tentative answers could be reached. By citing Cantillon
as providing a par between land and labor, Smith confused the issue because he “loftily
imputed to him an attempt to form exact estimates in matters where Cantillon expressly

15
Brewer (1992, p. 191).


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disclaimed any such pretension.”
16
On this point, F.A. Hayek ([1931] 1991, p. 248)
politely noted that Smith reported Cantillon’s views “quite inexactly.”
Furthermore, Cantillon (54-55/43/21) wrote that even if a good answer could be
found, it would have little practical value. Cantillon not only showed that such a par
could not be established, he explicitly distanced himself from Petty and claimed that such
a par was unnecessary for his purposes:
Sir Wm. Petty, in a little manuscript of the year 1685, considered
this Par, or Equation between Land and Labour, as the most important
consideration in Political Arithmetic, but the research which he has made
into it in passing is fanciful and remote from natural laws, because he has
attached himself not to causes and principles but only to effects, as Mr.
Locke, Mr. Davenant and all the other English authors who have written
on this subject have done after him.

This hardly sounds like a proponent of fixed values such as Petty’s Par, the labor theory
of value, or natural prices.
Smith not only misrepresented Cantillon’s views, but did so in a manner that
impeded his readers from getting the true meaning. The Essay was published
anonymously in 1755. Smith probably acquired and read the French version of the Essay
during his travels to France.
17
When Smith referred to Cantillon in 1776, the only book
accessible to his English audience by an author of that name was by a Philip Cantillon,
who published an essay in 1759. Phillip was a relative of Richard and trustee of his estate
and thus might have had access to a copy of the Essay, but he was far inferior in
analytical and explanatory powers. Thus any diligent student of Smith who sought to
verify the work of “Mr. Cantillon” (Smith’s amorphous reference) would have been

16
Higgs ([1894] 1926, p. 215).

17
Jevons “Richard Cantillon and the Nationality of Political Economy,” in Higgs edited (1931, p. 345)
and Brewe r (2001, p. 144).


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frustrated and sorely disappointed. Jevons also reported that if Smith’s readers had
turned to J. R. McCulloch’s Literature of Political Economy, they too would have been
led to Philip rather than Richard, along with a great deal of inaccuracies and
misinformation.
18
Jevons labeled this a “a tale full of errors” and with Cantillon long
dead and unable to correct the tale, it created a connection between Cantillon and par
values and the more modern conception of intrinsic value.
Many early commentators such as Jevons, Schumpeter, and Hayek overlooked the
puzzle between Cantillon’s contributions and his intrinsic value/objective cost doctrine,
or dismissed it as unfortunate. Others simply linked intrinsic value to Smith’s natural
price. More recently, however, economists have taken the puzzle more seriously and have
tried to tease out a solution and thereby have contributed much to resolving it.
Brewer (1992) started this process with his book- length treatment of Cantillon’s
economics, in which he treats intrinsic value as the long-run equilibrium price (natural
price) based on costs of land and labor. Because labor can be reduced to the amount of
land necessary to sustain it at par, value can be calculated in terms of land, and thus
emerges a land theory of value.
19
He notes, however, that this creates all sorts of
questions regarding such things as capital costs, heterogeneity of resources, and profits.
Brewer (1992, pp. 66-69) laments that “the exact procedure is hard to disentangle from
Cantillon’s verbal argument” and that the solution would be forthcoming if Cantillon had

18
Jevons “Richard Cantillon and the Nationality of Political Economy,” in Higgs edited (1931, p. 333) and
Brewer (2001, p. 133).
19
Also see Brewer (1988). This derivation of a land theory of value gives us an indication of how Cantillon
was a likely influence on the Physiocrats who believed that wealth and economic value could be attributed
to land.



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provided a “formal mathematical model” or if the statistical supplement had not been
lost.
In a similar vein, Aspromourgos (1989, 1996) takes this analysis a step further.
He concludes that Cantillon and intrinsic value face the circularity charge, in that costs
cannot be known independently of prices. He also notes that profit is absent in the
discussion of prices and only enters the text in a casual fashion and that rent is also given
a cursory treatment. All of this is further complicated by Cantillon’s analysis of interest,
which is treated in correct and complete detail.
Like Brewer and others before him, Aspromourgos sees problems of present ation
in the Essay, but perceptively mentions two noteworthy aspects about the land theory of
value attributed to Cantillon, namely that the quantity of land and labor are only measures
of intrinsic value and that money is the best measure of the par between land and labor.
He also notes that Cantillon’s pursuit of par was theoretically motivated whereas Petty’s
was empirically motivated.
Pendergast (1991) has argued (within a different framework) that Cantillon did
have a theory of profit in which capital employed earned a proportional return.
Aspromourgos successfully countered this by noting that intrinsic values imply an
interest return to capital when entrepreneurs borrow, but do not in the absence of
borrowing. He concluded that if Cantillon had developed a theory of profit he would have
been far in advance of the leading classical economists, but that the textual evidence
cannot support the claim of Pendergast.
By a serious and in-depth analysis of Cantillon’s Essay, Brewer, Aspromourgos,
and others have put the puzzle in scientific relief and set the table for its solution. They


14
found, for example, that intrinsic values suffer from the circularity problem of cost-of-
production theories of price, that intrinsic values never vary, and that Cantillon had no
distinct concept of profit in connection with intrinsic values.
20
A series of more recent
essays have addressed these conundrums and have taken key critical steps forward.
For example, in comparing the land theory of value to the general content of the
Essay, Grieve (1993, p. 46) exclaims:
In the opinion of the present reviewer that interpretation is open to
question; it also, unfortunately, leaves the impression that Cantillon’s
theory is something rather peculiar—a unique excursion in an odd
direction which can hardly be of more than antiquarian interest. The reader
is given no inkling of the possibility that Cantillon offers an approach to
the theory of value and distribution which not only escapes the problem of
the labour theory but is also at the same time free of the circularity of the
marginalist treatment.


He suggests the following resolution: Cantillon’s concept of intrinsic value is not based
on physical inputs, nor should the land theory of value be ascribed to him. Grieve noted
Cantillon’s emphasis on the heterogeneity of resources and claims that these resources
are only measures of, or proportionate to, intrinsic values. He therefore suggests that
Cantillon produced an income shares/cost of production theory of value.
In his critique of Rothbard (1995), Hülsmann (1997, 2001) defended Cantillon
against the charges related to objective cost theory. He noted that intrinsic value is not
conceptually detached from the market, but is a price not realized on the market. For
Hülsmann, Cantillon did not pretend that market prices are determined by costs and thus
he avoided the error of viewing value solely in terms of land and labor. He observed that
intrinsic value is merely a measure of land and labor and that Cantillon was driving

20
See Aspromourgos (1989).



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toward entrepreneurial calculation in terms of money prices. With these observations,
Hülsmann closes Rothbard’s “big gap” in Cantillon. He draws upon Cantillon’s
discussion of the gold mine to conclude that costs were grounded in survival, and that
survival demands that the costs of production not exceed the value of the product.
The claim that Cantillon’s concept of intrinsic value was based on opportunity
cost was broached earlier by Thornton (1998); a suggestion based on the fact that the
orthodox interpretation simply presents too many glaring inconsistencies to be
maintained against the textual evidence. First Cantillon examined the decision maker’s
alternatives in such cases as the landlord’s choice of how to use his land. Next, the
implications of these choices are drawn. In production, more horses mean fewer servants.
In consumption, more Belgian lace means less champagne. The opportunity cost of your
choice is what you sacrificed by making it. Intrinsic value is not the quantity of land and
labor used in production. Rather, the quantity of land and labor, adjusted by quality to
reflect market value and alternative uses, can be used as a measure or estimate of the
intrinsic value. Cantillon (37/29/16 & 127/97/42) was clear that intrinsic value is not the
land and labor itself, but rather that intrinsic value/opportunity cost is merely
“proportionable” to them. Not only are these qualifiers supported in the textual evidence,
but the interpretation of intrinsic value as opportunity cost helps clear up the perennial
inconsistencies and conundrums in Cantillon.






16
II. Cantillon’s Conception

Obviously Cantillon did not use the term opportunity cost, a concept credited to Carl
Menger and Friedrich von Wieser.
21
However, a careful reading of Cantillon reveals that
he painstakingly crafted the concept in all its essential elements and then employed it in
his economic analysis. Given his other accomplishments in economic theory, it should
not be surprising that the idea of opportunity cost emerges as a central concept in the
Essay.
The modern essence of opportunity costs can be distilled from James Buchanan
(1987), who describes the economic view of cost as consisting of four basic tenets. First,
opportunity cost implies a decision maker. Second, opportunity cost is the value that
exists in the mind of the decision maker. Third, opportunity cost is set at the moment of
choice and cannot be realized thereafter. Fourth, opportunity cost is subjective in nature
and cannot be measured by an outside observer. The unique characteristic of opportunity
cost is that it is forward looking or ex ante. Opportunity cost is choice influencing, not
choice influenced. In contrast, the accountant works with ex post choice-influenced costs
when the monthly bills are paid and balances are calculated. Cantillon’s use of “intrinsic
value” had all four characteristics of opportunity cost and he made the crucial distinction
between choice- influencing costs and choice- influenced costs.
In terms of Buchanan’s first tenet, Cantillon was careful to identify the decision
maker in a variety of situations. In fact, his identification of the relevant economic
decision maker has often been acclaimed as one of his primary accomplishments. No


17
economist has placed greater importance on the role of the decision maker or greater
emphasis on identifying the most important decision makers in society. He considered the
decisions of ordinary citizens, farmers, craftsmen, merchants and entrepreneurs in terms
of intrinsic value.
The most important decision makers for Cantillon were the Prince and the
landlord, who played a dominant role in the early 18
th
-century economy. He who owned
the land had the income necessary to make the bulk of consumption decisions and
determine how resources will be used, whether they managed the land or rented it out.
Writing on Cantillon in the original Palgrave’s, Henry Higgs ([1894], 1926, pp. 214-217)
concluded: “To consumption and demand he assigned an importance not generally
recognized until much latter.” Schumpeter concluded that “Cantillon had a clear
conception of the function of the entrepreneur” and that “nobody before Cantillon had
formulated it so fully.” Indeed Cantillon’s entrepreneur lived on into the classical period
through the works of A.R.J. Turgot and J.B. Say.
22

The second characteristic of opportunity cost is that cost is an alternative in the
decision maker’s mind. In the Essay we find several situations in which Cantillon tried to
place the reader inside the mind of the decision maker. For example, he enunciated the
important considerations a father takes into account in placing one of his sons into
apprenticeship—what must be given up and what are the alternatives. He also examined
the alternatives of a landlord raising more horses where he explicitly recognized that the
landlord will have to forego servants as a result, because land will be transferred from

21
While Wieser is credited with coining the term opportunity cost (and marginal utility) his contribution to
the concept over that of Carl Menger appears slight according to Streissler (1987). Actually, the English
term, opportunity cost, was probably first coined by Green (1894) and popularized by Frank Knight.
22
Schumpeter (1954, pp. 222 & 625) and Salerno (1985).


18
crop production that would have supported the servants into pasture to feed the horses.
Cantillon also portrayed the choices of the farmer, such as what crop to grow, or whether
to use free or slave labor, in terms of opportunity cost.
The opportunity cost of most consumption decisions is reckoned by Cantillon in
the alternative production decisions of the landlord. Likewise he did a masterful job
throughout the Essay of describing the opportunity cost of purchasing goods produced
from foreign countries. By integrating transportation costs and population theory into his
analysis, Cantillon was able to describe the opportunity cost of imported goods in terms
of local production and population. If France wished to import fine lace then it would
have to forgo a very large amount of wine produced and some population. By fully
complying with Buchanan’s first two tenets Cantillon demonstrated that his conception
was private and individual, not related to the physical attributes or nature of the good. His
view of price was not based on the costs of production, but on choice and actual scarcity.
The third tenet of opportunity cost is that cost is created and exists at the time of
choice. This is how Cantillon formulated cost and choice. His (38/31/16) discussion of
actual and hypothetical choices made clear that cost is incurred simultaneously with
choice and “there is never a variation in intrinsic values.” True enough, once a choice
has been made, the opportunity cost related to that choice does not change. This solves
the longstanding puzzle of how Cantillon could state that it is impossible to fix intrinsic
values and that there never is any variation in intrinsic values. To explain the latter, some
have suggested that Cantillon had no concept of economic progress, but this conclusion is
difficult to accept. The real solution is that Cantillon thought it was impossible to fix




19
intrinsic value in the sense of opportunity cost across nations, people, and time, but that
once the choice had been made, no variation in opportunity cost occurred.
The fourth aspect of opportunity cost is that cost is subjective and is not
objectively measured. This issue is the source of much confusion associated with
Cantillon’s economics. While he has been considered an objective cost theorist, he
clearly thought in subjectivist terms, especially when defining wealth in the opening
paragraph of the Essay as “nothing but the Maintenance, Conveniences, and Superfluities
of Life.” More directly, Cantillon wrote that consumption depends on the “Humour and
Fashion of Living of the Prince, the Lords, and the Owner: if these are fond of drink,
vines must be cultivated; if they are fond of silks, mulberry-trees must be planted and
silkworms raised…if they delight in horses, pasture is needed, and so on.” Cantillon (7-
8/7/7) demonstrated that choice is subjective and is made between alternative
enjoyments. Opportunity cost is a real obstacle to choice. Indeed, Cantillon (60/47/23)
wrote that everything in the State depends principally on the tastes and preference of
property owners and described this as a main focus of the Essay.
Market prices do change over time and can diverge greatly from intrinsic values
because market price depends on subjective valuations and market conditions. In his
example of a gentleman building a garden, the intrinsic value is stipulated as twice its
market value, but the garden is built because he values the garden more than what could
have been produced on the land, plus expenses. Cantillon (37/29/16) described intrinsic
value here in terms of the costs and opportunities foregone, stating that the garden’s
intrinsic value is “the value of the Land and the expense he has incurred.” Here Cantillon
was clearly not referring to a natural or long-run equilibrium price, nor was he using a


20
“real” cost approach, because he included both the direct expenses of building the
gardens as well as the opportunity cost of the land—a masterpiece example of
opportunity cost with clear subjective elements that conforms with contemporary
practice. It is reminiscent of modern textbook examples that examine the opportunity cost
of capital invested in a small business and the entrepreneur who accepts a lower income
in order to become her own boss.
Finally, Cantillon’s concept of intrinsic value is forward looking and choice
influencing. He conceived of choice in entrepreneurial terms where resources are entered
into production for the pursuit of future profits. He examined the alternatives of decision
makers and discussed possible changes in market conditions. Cantillon (56/43/22) used
the word cost to refer to accounting costs that were determined by past choices in the
sense of paying one’s bills or expenses. He clearly understood intrinsic value as
something that influenced choice (i.e. opportunity cost) while he used the term cost to
refer to the choice- influenced bills we pay as a result of making choices.
When intrinsic value is understood to mean opportunity cost, the mystery of
Cantillon’s omission of profit disappears. Entrepreneurs calculate intrinsic value and
market price and engage in those activities where intrinsic value is less than or equal to
market price. In stable markets, intrinsic value will likely be close to market price, and
when prices fluctuate widely, large profits and losses are possible. The entrepreneur will
also engage in projects such as a garden, when the intrinsic value exceeds the market
value, if the entrepreneur values the garden higher than the intrinsic value of building the
garden. Profits are not missing; rather Cantillon built them into his system as the driving
force of all action and choice. Indeed, as a man who lived by his wits in volatile


21
securities markets, Cantillon was perhaps more attuned to profits and their role in
economic activity than many of his contemporary economists.

IV. Cantillon in Context.

Cantillon had a far richer understanding of cost than that attributed to him: a
simple measure of the quantity of land and labor that enters into production. The
interpretation that intrinsic value for Cantillon is equivalent to opportunity cost is entirely
credible when one takes the entire context of the Essay into account. To that end, we
return to Cantillon’s text to further demonstrate the case for the new interpretation.
A clear way of distinguishing opportunity cost from objective cost is to show that
cost is not directly and objectively measurable. Although Cantillon used the word
“measure,” his description plainly indicates that opportunity cost/intrinsic value is not
measurable in the objective sense. First he established that all land and labor are
heterogeneous and differently productive. Each piece of land was of a different quality
and each laborer was also of a different quality. It was not possible to simply count the
number of hours and acres except in an abstract way or in simple illustrations. It also
depends on who is making the evaluation. In fact, he noted at the very beginning of Part
Two of the Essay (152/115/49) that for specific goods in the real economy it is
“impossible to fix their respective intrinsic value.” He showed that the value of labor
could not be readily translated into the value of land. He noted (44/35/18) that the value
of slave labor corresponded to twice the land needed to maintain him but that this “does
not admit of exact calculation, and exactitude is not very necessary; it suffices to be near


22
enough to the truth.” Exactitude was not necessary because Cantillon (57-58/45/22) went
on to show that his earlier calculations did not and could not establish any rule or par
value between land and labor. Such calculations are only meant to convey general
notions about the relationship between cost and value.
Despite a keen interest in economic observation and data, Cantillon was
consistent throughout the Essay that exact calculations and mathematical rules and
formulas have little place in understanding commerce or economics. As Hayek observed:
What is most significant about Cantillon’s achievement in the field of
value and price theory is his down-playing the quest for rules and
formulae that might account for the ‘normal’ relationship between the
value or price of various goods and concentrating instead on the forces and
mechanisms that are consistently at work in restoring these normal
relationships.
23


Cantillon’s own term, “intrinsic value” is to blame for much of the
misunderstanding that enshrouds his economics. This term evokes notions of objective
values like the fineness of gold, the caloric value of food, and the destructive capacity of
the unleashed atom. However, as shown in the previous section, Cantillon used the term
to describe the resources that had been sacrificed by placing them into the production of a
particular chosen good. In other words, he used the term intrinsic not to refer to the
objective properties of a good, like the malleability of gold, but to the value of resources
put into production.
It is also important to remember that Cantillon was naming and describing a
concept for which a term did not already exist in the Western world, for Cantillon
obviously knew many different languages. Cantillon (140/107/46) clearly recognized the

23
Hayek ([1931] 1991, p. 263).



23
difficulties with using the term intrinsic value and explicitly recognized the potential for
confusion:
In this Essay I have always used the term Intrinsic Value to signify the
amount of Land and Labour which enter into Production, not having found
any term more suitable to express my meaning. I mention this only to
avoid misunderstanding.

Schumpeter (1954, p. 219) also recognized the potential for confusion when he
recommended “never mind the objectionable word, it is quite harmless.” Quite plausibly
Schumpeter was referring to the fact that the meaning of the word intrinsic had changed
over time, and that the generally accepted meaning had changed in important respects
after Cantillon wrote the Essay. In French, it was originally a term of philosophy which
simply meant inside or interior to something, often referring to a thing’s qualities or
properties, such as beauty.
24
Only later was it understood to mean that which is essential
and proper to a thing, and the connection of weights of money with intrinsic value was
added.
25

True, John Locke had used the term intrinsic value to refer to the value of silver
money as the estimate which common consent had placed on it, and thus in the sense of
belonging to the thing in itself, or by its very nature, or inherent in the thing itself. But
Cantillon, as we have seen, dismissed Locke, who used the term in its third meaning. It
only makes sense that Cantillon was using the term according to one of its first two
meanings (in English), which is to be situated within or internal to and in the sense of
being secret and private. The third meaning of intrinsic, and its scientific and objective

24
Dictionnaire de L’ Académie francaise, 1
st
Edition (1694, p. 605).
25
Dictionnaire de L’ Académie francaise, 4
th
Edition (1762, p. 948).


24
applications, generally only occurred after Cantillon.
26
Therefore, according to common
usage of English and French at the time, Cantillon’s utilization of intrinsic value meant
something that was situated or placed into or inside the object and that the knowledge of
this value was something that was private and secret to the individual. The first two
meanings, which imply action and value that is individual and difficult to express, are
almost the opposite of the third meaning used in the physical sciences to refer to physical
properties and objective measurement. In addition to explicitly warning his readers about
the meaning of intrinsic value, Cantillon tried to bring further clarification to his
discovery by twice distancing himself from previous writers such as Locke and Petty who
took an objective value−mechanical view of economics.




V. Concluding Evidence

This paper establishes the first sustained claim that Richard Cantillon was
a pioneer in the discovery of the concept of opportunity cost. It has been
demonstrated that opportunity cost is a critical component of his theory, not an
unfortunate diversion and source of contradictions. Evidence has been presented
to explain how the puzzle developed and how it can be resolved. A careful
reexamination of the complete context of the Essay has yielded some “textbook”
examples of opportunity cost. The historical meaning of the term “intrinsic” has
been shown to support the case that intrinsic value was related to opportunity cost,

26
Oxford English Dictionary Online, Oxford University Press, 2003.


25
not objective measures and properties. In turn, this new interpretation solves
many of the perceived puzzles and contradictions in Cantillon.
Be that as it may, other writers have walked down a similar path, and their
individual and collective insights lend further support to this new interpretation.
For example, Spengler (1954, II, p. 407) provided a description of the standard
interpretation of Cantillon’s intrinsic value term but noted that:
Cantillon shows how farmers and others, animated by self- interest, guided
by the behavior of market prices and alert to the opportunity costs of
particular courses of action, change their activities until they arrive at a
combination which, under the circumstances, is satisfactory.

Hébert (1985, p. 272) has also noted that Cantillon understood and used the concept of
opportunity cost. He showed that Cantillon went further than Smith; or rather Smith did
not go as far as Cantillon, in providing a description of price determination and inter-
market price determination. He noted that Cantillon’s writing “is rich in suggestions of
self- interest as a motive force, relative prices as signals to adjust resource use, and
opportunity costs as a basis of economic decision making.” Bordo (1983, 234) also made
the connection between Cantillon and opportunity cost:
Finally, although it is not explicitly stated as such, the interest rate viewed
as the price of money (as opposed to its exchange value) could be
interpreted as an opportunity cost variable in the demand for money.

Possibly the most intriguing evidence of Cantillon’s enlightened influence
on later writers is the fact that Carl Menger, the acknowledged originator of the
concept of opportunity cost, owned a copy of the Essay (1755), which he
apparently purchased and read prior to the publication of his Principles in 1871.
27


27
The 1755 edition of the Essay is listed in Katalog der Carl Menger Bibliothek in der Handels-Universitat
Tokio, Bibliothek der Handels -Universitat Tokio (1926, p.559). Menger lists “Cantillon Essai sur la nature


26
Menger dedicated his Principles to William Roscher, the leading economist of the
German Historical School. This can be explained in part by the fact that Roscher
emphasized the importance of theory. More interestingly, he was virtually alone
in explicitly recognizing the significance of Cantillon’s work above all other early
authors.
28
Given Cantillon’s influence on Roscher and Roscher’s influence on
Menger, could it be that Menger purchased, read, and absorbed the concept of
opportunity cost from Cantillon? As intriguing as this evidence is, it remains
circumstantial, so it cannot be claimed as definitive proof of Cantillon’s influence
on Menger.
Given all the direct and indirect evidence it seems clear that Richard Cantillon
was the true discoverer of opportunity cost. By making this claim I hope not only to clear
him from the charge of objective cost theorist and provide solutions for many of the
puzzles in the Essay, but also to spark new interest in his timeless book, which continues
to stand as a fountainhead of clear analysis a quarter of a millennium after it was first
published.

un commerce, 1754” as number 998 of his book collection in Notebooks Unmarked, 1870. It is also listed in
another, presumably earlier notebook. The Papers of Carl Menger, 1840-1921, Part One, Reel 5,
Notebooks: Geflügelte Worte; excerpts to 1899 unmarked, 1870 & five unmarked notebooks.
28
Hayek, ([1931] 1991).


27
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29

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